NON PERFORMING ASSETS --
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INCOME RECOGNITION , ASSET CLASSIFICATION ,
NPA MANAGEMENT & RECOVERY
CLASSIFICATION OF LOAN A/Cs
Assets are classified into 4 categories
namely Standard (including Special Mention category), sub-standard, doubtful
and loss. But NPAs are classified into 3 categories i.e. Sub-standard, Doubtful
and Loss.
ASSETS CLASSIFICATION
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GROUP
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DEFINITION
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STANDARD
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Accounts
which are in order
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SUB STANDARD
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Accounts which have been
classified as NPAs for a period not exceeding 12 months
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DOUBTFUL
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Sub standard
accounts, which have remained NPAs for a period exceeding 12 months
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LOSS ASSETS
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Accounts
which have become unrealizable, where losses have been identified by the bank / internal / external auditor / RBI
Inspectors.
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SMA
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Special
mentioned assets: RBI has instructed banks to identify a/cs which are
overdue/out of order but not NPA & maintain a special watch.
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CATEGORY
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PROVISION REQUIREMENTS
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STANDARD ASSETS
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Direct Agri & SME
sectors
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All other loans & Advances
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Commercial Real Estate
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Teaser Rate – Housing Loan
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0.25%
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0.40%
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1%
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2%
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SUB-STANDARD ASSETS
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Secured Sub-standard
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Unsecured Sub-standard : Where the
value of security is not more than 10% right from the beginning i.e.
ab-initio
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15% of
outstanding dues
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25% of
outstanding dues*
*20% for
Infrastructure Loans with escrow arrangement
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DOUBTFUL ASSETS
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D1
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D2
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D3
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First 12 months
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Next 24 months
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Over 36 months
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RVS
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Shortfall in
Security
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RVS
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Shortfall in
Security
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100%
Uniformly
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25%
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100%
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40%
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100%
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LOSS ASSETS
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The entire assets should be
written off. If permitted to remain in the books for any reason, 100% of the
outstanding should be provided for.
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PERIOD OF CLASSIFICATION IN DIFFERENT
CATEGORIES:
The time period of their classification is
restricted as under:
1. Standard - Regular : No restriction on the
time period
1a. Standard - Irregular (called Special
Mention Account,SMA) : 90 days (If account became SMA on Dec 12, 2009, it will
remain SMA up to Mar 11, 2010).
2. Sub-Standard : 12 months (This account
becomes sub-standard on Mar 12, 2010 and remains sub-standard up to Mar 11,
2011).
3a.Doubtful- up to one year : 12 months (This
account becomes D-1 on Mar 12, 2011 and remains D-1 up to Mar 11, 2012)
3b. Doubtful - above one year but up to 3
years : 24 months (This account becomes D-2 on Mar 12, 2012 and remains D-2 up
to Mar 11, 2014)
3c. Doubtful - above three years : Uncertain
period (This account becomes D-3 on Mar 12, 2014 and remains D-3 for uncertain
period)
4. Loss: Account is a loss account when
security loss is 90% or more. The period is uncertain.
SUMMARY OF PROVISIONS PERCENTAGES
1-a. Standard accounts : General provision :
0.40%
1-b. Standard accounts: Direct Agriculture
& SME : 0.25%
1-c. Standard a/c : Commercial Real Estate :
1.00%
2. Sub-standard: Provision to be made on the
entire balance without bifurcation into secured or unsecured.
2a. Sub-standard Secured : 15%
2b. Sub-standard Unsecured : 25% (Substandard
unsecured means an account, where at the time of sanction either no security
was taken or security value was only up to 10% of sanctioned amount).
3. Doubtful : On unsecured portion of the
balance in any category of DF : 100%
On secured portion of the balance as per
doubtful category as under:
3a. Doubtful - upto 12 months (D-1) : 20%
(Balance is Rs.10 lac. Security value is Rs.8 lac. Provision will be @ 100% on
unsecured balance of Rs.2 lac and @20% on the secured portion of Rs.8 lac.
Total provision = 2 lac + 1.60 = 3.60 lac)
3b. Doubtful - more than 12 months but upto 3
years : 30% (Balance is Rs.10 lac. Security value is Rs.8 lac. Provision will be
@ 100% on unsecured balance of Rs.2 lac and @30% on the secured portion of Rs.8
lac. Total provision = 2 lac + 2.40 = 4.40 lac)
3c. Doubtful - more than 3 years
(secured/unsecured): 100% (Balance is Rs.10 lac. Security value is Rs.8 lac.
Provision will be @ 100% on unsecured balance of Rs.2 lac and @100% on the
secured portion of Rs.8 lac. Total provision = 2 lac + 8 lac = 10 lac)
Note: In doubtful accounts, no provision to
be made for amount secured by guarantee of govt., CGTMSE, DICGC or ECGC.
4. Loss account : 100%
SECURITY INCLUDES WHAT? : Primary +
collateral security including Govt. guarantee, ECGC guarantee, DICGC guarantee,
CGTMSE guarantee.
Example : Balance Rs.10 lac. Primary security
value Rs.4 lac. CGTMSE guarantee cover of 75%. Account in D-2 category. Amount
of provision. In this case balance of Rs.4 lac is covered by primary security.
The remaining Rs.6 lac is covered by 75% guarantee cover i.e. Rs.4.50 lac.
Hence unsecured amount shall be Rs.1.50 lac. The rate of provision shall be 100%
on unsecured portion of Rs.1.50 lac, 30% on secured portion of Rs.4 lac and no
provision on the amount secured by CGTMSE guarantee. Accordingly, total
provision shall be = 1.20 + 1.50 = Rs.2.70 lac
GUARANTOR'S NETWORTH : Not
to be taken as security for provision purpose.
Example : Balance Rs.10 lac. Primary security
value Rs.4 lac. Collateral Security value Rs.3 lac. Guarantor's networth Rs.5
lac. Account in D-2 category. Amount of provision = 100% on unsecured portion
of Rs.3 lac and 30% on secured portion of Rs.7 lac = 3.00 + 2.10 = Rs.5.10 lac
TOTAL
PROVISION COVERAGE RATIO:
(including floating provisions) to be achieved by September 2010 : 70%
OTHER MATTERS:
1. Provision on Standard account to be kept
as part of Other Liabilities in Schedule-5 of bank's balance sheet.
2. Provision on Standard accounts to be done
on Global balance and for NPA accounts on Gross Balance
LOK ADALAT
1. Lok Adalat is created under Legal Services
Authority Act 1987.
2. Cannot entertain dispute cases. Only
compromise cases are eligible. No court fee is payable.
3. Decisions are consent decrees. No appeal
against these decrees.
4. Civil Procedure Code is followed by these
courts as they are like civil courts.
5. Banks can also call Lok Adalt with
application to High Court.
6. Amount - Normal Lok Adalt : Up to Rs.20
lac (wef Aug03, 2004)
7. Above the aforesaid cut-off of Rs.20 lac -
DRT Lok Adalat.
8. Eligible accounts - NPA (Loss and
doubtful).
9. Decree for principal and interest should
be sought by banks as per RBI guidelines.
10. After full payment discharge should be
given.
11. Repayment : Preferably down-payment. If
it is instalments, max period is 1-3 years.
12. As per Supreme Court direction personal
loan cases up to Rs.10 lac, should preferably be settled
(SARFAESI ACT) 2002
1. Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) came
into force wef Aug 23, 2002 in entire India, including J&K. Act was amended
in 2004 on intervention of Supreme Court in Mardia Chemicals vs Union of India
and others.
2. Court jurisdiction : Cases under SARFAESI
Act can be referred to DRT and appeal to DRAT only
3. Rights of banks as creditor - To take
possession, take over management, appoint manager, recover money receivable
from 3rd parties, sale of securities charged to the bank, without court
intervention.
4. Designated officer who can initiate action
under the Act - Scale IV and above in banks OR officers approved by BoD of the
bank.
5.
Consortium/BIFR cases : In case of joint/consortium financing, consent of banks
with 75% share by value required for action. BIFR cases can be recalled back
with consent of banks holding 75% share.
6. Loans not eligible -
(1) Balance up to Rs.1 lac,
(2) if the security agricultural land,
(3) pledge & lien and loan against bank
deposit)
(4) where recovery up to 80% of due amount
already affected
(5) where limitation has expired
(6) if security is not charged to bank - say
hypothecated, mortgaged etc.
7. Sale of securities charged to bank : If
there is default, the security can be sold without court intervention after
possession of the security.
8. Possession - 60 days notice to be served
by bank before possession.
9. Remedy with borrower - If borrower objects
to possession, bank to justify the possession by sending reply within one week.
If borrower still not satisfied, it could approach DRT within 45 days without
deposit of any amount
(Earlier provision Sec 17 to deposit 75%
amount was deleted in 2004 on Supreme Court intervention in Mardia Chemicals vs
Union of India and others).
10. DRT's decision is appealable (within 30
days) to DRAT by bank or borrower. Borrower can appeal after deposit of 50% of
amount that could be reduced to 25% by DRAT.
11. Sale - Before sale, 30 days notice to be
served on the borrower.
12. Sale price : Sale cannot be below the
reserve price to be fixed by bank. For sale below reserve price, consent of the
borrower is required.
13. Method of sale: Sale can be by tenders or
through public auction. If sale is through public auction, public notice in two
news papers (one of which to be regional) to be given.
14. Purchase price : Sale is confirmed by
bank on receipt of 25% amount immdly. Balance is payable in 15 days.
15. DRT pending case: Banks can make use of
SARFAESI Act for sale of security for such pending cases as per Supreme Court
judgement in Transcore vs Union of India).
DEBT RECOVERY TRIBUNAL
1. Created under Recovery of Debt Due to
Banks & FIs Act 1993 (except JK).
2. These are like other civil courts for a
special purpose of helping in quicker NPA recovery in large loan accounts.
3. DRT headed by Presiding officer who is
assisted by Registrar and Recovery Officer. DRAT is headed by Chairperson.
4. Eligible account - Loans of banks and FIs
with recoverable dues of Rs.10 lac or more.
5. Jurisdiction : No other court has
jurisdiction over such cases.
6. Time limit - On receipt of application,
show cause notice will be served on borrower within 30 days. Disposal by DRT is
expected in 180 days. Disposal of appeal by DRAT is expected in maximum 180
days.
7. Appeal - Order by DRT appealable to DRAT
within 45 days from date of receipt. If borrower has to appeal, deposit of 75%
of decree amount is mandatory. DRAT may reduce or waive the deposit of this
amount.
8. Order- After claim is upheld, Recovery
certificate is issued. Recovery officer is to make the recovery. He has powers
such as take possession of assets, sale of securities, attachment etc. as per
provisions of Sec 226 of Income Tax Act.
9. Complaint can be made to presiding officer
of DRT against order of Recovery Officer within 30 days and against Registrar
within 15 days, if need be.
10. Fee - Min Rs.12000. For each additional
Rs.1 lac Rs.1000. Max 1.50 lac. For appeal - Min Rs.12000 for decree of less
than Rs.10 lac, 20000 (10 lac to less than Rs.30 lac) and Rs.30000 (Rs.30 lac
& above).
ASSET RECONSTRUCTION COMPANIES
1. Set up for taking over distressed assets
from banks/FIs and reconstruct or re-pack for sale. (First ARC - ARCIL).
2. Recovery plan should be for a maximum
period of 5 years (2 year extension given in Apr 2009).
3. To be set up as a joint stock company.
4. RBI registration must before commencement
for business as ARC. Business to be commenced within 6 months of registration
with RBI. RBI can extend it by another 1 year in aggregate.
5. Net worth not less Rs.100 cr or 15% of
acquired assets, whichever lower.
6. Capital adequacy ratio min 15% of Risk
Weighted Assets.
7. Asset would be classified as sub-standard
for 12 months, doubtful for 12 months and loss account if remains NPA for more
than 36 months.
8. Provision on sub-standard 10%, on
unsecured portion of doubtful 100% and secured portion of doubtful 50%. On loss
accounts 100%.
9. ARC to invest at least 5% in security
receipts created out of each securitization of debt.
CORPORATE DEBT RESTRUCTURING SYSTEM
1. A mechanism prescribed by RBI outside BIFR
or DRT for restructuring of loan account. It is not a judicial system. It is
based on mutual agreement between borrower and banks.
2. Structure : CDR is a 3-tier structure.
(a) CDR Forum (at top - the policy making
body, having Chairman of banks as members - meets at least once in 6 months),
(b) CDR Empowered Group (sanctioning
authority having EDs of banks as members - has 90 days to take decision on
case. In exceptional case up to 180 days) and
(c) CDR Cell (operating wing to prepare the
proposals within one month from reference).
3. Eligible account - Multi-lender a/cs only
(such as consortium, multiple banking etc). Fund and non-fund exposure of Rs.10
cr or more.
4. Reference to CDR in case of Category I
accounts (i.e. Standard & Substandard accounts) by a bank /FI with 20%
share (by value). Borrower can also make a reference with support of a bank /
FI having 20% share by value.
5. Category II accounts (Doubtful account)
can be referred jointly by banks / FIs having 75% shares by value & 60% in
number.
6. Suit filed a/c eligible with consent of
banks / FIs having 75% shares by value & 60% in number.
7. Fraud and willful default cases are not
also eligible. Large value BIFR cases, can be taken up on specific
recommendation of CDR core group.
8. Stand still clause - Borrower and
banks/FIs to sign Debtor-Creditor agreement, for no legal action for 90 days
(extendable to 180 days), when case is pending with CDR.
Creditors to enter into Inter-creditor
Agreement, valid for 3 years. It can be extended for 3 years.
9. Time schedule: Preliminary restructure
case to be prepared by lead institution within one month for submission to CDR
Cell. CDR cell to prepare restructure plan within 30 days for decision by CDR
Empowered Group within 90 days (180 days in special circumstances).
10. Decision criteria followed by CDR - (1)
Unit to become viable in 7 years. (2) Restructured debt should be paid within
10 years. (3) Return on capital employed, DSCR and IRR should be acceptable (4)
Promoter should contribute 15% of sacrifice of creditors.
11. Asset classification of restructured
loans : Account classification to be changed to standard category only after 12
months regular repayment as per the revised due date schedule. Fresh loans to
remain standard for one year. After one year, the classification will be
according to record of recovery.
12. Asset classification for the period when
case was pending with CDR : If approved package implemented within 4 months,
asset classification at the time of reference, to be restored.
13. Implementation on approval : Decision
binding on all creditors where 75% by value and 60% in number, agree. Provision
shall be made for this in the inter-creditor agreement.
RESTRUCTURING OF SME ACCOUNTS
1. Eligible - All non-corporate SMEs whether
single bank or multi-lender. Corporate SMEs enjoying any amount of limits from
one bank and in multiple accounts funded and non-funded exposure up to Rs.10 cr
SALE & PURCHASE OF NPA BY BANKS
These guidelines of RBI are applicable to
banks, FIs and NBFCs.
Sale of NPAs to Asset Reconstruction
Companies, is as per provisions of SARFAESI Act.
CONDITIONS TO BE SATISFIED BY SELLER BANK:
(a) Minimum age of NPA in the books of
selling bank - 2 years.
(b) sale on cash basis only. Loan account and
securities to be transferred only after receipt of full consideration amount
(c) Sale on without recourse basis i.e. the
seller bank shall have no obligation of any type, after sale and
(d) Seller bank cannot re-purchase the sold
account.
CONDITIONS TO BE SATISFIED BY BUYER BANK:
(a) Max time for realisation of purchased
NPAs - 3 years . Not less than 10% should be recovered in first year and 5% in
each HY during 2nd and 3rd year.
(b) Minimum period the purchasing bank is to
keep the account with it, if it wants to sell to another bank: 15 month from
date of purchase.
(c) Asset classification of NPA by purchaser
bank - For first 90 days, it will be treated standard. If recovery is not as
planned, the treatment to be given as sub-standard.
(d) For CAR purposes, for purchased NPA, risk
weightage = 100%.
INITIATION
OF NPA SYSTEM: The process of
prudent guidelines on NPA was initiated by RBI in the year 1992-93, on
recommendations of Narasimham Committee.
WHEN ACCOUNT BECOMES NPA DUE TO PROBLEM IN
RECOVERY / REPAYMENT :
1. Term Loan : interest and/or instalment of
principal remain overdue for a period of more than 90 days (Due date of
instalment payment was Dec 12, 2009 which borrower failed to pay. Account
becomes irregular from Dec 13 and NPA after 90 days (i.e. 19+31+28+12) on Mar
13, 2010.
2. Bills account: Bill remains overdue for a
period of more than 90 days (Due date of bill was Dec 12, 2009. The drawee
failed to pay. Bill becomes overdue on Dec 13 and NPA after 90 days (i.e.
19+31+28+12) on Mar 13, 2010.
3. Other loans : Any amount to be received
remains overdue for a period of more than 90 days
4. Cash credit / Over draft : The account
remains out of order for a period of more than 90 days. (Account became out of
order as balance exceeded the sanctioned limit wef Dec 12, 2009. Account becomes
NPA after 90 days (i.e. 20+31+28+11) on Mar 12, 2010.
5. Out of order is an account
(a) where the balance is more than sanctioned
limit or drawing power (Balance exceeded the limit on Dec 12, 2009. Account
became out of order on Dec 12, 2009). OR
(b) balance is within limit or drawing power
but
(i) where as on date of balance sheet, there
is no credit in the account for 90 days or
(ii) credit is less than interest debited or
(iii) where stock report has not been
received for 3 months or more.
Further, if the sanction of limit is not
renewed on due date, the account becomes sub-standard after 6 months (Date of
sanction - Jan 10, 2008. Due date of renewal - Jan 09, 2009. If limit not
renewed for 6 months, account becomes NPA on Jul 10, 2009).
6. Special mention account (SMA): During
period of irregularity up to 90 days, before becoming NPA, the account is
called SMA, which is part of Standard account.
CLASSIFICATION OF SPECIAL CATEGORY OF
ACCOUNTS:
1. Agriculture: As per recommendations of VS
Vyas Committee, in case of crop based loans (whether crop loans or other loans
like finance for tractor etc.), the normal SMA period of 90 days is not
applicable. Instead, a loan for short duration crops will be treated NPA if the
instalment of the principal or interest thereon remains unpaid for two crop
seasons beyond the due date. For a loan for long duration crops the above
period would be one crop season beyond the due date. Decision regarding
classification of crop duration, is taken by SLBC in each State.
2. Loan against liquid securities (Bank
Deposit/NSC/IVP/KVP/LIP) : As long as latest security value is more than the
latest balance, account not to be treated as NPA. (This rule is not applicable
to govt. securities, mutual fund units, gold loans etc).
3. Consortium loans : Each bank will classify
the account as per its own conduct of account and will not take into account
the classification with other consortium banks. It is possible that different
banks have different classification of the account (one having standard and
others sub-standard).
4. Govt. guaranteed accounts : State govt.
guaranteed accounts to be treated like other accounts. But in case of Central
Govt. guaranteed accounts, account will be treated Standard and provision not
be made. Income to be taken into profit only if interest is recovered. But if
govt. repudiates its guarantee (i.e. refuses to pay), it is to be treated like
other accounts.
5. Restructured NPA account : Account
classification cannot be changed immediately to standard category. It will be
done after 12 months regular repayment as per the revised due date. (Account
rescheduled on Jan 22, 2009. Revised due date for payment July 31, 2009. There
is regular repayment. Account to be classified as Standard account on July 31,
2010).
6. Upgrading of account, if due amount is
recovered in NPA account: Account to be classified standard immediately
(Balance Rs.10 lac in sub-standard account. Due amount Rs.3 lac. Party made
payment of Rs.3 lac on Jan 12, 2010. Account will be classified Standard on Jan
12, 2010.
WHEN ACCOUNT BECOMES NPA IMMEDIATELY, DUE TO
PROBLEM IN SECURITY IN THE ACCOUNT:
(a) Doubtful : When account is fully secured
at the time of sanction but later on there is loss of security to the extent of
50% or more (in other words, when balance covered by security remains less than
50%).
(b) Loss : While account was fully secured at
the time of sanction but later on there was loss of security to the extent of
90% or more. (in other words, when balance covered by security remains less
than 10%).
(Balance Rs.10 lac. Initially fully secured.
But later on damage to security to the extent of Rs.6 lac (i.e. 60%). Account
will be treated doubtful immediately. But if loss is Rs.9.30 lac (i.e. 93%),
account will be treated loss account immediately).
NON-SSI SICK AND WEAK UNITS
(RBI definitions)
(a)
Weak units : Account irregular for more than one year OR erosion in net worth
of previous year 50% or more
(b)
Sick unit : Accumulated losses > net worth.
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