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NON PERFORMING ASSETS: ITS REGULATION AND ROLE

OF RBI
(Project Report)

Submitted to
Ms. Navita Aggarwal
Faculty Member of Banking Law

BY:
Rajat Chopra

Roll No. 113

Semester X, B.A., LL.B (Hons.)

HIDAYATULLAH NATIONAL LAW

UNIVERSITY
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ATAL NAGAR, NEW RAIPUR,

CHHATTISGARH

Declaration

I hereby declare that this research work titled “NPA: Its regulation and role of RBI” is my
own work and represents my own ideas, and where others’ ideas or words have been
included, I have adequately cited and referenced the original sources. I also declare that I
have adhered to all principles of academic honesty and integrity and have not misrepresented
or fabricated or falsified any idea/data/fact/source in my submission.

Rajat Chopra

Roll no 113
B.A. LLB., 5th year
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Acknowledgement

I feel highly elated to work on the topic “NPA: Its regulation and role of RBI”.

The practical realisation of this project has obligated the assistance of many persons. I
express my deepest regard and gratitude for Ms. Navita Aggarwal. Her consistent
supervision, constant inspiration and invaluable guidance have been of immense help in
understanding and carrying out the nuances of the project report.

I would like to thank my family and friends without whose support and encouragement, this
project would not have been a reality.

I take this opportunity to also thank the University and the Vice Chancellor for providing
extensive database resources in the Library and through Internet. I would be grateful to
receive comments and suggestions to further improve this project report.

Rajat Chopra

Semester- X
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CONTENTS

INTRODUCTION………………………….……05 .............................................
CONCLUSION...................................................................................................13
REFERENCES....................................................................................................14

Objective
Scope of Study
Methodology of Study

NON PERFORMING ASSETS…………………..07

Reasons
Impact

STEPS TAKEN BY RBI AND GOVERNMENT TO REGULATE NPA……09

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INTRODUCTION

An NPA is defined as a loan asset, which has ceased to generate any income for a bank
whether in the form of interest or principal repayment. Banking in India is one of the most
prominent sectors fuelling the growth of Indian economy. This sector is the foundation of
modern economic development and key player of development strategy. Public sector banks
are the ones in which the government has a major holding. They are divided into two groups,
i.e., nationalised banks and State Bank of India and its associates. The future of PSB’s would
be based on their capability to continuously construct good quality assets in an increasingly
competitive environment and maintaining capital adequacy and stringent prudential norms.
Since, management quality of credit risk by the banks is a reason for expanding NPAs, banks
concerned are continuously monitor- ing loans to identify accounts that have potential to
become non-performing as banks need to maintain have adequate capital to support all the
risks. For the purpose of making Indian banking business at par with global standards and
make it more reliable, transparent and safe the Reserve Bank of India (RBI) has introduced
stringent policy norms. These norms are necessary since India is a developing economy and it
is ob- serving increased capital flows from foreign countries and there is increasing
international financial and economic transactions.

Objective:
• To study about the concept of NPA.
• To study about reasons and impact of NPA.
• To study about various measures adopted by government and RBI to regulate NPA.
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Scope of Study

The scope of study includes the purview within which the project work lies. This topic has
been clearly enunciated with the help of articles from magazines, newspapers and other such
earticle databases that have been explored.

Methodology of Study

This project work is descriptive & analytical in approach. It is largely based on secondary &
electronic sources of data. Internet & other references as guided by faculty of comparative
constitutional law are primarily helpful for the completion of this project.
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NON PERFORMING ASSETS

When the borrower stops paying interest or principal on a loan, the lender will lose money.
Such a loan is known as Non-Performing Asset (NPA).

NPAs definition by Reserve Bank of India (RBI):

An asset, including a leased asset, becomes nonperforming when it ceases to generate income
for the bank. as defined by the country‟s central bank, if for a period of more than 90 days,
the interest or installment amount is overdue then that loan account can be termed as a Non-
Performing Asset.

Reasons for the rise in NPA in India:

• Ineffective working of recovery tribunals which set up by the government
• Intentional defaults by the borrowers
• Major natural calamities making the borrowers unable to pay back there loans.
• Industrial sickness leads to low recovery of loans in the banks where they
borrowed.
• Changes in the principles and policies of Govrnment.
• Defective Lending process lead to rise in NPA's
• The inappropriate strength, weakness, opportunity and threat analysis is another
reason for increase in NPAs.
• Due to poor credit appraisal the bank gives advances to those who are not able to
repay it back. Ultimately which rises NPA's.

The impact of NPAs:

• Lenders suffer lowering of profit margins.
• Stress in banking sector causes less money available to fund other projects,
therefore, negative impact on the larger national economy.
• Higher interest rates by the banks to maintain the profit margin. Redirecting funds
from the good projects to the bad ones.
• As investments got stuck, it may result in it may result in unemployment.
• In the case of public sector banks, the bad health of banks means a bad return for a
shareholder which means that government of India gets less money as a dividend.
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Therefore it may impact easy deployment of money for social and infrastructure
development and results in social and political cost.
• Investors do not get rightful returns.
• Balance sheet syndrome of Indian characteristics that is both the banks and the
corporate sector have stressed balance sheet and causes halting of the
investmentled development process.
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STEPS TAKEN BY RBI AND GOVERNMENT TO REGULATE NPA

NPAs story is not new in India and there have been several steps taken by the GOI on legal,
financial, policy level reforms. In the year 1991, Narsimham committee recommended many
reforms to tackle NPAs. Some of them were implemented.

• The Debt Recovery Tribunals (DRTs)–1993

To decrease the time required for settling cases. They are governed by the provisions
of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993.However,
their number is not sufficient therefore they also suffer from time lag and cases are
pending for more than 2-3 years in many areas.

• Credit Information Bureau – 2000

A good information system is required to prevent loan falling into bad hands and
therefore prevention of NPAs. It helps banks by maintaining and sharing data of
individual defaulters and willful defaulters.

• Lok Adalats – 2001

They are helpful in tackling and recovery of small loans however they are limited up
to 5 lakh rupees loans only by the RBI guidelines issued in 2001. They are positive in
the sense that they avoid more cases into the legal system.

• Compromise Settlement – 2001

It provides a simple mechanism for recovery of NPA for the advances below Rs. 10
Crores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however
willful default and fraud cases are excluded.

• Sarfaesi Act – 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 – The Act permits Banks / Financial
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Institutions to recover their NPAs without the involvement of the Court, through
acquiring and disposing of the secured assets in NPA accounts with an outstanding
amount of Rs. 1 lakh and above.The banks have to first issue a notice. Then, on the
borrower‟s failure to repay, they can:
o Take ownership of security and/or o Control over the management of
the borrowing concern.
o Appoint a person to manage the concern.
Further, this act has been amended last year to make its enforcement faster.

• ARC (Asset Reconstruction Companies)

The RBI gave license to 14 new ARCs recently after the amendment of the
SARFAESI Act of 2002.These companies are created to unlock value from stressed
loans. Before this law came, lenders could enforce their security interests only
through courts, which was a time-consuming process.

• Corporate debt restructuring – 2005

It is for reducing the burden of the debts on the company by decreasing the rates paid
and increasing the time the company has to pay the obligation back.

• 5:25 rule – 2014

Also known as, Flexible Structuring of Long Term Project Loans to Infrastructure and
Core Industries.It was proposed to maintain the cash flow of such companies since the
project timeline is long and they do not get the money back into their books for a long
time, therefore, the requirement of loans at every 5-7 years and thus refinancing for
long term projects.

• Joint Lenders Forum – 2014

It was created by the inclusion of all PSBs whose loans have become stressed. It is
present so as to avoid loan to same individual or company from different banks. It is
formulated to prevent the instances where one person takes a loan from one bank to
give a loan of the other bank.

• Strategic debt restructuring (SDR) – 2015

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Under this scheme banks who have given loans to a corporate borrower gets the right
to convert the complete or part of their loans into equity shares in the loan taken
company. Its basic purpose is to ensure that more stake of promoters in reviving
stressed accounts and providing banks with enhanced capabilities for initiating a
change of ownership in appropriate cases.

• Sustainable structuring of stressed assets (S4A) – 2016

It has been formulated as an optional framework for the resolution of largely stressed
accounts. It involves the determination of sustainable debt level for a stressed
borrower and bifurcation of the outstanding debt into sustainable debt and
equity/quasi-equity instruments which are expected to provide upside to the lenders
when the borrower turns around.

• Insolvency and Bankruptcy code Act-2016

IBC 2016 lays the insolvency processes for individuals, companies and partnership
firms. The law has brought a significant change in the power-sharing equation
between creditors and debtors by giving both of them the power to initiate
proceedings against each other.
The Code provides clear, coherent and speedy process for early identification of financial
distress and resolution of entities if the underlying business is found to be viable. It suggests
two options – a restructuring if the firm is viable and liquidation if it is not financially viable.
Resolution should be done quickly and judiciously to ensure that business is not stuck. The
new code will replace existing bankruptcy laws and cover companies, limited liability
partnerships, partnership firms, other corporate persons, and individuals, and any other body
specified by the Government. There are Sick Industrial Companies Act, the Recovery of Debt
Due to Banks and Financial Institutions Act, and Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Besides,
DRTs, Lok Adalats are also dealing with bankruptcy procedures. All these will be
substituted/guided by the Insolvency and Bankruptcy Code on bankruptcy matters as it
consolidates/improves the existing laws.

On February 12, 2018, the RBI decided to completely revamp the guidelines on the
resolution of stressed assets and withdrew all its existing guidelines and schemes. The revised
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framework has specified norms for "early identification" of stressed assets, timelines for
implementation of resolution plans, and a penalty on Banks for failing to adhere to the
prescribed timelines.
• The revised framework scrapped the corporate debt restructuring (CDR), strategic
debt restructuring (SDR), scheme for sustainable structuring of stressed assets (S4A)
and the joint lenders‟ forum (JLF) that were used by banks to restructure debt defaults
as the IBC process had settled into place.
• The new „Resolution of Stressed Assets-Revised Framework‟ called on lenders to
identify assets “immediately on default”, beginning with loans on which any amount
was due from one to 30 days.
• The new rules also require banks to inform the Central Repository of Information on
Large Credits (CRILC) on a weekly basis of defaults by all borrowers in excess of `5
crore. This could mean that payments delayed for even a few days could spiral into a
bigger problem for borrowers if the default status became public.
• The new rule mandates lenders to initiate insolvency resolution under the Bankruptcy
Code if a borrower fails to pay even at the end of the 180 days of first default.

CONCLUSION

Nowadays the serious problem faced by banks all over the world is the growth of NPAs. The
value of loan-disbursement process is harmed because of non-recovery of loan instalment and
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the interest on the loan which in turn is the consequence of growth of NPAs which adversely
affect the lending activity of the banks. As a result significant importance has been given, to
make stronger the capital adequacy requirements like the measure of CRAR to measure the
capacity of banks to absorb losses occurring from non-performing assets. Public sector banks
in India have been able to manage high level of CRAR to provide sufficient cushion for any
unexpected losses, in relation to capital adequacy requirements. Despite the fact, rise of
NPAs in recent years remains an area of concern and should be tackled with sincere efforts
during the periods of disbursement of loans and recovery of the same. In recent times, the use
of the method, in which com-promise settlements has been effected by banks; certain serious
concerns have been articulated from different sections and by the Debt Recovery Tribunals. It
was examined that the banks take up different parameter to different borrowers, and agreed
for a lesser amount as against claimed amount, regardless of availability of plentiful securities
and thus ignoring RBI guidelines. The study finally observes that the prudential and
provisioning norms and other initiatives taken by the regulatory bodies has pressurised banks
to improve their performance, and consequently resulted into trim down of NPA as well as
improvement in the financial health of the Indian banking system. In the nutshell, we can say
that, however during the periods of economic slow- down, public sector banks in India have
shown flexibility, management of NPAs through better quality of advances and recovery
procedures is essential for banks to maintain their continued existence and expansion.

REFERENCES

• https://www.clearias.com/non-performing-assets-npa/
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• https://businessperspectives.org/images/pdf/applications/publishing/templates/article/
assets/4383/BBS_en_2011_04_Rajput.pdf
• https://www.goodreturns.in/classroom/2018/01/what-are-the-types-non-performing
assets/articlecontent-pf10692-663427.html
• https://www.pwc.in/assets/pdfs/publications/2018/rbi-s-revised-framework-for-
resolving-stressed-assets-building-transparency-and-accuracy.pdf
• https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11218&fn=2&Mode=0
• https://blog.forumias.com/non-performing-assetsnpas-and-its-impact-on-indian-
economy/
• https://www.firstpost.com/business/banks-bad-loans-pile-crosses-rs-10-lakh-crore-
uprs-1-39-lakh-crore-in-march-quarter-the-npa-mess-explained-in-7-
charts4496431.html