7 Ys BASEL Norms & Different Types of Risks in Banking & Doubt Clearing Session 2.0: Course on Banking, Financial & Economic Awareness for RRB Con eee ELSAssets- Something which you own. You have right over that. Ex: Loans and advances given by the banks Performing- Which generates income.Basics of NPA As per explanation given in the RBI Master Directions on Prudential Norms on Income Recognition, Asset Classification & Provisioning” (IRAC Norms) An Asset becomes Non performing when it ceases to generate income for the bank. A.Non Performing asset (NPA) is a Loan or an Advance where; i. Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a Term loan, The account remains ‘out of order’ in respect of an Overdraft/Cash Credit. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. The installment of pr duration crops, (terest thereon remains overdue for two crop seasons for short pal o v. _ The installment of principal or interest thereon remains overdue for one crop season for long duration crops.Example > If A has borrowed Rs. 1.00 Lac in form of Term Loan from XYZ bank on 2" April @ Interest Rate of 10% for 5 years. As per calculation Equated Monthly installment (EMI) will be Rs. 2125. > Till the time A is repaying EMI it will remain/known as Performing Asset of the Bank but if A ceases to pay Rs. 2125 at each month end for next 90 days/ 3 months than A’s Loan account will become a Non-performing asset for XYZ bank.Banks are required to classify Non Performing Assets further into the following three categories based on the period for which the asset has remained non performing and the realisability of the dues: Sub Standard Assets A substandard asset would be one which has remained NPA for a period less than or equal to 12 months. Doubtful Assets An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.Provi: Provisions should be made on the NPA on the basis of classification of assets into prescribed : Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. Doubtful Assets: i) 100 percent of the extent to which the advance is not covered by the realisable value of the security. il) In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful Provision requirement - Up to one year (25%) (Gre to three years (4055) More than three years (100%) Substandard Assets: A general provision of 15 percent on Total outstanding should be made.Example” Consider ‘XYZ’ bank is having 1 NPA account of Rs. 100 and having Profit of Rs. 1000 than in this case if that NPA account is in category of Doubtful assets for a period of 2 years than provision requirement on that would be 40% so the bank has to keep 40% of Rs. 100 (NPA p portion) in the form of provision. So the Net Profit of the bank will decrease to Rs. 960 0 (Rs.1000- Rs.40) ., So in this case Gross NPA of the Bank is Rs. 100 & Net NPA = (Gross NPA- Provision) ice Rs. 100- 40= Rs.60 Gross NPA Ratio = Gross NPA ee Total Loans & Advances Net NPA Ratio = Gross NPA- Total Provision Yo = Total Loans & Advances- Total Provision -~ eee i The Provisioning Coverage Ratio is the percentage of bad assets that the bank has to provide for (keep money) from their own funds —most probably profit. For example, if the provisioning coverage ratio is_Z0% for a particular category of bad loans, banks have to set aside funds equivalent to 70% those bad assets out of their profits_- ee The provision coverage ratio (PCR) gives an indication_of the provision made against bad loans from the profit generated. Higher the | PCR, lower is the unexposed part of the bad debts-—>— Rise in PCR also indicates the adoption of discipline for making adequate provisions for NPAs. ——Measures to CusG NPA |- The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 . 7 Lok Adalats. <*& Debt Recovery Tribunal. ns Loan restructuring schemes (Discontinued now) Insolvency & Bankruptcy Code.SARFA@SJ Act »The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act. » Non-performing assets should be backed by securities charged to the Bank by way of Hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under sec.60 of CPC, are not covered under this Act.As a legal mechanism to insulate assets, the Act addresses the interests of secured creditors (Banks). Several provisions of the Act give directives and powers to various institutions to manage the bad asset problem. v The Act provides the legal framework for securitization activities in India. v It gives the procedures for the transfer of NPAs to asset reconstruction companies for the reconstruction of the assets. Y The Act enforces the security interest without Court’s intervention v The Act give powers to banks and financial institutions to take over the immovable property that is hypothecated or charged to enforce the recovery of debt. ¥ Major feature of SARFAES! is that it promotes the setting up of asset reconstruction (RCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions. KapilSecuritization Securitization turns mortgages into liquid assets. The process works like this: A bank or other institution gathers hundreds or thousands of mortgages into a "pool." It then divides that pool into shares and sells those shares as securities. Buyers of these securities gain the right to collect mortgage payments made by the hundreds or thousands of homeowners whose mortgages have been pooled, which is why they're called "mortgage-backed securities."Asset Reconstruction Asset reconstruction is the activity of converting a bad or non-performing asset into performing asset. The process of asset reconstruction involves several steps including purchasing of bad asset by a dedicated asset reconstruction company (ARC) including the underlying hypothecated asset, financing of the bad asset conversion into good asset using bonds, debentures, securities and cash, realization of returns from the hypothecated assets etc.SARFA@SJ Act The Act empowers the lender (banker), when the borrower defaults, to issue notice to the defaulting borrower and guarantor, calling to repay the debt : » To issue demand notice to the defaulting borrower and guarantor to discharge their dues in full within 60 days from the date of the notice. > If the borrower(s) / guarantor(s) do not come forward for liquidation /settlement of their account after expiry of 60 days notice period, the Authorized Officer should take possession of the secured assets as per the norms laid down in the Rules, 2002 . » Wherever the possession of the secured assets is resisted by the borrowers / guarantors or otherwise deemed fit, the Authorized Officers have to file an application under Section 14 of the Act before Chief Metropolitan Magistrate /Distt. Magistrate, as the case may be, seeking his help for physical possession of the assets. > Further the Auction process of the property is initiated. KapilLok Adalat is similar to a civil court can be organised by the State Authority, the District Authority, The Supreme Court Legal Service Committee or High Court Legal Services Committee at such intervals and places as deemed appropriate. Lok Adalts are created under Legal Services Authority Act 1987. » A Lok Adalat has jurisdiction to determine and arrive at a compromise or settlement between the parties to the dispute. » To make increasing use of the forum of Lok Adalats to settle banking disputes involving smaller amounts, RBI during April 2001 advised bank and financial institutions to use the Lok Adalats for the settlement purpose. > Generally cases involving an amount up to Rs. 20 lakh may be referred to Lok Adalats. _ Kapilrane eeas neeThe (DRTs) and Debts D> 1, Recovery Appellate Tribunal (DRATs) were established Ai) under the Recovery of Debts Due to Banks and Financial a g Institutions Act (RDDBFI Act), 1993 with the specific W 9) objective of providing expeditious adjudication, reducing the cost of litigation and recovery of debts due to Banks and Financial Institution. Presently 38 DRT's jand 5 DRAT's are functioning in India. Mumbai, Chennai ,Delhi, Kolkata & Allahabad._ aan “The provisions of the Act applies in cases where amount due from debtor is porta Rs, 20,00 Lac. For debt less than 20.00 Lac, suit in civil courts may be Kapil esae | Insolvency’& Bankruptcy Code, 2016 __¢yLegal Background * The Insolvency and Bankruptcy Code, 2015 was introduced in the Lok Sabha in December 2015 by the Finance Minister, Arun Jaitley * Code was passed by both houses on 11 May 2016 * Received assent from President on 26 May 2016 * Became effective in December 2016What is Insolvency and Bankruptcy? _ Insolvency : When debtor cannot meet his financial obligation i.e. when he cannot pay back the money to lender on time, it may not lead to bankruptcy Bankruptcy : legal declaration of insolvency. Debtor or creditor can file application with court, it is a last stage of insolvency Insolvency is financial situation and bankruptcy is a legal condition Tn Insolvency may or may not lead to bankruptcy —ee eke ae ane uke ie mean ee) See Oe ks LS 7 oR CET Ca eae ear (to prevent suits/recovery/asset trans eRe eke ey Rete etn aris er nua ancy nes sac Rn] Pe eet Peed ieee) eredThe Process Go On? _ ~~“ Under the Code, a financial creditor may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process. The NCLT must find the existence of default within 14 days. Thereafter, a Committee of Creditors (CoC) consisting of financial creditors will be constituted for taking decisions regarding insolvency resolution. The CoC may either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets. -~ The CoC will appoint a resolution professional who will present a resolution plan to the CoC. The CoC must approve a resolution plan, and the resolution process must be completed within 180 days. This may be extended by a period of up to 90 days if the extension is approved by NCLT. If the resolution plan is rejected by the CoC, the debtor will go into liquidationThe Process Go On? * Time-limit for resolution process: The Code states that the insolvency resolution Process must be completed within 180 days, extendable by a period of up to 90 days. The Bill adds that the resolution process must be completed within 330 days. This includes time for any extension granted and the time taken in legal proceedings in relation to the processFour pillars */\nsolvency Professionals (IP) : Have role in the working of the bankruptcy process, regulated by Insolvency Professional Agencies “Information Uti $ (IU) : Will electronically store facts about lenders, National e- Governance Services Ltd is the first to be registered ~ * Adjudication : Will be done by National Company Law Tribunal(NCLT) for insolvency, Debts Recovery Tribunals (DRTS) will consider bankruptcy cases of individuals/unlimited liabilit nerships * Appellate authorities Are NCLAT;DRATS * Regulator : The Insolvency Bankruptcy Board of India Bankruptcy Board of]A New Regime RBI scraps SDR, S4A, CDR, JLF frameworks from March 2018 RBI harmonises stressed asset resolution framework in view of enactment of IBC Resolution plans for all stressed cases of ‘over %2,000 cr must be completed within 180 days ea Cote eres DER beRem Cade If RP not implemented, then account to be referred to IBC in 15 days For restructuring outside IBC, account should not be in default Banks will now have to report credit information to CRILC ‘on special mention accounts every monthThe Reserve Bank of India has issued various instructions aimed at resolution of stressed assets in the economy, including introduction of certain specific schemes at different points of time. in view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets. So RBI has decided to withdraw all current resolution schemes like CDR, S4A or SDR immediately. Early identi ion and reporting of stress Lenders shall identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMA) as per the following categories: SMA-O 1-30 days SMA-1 31-60 days SMA-2 61-90 daysAs per the RBI guidelines, lenders shall report credit information, including classification of an account as SMA to Central Repository of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure of © 50 million and above with them. So now the CRILC-Main Report will now be required to be submitted on a monthly basis effective April 1, 2018. In addition, the lenders shall report to CRILC, all borrower entities in default (with aggregate exposure of % SO million and above), on a weekly basis. The first such weekly report shall be submitted for the week ending February 23, 2018. Implementation of Resolution Plan All lenders must put in place Board-approved policies for resolution of stressed assets under this framework, including the timelines for resolution. As soon as there is a default in the borrower entity’s account with any lender, all lenders ~ singly or jointly ~ shall initiate steps to cure the default. The resolution plan (RP) may involve any actions / plans / reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures fo oi r entities / investors, change in ownership, or restructuring.Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower's financial difficulty, grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of instalments / rate of interest / roll over of credit facilities / sanction of additional credit facility / enhancement of existing credit limits / compromise settlements where time for payment of settlement amount exceeds three months.