- Sanjay Srinivaas , Sadasiv and Kishore

 Asset is a resource with economic value that an individual

or country owns or controls with the expectation that it will
provide a future benefit.

 The necessary quality for an asset is that value remains

after the period of analysis, so it can be used as a store of
value.
 Assets

Performing Non-performing
Assets Assets

Standard Sub-standard Loss Assets

Doubtful Assets
Assets Assets
A nonperforming asset (NPA) refers to a classification for
loans or advances that are in default or are in arrears on
scheduled payments of principal or interest. In most cases,
debt is classified as nonperforming when loan payments
have not been made for a period of time. As of 31st March,
2004 it has been decided to adopt the ‘90 days’ overdue.

In other words, an asset is tagged as non-performing when it

ceases to generate income for the lender
 Sub-standard Assets:-
A sub-standard asset is an asset classified as an NPA for less
than 12 months.
 Doubtful Assets:-
A Doubtful asset is one which has been NPA for more than 12
months. After 36 months it becomes Loss asset.
 Loss Assets:-
Loss assets are usually defined as loans advanced by
banks/financial institutions which are doubtful and have
been declared as not recoverable by the auditors of the bank.
 During the late 1990s, in view of the rising level of bank
NPAs, the Narasimham Committee II and Andhyarujina
Committee were constituted to examine the scope for
banking sector reforms and the need for changes in the
legal system to resolve NPAs.

 These committees suggested a new legislation for

securitisation, empowering banks and financial
institutions (FIs) to take possession of the securities and
sell them without the intervention of the court.
Accordingly, the SARFAESI Act was enacted in 2002 to
provide an enabling environment for resolution of NPAs
and for strengthening the financial sector.
 Ineffective Defective
recovery Lending
tribunal process

Absence
Lack of External Industrial of Internal Improper
SWOT
demand Sickness Industrial
Factors Visit Factors analysis

Poor
Natural credit
calamities appraisal
system
 Higher Interest
unemploy rates will
ment skyrocket

Dis-
Scarcity incentive
of funds for
investors

Banks
Can lead
not
to a vicious
willing to
circle
lend
 System-wide gross non-performing assets of banks rose to
11.2 percent or at Rs 10.39 trillion in FY18 from 9.3 percent a
year ago, and the share of public sector banks stood at Rs
8.95 trillion, or at 14.6 percent.
Asset (Credit) contraction:
• Reduced recycling of funds and reduced ability of lending
more which leads to lesser interest income.
• Contracts the money stock which may lead to economic
slowdown.

Liability Management:
• Banks tend to lower the interest rates on deposits and levy
higher interest rates on advances to sustain NIM.
Shareholders confidence:
• Adverse impact on the bank business as well as
profitability, so the shareholders do not receive a market
return on their capital and sometimes it may erode their
value of investments.
• As per guidelines, banks whose net NPA level is 5% &
above are required to take prior permission from RBI to
declare dividend.

Public confidence:
• Higher level of NPAs shakes the confidence of general
public in the soundness of the banking system.
• Liquidity issues arise, which are likely to lead run on bank
by depositors.
 In 2010, RBI relaxed its norms for corporate debt restructuring of aviation industry.

Group of banks lead by SBI to lend more money to Kingfisher Airlines, keeping the
defunct airlines’ brand as collateral.

17 months later, SBI pleaded RBI to treat the loans of Kingfisher Airlines under stressed
asset category and that the restructured loans were in compliance with RBI guidelines
 RBI has issued guidelines on income recognition, asset
classification and provisioning as regards NPA accounts.
 In September 2002
 Released guidelines on preventing slippage of NPAs.
 Gave recommendations on
(i) Early Recognition of the problem
(ii) Identifying borrowers with genuine intent
(iii) Timeliness and adequacy of response
(iv) Consortium/multiple financing
 In February 2014:
 Introduced the Joint lenders forum (JLF)
 Allowed multiple banks that had extended loans to a
specific company to consider a collective mechanism to
resolve the problem
In June 2015:
 RBI introduced the strategic debt restructuring (SDR)
scheme
 Allowed banks to buy a stake in defaulting companies by
converting debt into equity
 It had only a little success, as finding buyers for this equity
was often difficult
In June 2016:
 Introduced a scheme for sustainable structuring of stressed
assets
 Evidently, the scope of this scheme is limited as it is
applicable only to active projects
Insolvency and Bankruptcy Code 2016:
 The 2016 Code provides for a time-bound process to
resolve insolvency
 Creditors gain control over the debtor’s assets and must
make decisions to resolve insolvency within a 180-day
period
 Code also provides immunity to debtors from resolution
claims of creditors during this period

 In February, 2018:
 Lenders initiate the process of implementing a resolution
plan even if there was a one-day default.
 Defaults are to be recognized within 30 days.
 Don't Promote & Lend for undesired purposes
 No Sanctioning of High Value Loan due to political
pressure
 Reduce Abuse and threat for Recovery
 Proper KYC & Repeat KYC [Know-Your-Customer] will
restrict Benami Accounts and Loans sanctioned
 Regular Audits and Inspection by external RBI Auditors
 Credit Quality & Credit Worthiness must be taken into
account to eliminate / restrict willful Defaulters
 Not Charging High Rate of Interest
 RECOVERY MECHANISMS

 Lok Adalats
 Debt Recovery Tribunals
 Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002
(SARFAESI Act)
 Fugitive Economic Offenders Bill
 For cases involving an amount upto Rs.5 lakh
 The Indian Banks’ Association (IBA) issues
guidelines for taking up of cases by Lok Adalats
 No initial fees and its decrees have legal status and
binding
 After full payments of claimed amount, a discharge
certificate should be issued by the bank/financial
institutions.
 Proved to be quite effective in speedy justice and
recovery of small loans hence government
suggested to increase their number.
Table: Showing NPAs recovered by SCBs through Lok Adalats
(in Billions)
 Established under the Recovery of Debts Due to
Banks and Financial Institutions Act (RDDBFI
Act), 1993
 Provides speedy recovery of debts due to Banks and
Financial Institution
 Presently 39 DRT's and 5 DRAT's
 Presiding officer rank of District Judge appointed
for 5 years by central government
 Borrowers, guarantors aggrieved by any action of
the bank can approach under SARFAESI act,2002
 Covers recovery of debt of Rs 20 lakh or more.
 Stands for Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act)
 Npa loans with outstanding of above Rs 1 lakh
 NPA accounts where amount is less than 20% of
principal and interest not eligible
 Empowers banks to
 issue demand notice to defaulting borrower or
guarantor to discharge their dues within 60 days of
notice
 to send notice to anyone who has acquired any of the
secured assets from the borrower to surrender the
same to bank
 to ask the debtor of borrower to repay any dues to the
borrower
 If the borrower fails to comply with notice
 take possession of the security

 sale, lease or assign the right over security

 manage the same or appoint any person to do

the same
 30 days time to file objection
 The act has provisions for registration and
regulation of Securitisation and Reconstruction
companies
 Gives the procedures for the transfer of NPAs to
asset reconstruction companies for the
reconstruction of the assets
Process to be followed
Comparative statement of NPA recovery by various recovery
channels

NPA recovery by various channels

 Was introduced in the Lok Sabha on 12
March 2018
Key Provisions:
+ A person is declared Fugitive Economic Offender if:-
 An arrest warrant has been issued for offence valued
over 100 cr
 He has left the country and refuses to return for
prosecution
+ An application in will be filed and time of 6 weeks would
be given to accused to return and face prosecution.
 Enforcement Directorate (ED) or Directorate General of
Economic Enforcement is the apex authority
 Upon declaration of FEO
 Properties may be confiscated and vested in central

government.
 The FEO and the company associated will be barred

from filing and defending civil cases.

 Has to be kept in check for misuse of power.
 Will lead to improvement of the whole system.
• He was ranked 57 in the
Forbes list of India’s
billionaires in 2017.

• He is the founder and

creative director of the
Nirav Modi chain of
diamond jewellery.
•On 29th Jan,2018, PNB (Punjab National Bank) filed a
criminal complaint against Nirav Modi.

•He fraudulently raised funds of worth Rs.13,500 crore from

various public & private sector banks in 2011.

•He showed the Letter of Undertaking (LoU) issued by Punjab

National Bank.
•The employees at PNB branch fraudulently issued a LoU for
365 days without making any provisions for collateral.

•The Nirav Modi’s three companies allegedly raised loans

from many banks by showing LoU.

•After that PNB officials started scanning the records and

didn’t find any such transactions and then filed a complaint
with CBI.
•The failure of Auditors
•Management Failure
•No rotation of Employees
•Tagged as ‘wilful defaulter’ by SBI in
November 2015.

•Already owed around Rs.7000 crore

then to Public Sector Banks (PSBs).

•Was given further loan by the

consortium of banks led by SBI for
Kingfisher Airlines.
•Kingfisher Airlines (KFA) started out of acquisition of
already loss making Deccan Airlines in 2005.

•Tried dumping to lure customers, without any proper plans

for any profitability.

•Charged too low prices for high-end services.

•Reported losses of ₹1602 crores in 2008.

•All KFA flights ultimately
got grounded in 2012 with
accumulated losses of Rs.
8200 crores.

•Kingfisher, today owes

over Rs. 9000 crore to its
lenders.
•PSBs disbursed loans to big projects without analysing pros
and cons.

•Banks must have deliberately closed their eyes as collateral

was decided on assets that were to be created in the then
future.

•Late reaction by the government, regulators and banks.

•Banks should have restructured KFA’s debt in 2010.

•It was 2014 when UBI first declared him as wilful defaulter
and SBI followed suit.
 Punjab and Maharashtra Co-operative bank had a total
deposits of Rs.11,000 crore, deposited by around 15 lakh
customers.
 The bank gave out loans to a company(HDIL), the
company was unable to pay back and these loans became
bad loans/NPAs.
 But despite that, the bank continued to loan out to the
company.
 The total amount of money involved in this fraud is 6,500
crores.
 HDIL company had created 21,000 dummy accounts in
this bank to show how these small accounts had borrowed
small amounts of loans.

 It was done to hide the fact that all these accounts

belonged to the same company and a huge amount had
been loaned out which they could not repay.

 This is how they managed to hide from the RBI’s auditing.

Because while auditing, the RBI analyses only a few
accounts, not all of them.
 The RBI put sanctions on
the withdrawal of money
from the bank to just Rs 1,000
per customer for the next six
months.
 The limit was raised to
Rs.25,000 but angry
customers have continued to
protest.
 Since deposit insurance in India could only cover an
amount of one lakh, people who had deposited more than
one lakh rupees are facing risk.
 No assurance was given to the depositors by the
government/RBI.