Last Session on Fundamentals of

Banking
1. Narsimham Committee –I and II
2. Recovery of advances and NPA norms
3. Corporate Debt Restructuring
4. Bank Investments
5. Remittances
Narsimham Committees on Banking Reforms

• In August 1991, the Government appointed a committee under

the chairmanship of M. Narasimham, which worked for the
liberalization of banking practices. The aim of this Committee was
to bring about ‘operational flexibility’ and ‘functional autonomy’
so as to enhance efficiency, productivity and profitability of banks.
• The Committee submitted its report in November, 1991.
• The Government also appointed another committee on banking
sector reforms under the Chairmanship of M. Narasimham which
submitted its report in April 1998. The committee focused on
bringing about structural changes so as to strengthen the
foundations of the banking system to make it more stable.
Recommendations of Narsimham Committee
-I
•‘Reduction in CRR to 8.5 percent and SLR to 25 percent over a period of about five
years.
•Deregulation of interest rates structure and decreasing the emphasis laid on directed
credit and phasing out the concessional rates of interest to priority sector.
•To raise fresh capital through public issue by the profit making banks.
•Transparency in Balance sheets
•Establishment of Special Tribunals to speed up the process of debts recovery
•Establishment of an Assets Reconstruction Fund with special power of recovery
•Bank restructuring through evolving a system of a broad pattern consisting of 3 or 4
large banks including SBI, 8-10 national Banks engaged in ‘Universal’ Banking with a
network of branches, local banks confined to a specific region and RRBs confined to
the rural areas engaged in financing of agriculture and allied activities.
•Abolishment of branch licensing and leaving the matter of opening and closing of
branches to the commercial judgment of individual banks
 Contd…
• Progressive reduction in pre-emptive reserves.
• Introduction of prudential norms to ensure capital adequacy norms, proper income
recognition, more stringent recognition of NPAs, classification of assets based on
their quality and provisioning against bad and doubtful debts by constituting the
special debt recovery tribunals
• Introduction of greater competition by entry of private sector banks and foreign
banks and permitting them to access capital market
• Partial deviation from directed lending
• Strengthening the supervisory mechanism by creating a separate Board for Banking
and Financial supervision
• Up gradation of technology through the introduction of computerized system in
banks.
• Freedom to appoint chief executive and officers of the banks and changes in the
constitutions of the board
• Bringing NBFC’S under the ambit of regulatory framework.
Recommendations of Narsimham Committee
- II
• Need For Stronger Banking System: The narasimham committee has
made out a stronger banking system in country, especially in the
context of capital account convertibility (CAC) which would involve
large amount of inflow and outflow of capital and consequent
complications for exchange rate management and domestic liquidity.
To handle this India would need a strong resilient banking and financial
system.
• Experiment With The Concept of Narrow Banking: The narasimham
committee is seriously concerned with the rehabilitation of weak
public sector banks which have accumulated a high percentage of non-
paying assets (NPA), and in some cases, as high as 20% of their total
assets. They suggested the concept of narrow banking to rehabilitate
such weak banks.
 Contd…..
• Small Local Banks: The narasimham committee has argued that
“While two or three banks with an international orientation and
8 to 10 of larger banks should take care of their needs of the
large and medium corporate sector ad larger of the small
enterprises, there will still be a need for a large number of local
banks.” The committee has suggested the setting up of small
local banks which should be confined to states or clusters of
districts in order to serve local trade, small industry etc.
• Capital Adequacy Ratio: The narasimham committee has also
suggested that the government should consider raising the
prescribed capital adequacy ratio to improve the inherent
strength of banks and to improve their risk taking ability.
 Contd….
• Public Ownership And Real Autonomy: The narasimham
committee has argued that government ownership and
management of banks does not enhance autonomy and
flexibility in working of public sector banks. Accordingly, the
committee has recommended a review of functions of banks
boards with a view to make them responsible for enhancing
shareholder value through formulation of corporate strategy.
• Review And Updating Banking Laws: The narasimham
committee has suggested the urgent need to review and
amended the provisions of RBI Act, Banking Regulation Act,
State Bank of act etc so as to bring them on same line of
current banking needs.
 The main recommendations of the
Committee were: -

• Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period

of five years
• Progressive reduction in Cash Reserve Ratio (CRR) to 3-5%
• Phasing out of directed credit programmes and redefinition of the
priority sector
• Stipulation of minimum capital adequacy ratio of 8 per cent by March
1996.(Capital adequacy ratios ("CAR") are a measure of the amount of a
bank's capital expressed as a percentage of its risk weighted credit
exposures.)
• Adoption of uniform accounting practices in regard to income
recognition, asset classification and provisioning against bad and
doubtful debts
 Contd…
• Setting up of special tribunals to speed up the recovery process of loans
• Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a
portion of their bad and doubtful advances at a discount
• Abolition of branch licensing
• Liberalizing the policy with regard to allowing foreign banks to open offices
in India
• Giving freedom to individual banks to recruit officers
• Revised procedure for selection of Chief Executives and Directors of Boards
of public sector banks
• Speedy liberalization of capital market
• Enactment of a separate legislation providing appropriate legal framework
for mutual funds and laying down prudential norms for such institutions,
etc.
 Need for stronger banking system
• The committee has made clear the need of a stronger
banking system , which would involve large inflows and
outflows of large capital and consequent complications for
exchange rate management and domestic liquidity. So
committee recommended the merger of strong banks
which would have a ‘multiplier effect’ on industry.
• But has rejected the merger of weak banks with strong
banks as it may have a negative impact on the asset quality
of the stronger bank.
• The committee has also supported that two or three large
Indian banks be given international or global character.
 Small Local Banks
• The committee has suggested setting up of small,
local banks which would be confined to states or
clusters of districts in order to serve local trade,
small industry, and agriculture.

• Small Local Banks :

At the same time, these banks should have
strong corresponding relationship with the larger
and international bank.
 Experiment with concept of narrow
banking

• Serious concern for rehabilitation of weak PSBs

which have accumulated a high percentage of NPAs
in some cases as high as 20% of the total assets.
• Committee suggested the concept of narrow
banking to rehabilitate weak banks.
• Narrow banking means that the weak banks place
their funds only in the short term in risk-free assets-
these banks try to match their demand deposits
with safe liquid assets
 Capital Adequacy Ratio
• The committee has also suggested that the
government should consider raising the prescribed
capital adequacy ratio to improve inherent strength of
banks and to improve their risk absorption capacity

Review and update banking laws:

• Committee has suggested an urgent need to review
and amend the provisions of RBI Act, Banks
Nationalization Act, etc so as to bring them in line with
the current needs of the banking industry.
 Other recommendations

• Other recommendations relate to the need for

automation of PSBs; professionalizing and
depoliticizing bank boards; review of
recruitment procedures; training and
remuneration policies; real autonomy etc
 Non Performing Assets-
DEFINITIONS

• Non performing Assets

• An asset, including a leased 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 instalment
of principal remain overdue for a period of more than 90 days in respect of a term loan, ii.
the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC), iii. the
bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted, iv. the instalment of principal or interest thereon remains overdue for two crop
seasons for short duration crops, v. the instalment of principal or interest thereon remains
overdue for one crop season for long duration crops, vi. the amount of liquidity facility
remains outstanding for more than 90 days, in respect of a securitisation transaction
undertaken in terms of guidelines . vii. in respect of derivative transactions, the overdue
receivables representing positive mark-to-market value of a derivative contract, if these
remain unpaid for a period of 90 days from the specified due date for payment.
• Banks should, classify an account as NPA only if the interest due and charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
 NPA norms in respect of Agricultural
Advances
A loan granted for short duration crops will be treated as NPA, if the instalment of
principal or interest thereon remains overdue for two crop seasons. A loan granted
for long duration crops will be treated as NPA, if the instalment of principal or
interest thereon remains overdue for one crop season. For the purpose of these
guidelines, “long duration” crops would be crops with crop season longer than one
year and crops, which are not “long duration” crops, would be treated as “short
duration” crops. The crop season for each crop, which means the period up to
harvesting of the crops raised, would be as determined by the State Level Bankers’
Committee in each State. Depending upon the duration of crops raised by an
agriculturist, the above NPA norms would also be made applicable to agricultural
term loans availed of by him. The above norms should be made applicable to all
direct agricultural advances. Where natural calamities impair the repaying capacity
of agricultural borrowers, banks may decide on their own as a relief measure
conversion of the short-term production loan into a term loan or re- schedulement
of the repayment period; and the sanctioning of fresh short-term loan
 Contd….
‘Out of Order’ status
• An account should be treated as 'out of order' if the outstanding
balance remains continuously in excess of the sanctioned
limit/drawing power. In cases where the outstanding balance in
the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 90
days as on the date of Balance Sheet or credits are not enough to
cover the interest debited during the same period, these
accounts should be treated as 'out of order'.
‘Overdue’
• Any amount due to the bank under any credit facility is ‘overdue’
if it is not paid on the duedate fixed by the bank.
 Income Recognition Policy

• Income from nonperforming assets (NPA) is not recognised on

accrual basis but is booked as income only when it is actually
received. Therefore, the banks should not charge and take to
income account.
• If any advance, including bills purchased and discounted, becomes
NPA, the entire interest accrued and credited to income account in
the past periods, should be reversed if the same is not realised.
This will apply to Government guaranteed accounts also.
• Interest realised on NPAs may be taken to income account
provided the credits in the accounts towards interest are not out
of fresh/ additional credit facilities sanctioned to the borrower
concerned.
 ASSET CLASSIFICATION
Categories of NPAs

Substandard Assets
• With effect from 31 March 2005, a substandard asset
would be one, which has remained NPA for a period less
than or equal to 12 months. In such cases, the current net
worth of the borrower/ guarantor or the current market
value of the security charged is not enough to ensure
recovery of the dues to the banks in full. In other words,
such an asset will have well defined credit weaknesses
that jeopardise the liquidation of the debt and are
characterised by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.
 Contd….
Doubtful Assets
With effect from March 31, 2005, an asset would be classified as doubtful if
it has remained in the substandard category for a period of 12 months. A loan
classified as doubtful has all the weaknesses inherent in assets that were
classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, – on the basis of currently known facts,
conditions and values – highly questionable and improbable.

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. In other words, such an asset is considered uncollectible and of
such little value that its continuance as a bankable asset is not warranted
although there may be some salvage or recovery value.
 Contd……
Accounts where there is erosion in the value of
security/frauds committed by borrowers

• In respect of accounts where there are potential threats for

recovery on account of erosion in the value of security or
non-availability of security and existence of other factors
such as frauds committed by borrowers it will not be
prudent that such accounts should go through various
stages of asset classification. In cases of such serious credit
impairment the asset should be straightaway classified as
doubtful or loss asset as appropriate
 PROVISIONING NORMS
Loss assets :
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 to which the bank has a valid recourse and the
realisable value is estimated on a realistic basis.
ii. In regard to the secured portion, provision may be made on the following
basis, at the rates ranging from 20 percent to 100 percent of the secured
portion depending upon the period for which the asset has remained doubtful:
• Up to one year : 20%
• One to three years : 30%
• More than three years: 100%
 Contd…..
Substandard assets :
(i) A general provision of 10 percent on total outstanding should be made
without making any allowance for ECGC guarantee cover and securities
available.
(ii) The ‘unsecured exposures’ which are identified as ‘substandard’ would
attract additional provision of 10 per cent, i.e., a total of 20 per cent on the
outstanding balance. However, in view of certain safeguards such as
escrow accounts available in respect of infrastructure lending,
infrastructure loan accounts which are classified as sub-standard will
attract a provisioning of 15 per cent instead of the aforesaid prescription of
20 per cent. To avail of this benefit of lower provisioning, the banks should
have in place an appropriate mechanism to escrow the cash flows and also
have a clear and legal first claim on these cash flows. The provisioning
requirement for unsecured ‘doubtful’ assets is 100 per cent.
 Contd….
The provisioning requirements for all types of standard assets
stands :
• Banks should make general provision for standard assets at
the following rates for the funded outstanding on global loan
portfolio basis:
• (a) direct advances to agricultural and SME sectors at 0.25
per cent;
• (b) advances to Commercial Real Estate (CRE) Sector at 1.00
per cent;
• (c) all other loans and advances not included in (a) and (b)
above at 0.40 per cent
 Corporate Debt Restructuring
Companies sometimes are found to be in financial troubles for
factors beyond their control and also due to certain internal
reasons. For the revival of such businesses, as well as, for the
security of the funds lent by the banks and FIs, timely support
through restructuring in genuine cases was required. With this view,
a CDR system was established with the objective to ensure timely
and transparent restructuring of corporate debts of viable entities
facing problems, which are outside the purview of BIFR, DRT and
other legal proceedings. In particular, the system aimed at
preserving viable corporate/businesses that are impacted by certain
internal and external factors, thus minimising the losses to the
creditors and other stakeholders.
 Contd…..
• Eligibility criteria
  The CDR mechanism will cover only multiple banking accounts /
syndication / consortium accounts with outstanding exposure of Rs.10
crore and above by banks and institutions.
• In terms of the extant instructions, in no case, requests of any corporate
indulging in wilful default, fraud or misfeasance even in a single bank will
be considered for restructuring under the CDR mechanism. As a general
principle therefore, wilful defaulters should not be entertained under the
CDR mechanism. However, in deserving cases, the Core Group may review
the reasons for classification of the borrower as wilful defaulter and
satisfy itself that the borrower is in a position to rectify the wilful default
provided he is granted an opportunity under the CDR mechanism.
 
 Contd….
• The accounts where recovery suits have been filed by the lenders against the company, may
be eligible for consideration under the CDR mechanism provided, the initiative to resolve the
case under the CDR mechanism is taken by at least 75% of the lenders (by value) and 60% of
lenders in number.
Category 2 CDR System
  For the second category of CDR where the accounts have been classified as ‘doubtful’ in the
books of lenders, a minimum of 75% (by value) and 60% of the lenders in number should
satisfy themselves of the viability of the account and consent for such restructuring.
• Legal Basis
    In order to ensure discipline in the CDR mechanism, members of CDR may jointly or severally
decide that those banks that have not joined the mechanism as members would not be
eligible for future consortium / syndication arrangements for lending. For this purpose, a
collective action clause may be incorporated in the loan agreements involving multiple
lenders whereby all lenders agree to abide by the majority decision for restructuring of the
account in case of need. If 75 per cent of creditors by value and 60% of the creditors in
number, approve a restructuring package of an existing debt (i.e., debt outstanding) under
CDR mechanism, it shall be binding on the remaining creditors.
 Stand-Still Clause

•    During pendency of the case with the CDR mechanism, the usual asset
classification norms continue to apply and the process of reclassification of an asset
does not stop merely because the case is referred to the CDR Cell. If restructuring
under the CDR mechanism is approved and the approved package is implemented
within three months from the date of approval by the Empowered Group, the asset
classification status would be restored to the position, which existed when the
reference to the Cell was made. Consequently, any additional provisions made by
banks towards deterioration in the asset classification status during the pendency of
the case with the CDR mechanism may be reversed.

• If an approved package remains unimplemented even three months after the date of
approval by the Empowered Group, it would indicate that the success of the package is
uncertain. Therefore, the asset classification status of the account should not be
restored to the position as on the date of reference to the CDR Cell. This will ensure
that banks which delay implementation of the package will not be allowed to enjoy the
regulatory concessions
 Additional finance
•  Additional finance, if any, is to be provided by all lenders irrespective of whether they
are working capital or term lenders on a pro-rata basis. The additional finance may be
treated as standard asset up to a period of one year after the first interest/ principal
payment whichever is earlier falls due under the approved restructuring package. The
income in this period may be recognized only on cash basis. If restructured asset does
not qualify for up gradation at the end of the above period, additional finance shall be
placed in the same asset classification category as the restructured debt.

• In case for any internal reason, any creditor (outside the minimum 75 and 60 per cent)
does not wish to commit additional financing, that creditor will have the option to
either (a) arrange for his share of additional financing to be provided by a new or
existing creditor, or (b) agree to deferment of the first year’s interest due to him after
the CDR package becomes effective. The first year’s deferred interest as mentioned
above, without compounding, will be payable along with the last instalment of the
principal due to the creditor
 Exit Option

• The proposals for restructuring package should provide for option to a particular
lender or lenders (outside the minimum 75 and 60 per cent who have agreed for
restructuring) who for any internal reason, does/do not fully abide by the CDR
Empowered Group's decision on restructuring. The lenders who wish to exit from
the package would have the option to sell their existing share to either the
existing lenders or fresh lenders, at an appropriate price, which would be decided
mutually between the exiting lender and the taking over lender. The new lenders
shall rank on par with the existing lenders for repayment and servicing of the
dues since they have taken over the existing dues to the exiting lender. In
addition, the 'exit option' will also be available to all other lenders within the
minimum 75 and 60 per cent, provided the purchaser agrees to abide by the
restructuring package approved by the Empowered Group.
• In order to bring more flexibility in the exit option, One Time Settlement can also
be considered, wherever necessary, as a part of the restructuring package.
 Contd……
Conversion option   

• Equity acquired by way of conversion of debt / overdue interest

under the CDR mechanism is allowed to be taken up without seeking
prior approval from RBI even if the capital market ceiling is breached,
subject to reporting such holdings to RBI every month along with the
regular statement.

• Acquisition of non-SLR securities by way of conversion of debt are

exempted from the guidelines on non-SLR securities subject to periodical
reporting to RBI
 
 
 Contd……
Treatment of ‘standard’ accounts restructured under CDR
• A rescheduling of interest element either before commencement of commercial production or after commencement of commercial
production but before the asset has been classified as substandard provided conditions (i) to (iv) of Para 5.1 are complied with would
not cause an asset to be downgraded to sub-standard category on writing off/providing for the amount of sacrifice, if any, in the
element of interest measured in present value terms. For this purpose, the sacrifice should be computed as the difference between the
present value of future interest income reckoned based on the current BPLR as on the date of restructuring plus the appropriate term
premium and credit risk premium for the borrower category on the date of restructuring and the interest charged as per the
restructuring package discounted by the current BPLR as on the date of restructuring plus appropriate term premium and credit risk
premium as on the date of restructuring
 
Treatment of ‘sub-standard’ / ‘doubtful’ accounts restructured under CDR

• A rescheduling of interest element would render a sub-standard / ‘doubtful’ asset eligible to be continued to be classified in sub-
standard / ‘doubtful’ category for the specified period provided the conditions (i) to (iv) of Para 5.1 are complied with and the amount
of sacrifice, if any, in the element of interest, measured in present value terms computed as per the methodology described in Para
5.2.1 is either written off or provision is made to the extent of the sacrifice involved.

•  Banks/ FIs may recalculate the amount of sacrifice at each balance sheet date so as to capture the changes in the fair value on account
of changes in BPLR, term premium and the credit category of the borrower and the amount of excess provision, if any may be reversed .

• Economic sacrifice must necessarily be provided for by debit to the Profit & Loss account. In the event a zero coupon bond is taken
against the sacrifice, it should be valued at Re1/- till the maturity of the bond. This will ensure that the effect of charging off the
economic sacrifice to the Profit & Loss account is not negated.
 Recovery of advances
• Recovery through recovery agents
• Recovery through SERFAESI Act
• Recovery through filing a suit against the
borrower and guarantor
• Recovery through Lok Adalat
• Recovery through Debt Recovery Tribunal
• Recovery through Local Recovery Acts
Recovery through Recovery agents
RBI has issued guidelines on recovery through agents:
(i) Banks should have a due diligence process in place for engagement of
recovery agents, which should be so structured to cover, among others,
individuals involved in the recovery process.
(ii) To ensure due notice and appropriate authorization by the banks, they
should inform the borrower the details of recovery agents engaged for the
purpose, while forwarding default cases to the recovery agents. The details
should include their telephone numbers etc. The recovery agents should
call the borrowers only from telephone numbers notified to the borrower.
(iii) Each bank should have a mechanism whereby the borrowers' grievances
with regard to the recovery process can be addressed.
(iv) Contracts with the recovery agents do not induce adoption of uncivilized,
unlawful and questionable behaviour or recovery process.
 Contd….
(v) Indian Institute of Banking and Finance (IIBF) has started a certificate course for Direct
Sales Agents / Direct Marketing Agents / Recovery Agents with minimum 100 hours of
training. Banks should ensure that all their Recovery Agents undergo the above training
and obtain the certificate from the above institute. Further, the service providers
engaged by banks should also employ only such personnel who have undergone the
above training and obtained the certificate from the IIBF.

In the matter of recovery of loans:

(a) the lenders should not resort to undue harassment viz. persistently bothering the
borrowers at odd hours, use of muscle power for recovery of loans, etc. (b) the banks
should ensure that agents engaged by them for debt collection refrain from action/s that
could damage the integrity and reputation of the bank (c) their agents should not resort
to intimidation or harassment of any kind, either verbal or physical, against any person in
their debt collection efforts, including acts intended to humiliate publicly or intrude into
the privacy of the borrowers'/ credit card holders' family members, referees and friends,
making threatening and anonymous calls or making false and misleading representations.
 Recovery through SARFAESI Act
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions
to recover their non-performing assets without the intervention of the Court.
Methods:
The Act provides three alternative methods for recovery of non-performing
assets.
• Securitisation,
• Asset Reconstruction,
• Enforcement of Security without the intervention of the Court
• Provisions:
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
 Contd..
• The Act facilitates Securitisation Companies (SCs) or Assets
Reconstruction companies (ARCs) securitisation of financial assets of
banks, empower SCs/ARCs to raise funds by issuing security receipts to
qualified institutional buyers (QIBs), empowering banks and FIs to take
possession of securities given for financial assistance and sell or lease the
same to take over management in the event of default.
• Securitisation: It means issue of security by raising of receipts or funds by
SCs/ARCs. A securitisation company or reconstruction company may raise
funds from the QIBs by forming schemes for acquiring financial assets. The
SC/ARC shall keep and maintain separate and distinct accounts in respect
of each such scheme for every financial asset acquired, out of investments
made by a QIB and ensure that realisations of such financial asset is held
and applied towards redemption of investments and payment of returns
assured on such investments under the relevant scheme.
 Contd….
Asset Reconstruction:
The SCs/ARCs for the purpose of asset reconstruction should provide
for any one or more of the following measures:
• the proper management of the business of the borrower, by change
in, or take over of, the management of the business of the borrower
• the sale or lease of a part or whole of the business of the borrower
• rescheduling of payment of debts payable by the borrower
• enforcement of security interest in accordance with the provisions of
this Act
• settlement of dues payable by the borrower
• taking possession of secured assets in accordance with the
provisions of this Act.
 Enforcement of Security without the
intervention of the Court
This act gives the following powers to the affected Banks
• To issue demand notice to the defaulting borrower and
guarantor, calling upon them to discharge their dues in full
within 60 days from the date of the notice.
• To give notice to any person who has acquired any of the
secured assets from the borrower to surrender the same to
the Bank.
• To ask any debtor of the borrower to pay any sum due or
becoming due to the borrower.
• Any Security Interest created over Agricultural Land cannot
be proceeded with.
 Contd…..
• Procedure:
If on receipt of demand notice, the borrower makes any representation or
raises any objection, Authorised Officer shall consider such representation
or objection carefully and if he comes to the conclusion that such
representation or objection is not acceptable or tenable, he shall
communicate the reasons for non acceptance within One Week of receipt
of such representation or objection.
A borrower / guarantor aggrieved by the action of the Bank can file an
appeal with DRT and then with DRAT, but not with any civil court. The
borrower / guarantor has to deposit 50% of the dues before an appeal
with DRAT.
• If the borrower fails to comply with the notice, the Bank may take
recourse to one or more of the following measures:
• Take possession of the security
• Sale or lease or assign the right over the security
• Manage the same or appoint any person to manage the same
Recovery through Debt Recovery Tribunals

What are the Debts Recovery Tribunals?

• The Debts Recovery Tribunals have been established by the
Government of India under an Act of Parliament (Act 51 of
1993) for expeditious adjudication and recovery of debts due
to banks and financial institutions.

Who can file cases before the DRTs?

• Where a bank or financial institution has to recover any debt
from any person, it makes an application called Original
Application (OA) to the Tribunal against such person.
What is the pecuniary jurisdiction of the DRTs?
The provisions of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 shall not apply where the amount of debt due to bank or financial institution or to
a consortium of banks or financial institutions is less than ten lakhs rupees or such other
amount, being not less than one lakh rupees, as the Central Government may, by
notification, specify.

Fee for filing an Original Application (OA) before the Tribunal

The fee payable as per Rule 7 of the Debts Recovery Tribunal (Procedure) Rules, 1993
is Rs.12,000/- where an amount of debt due is Rs.10.00 lakhs, Rs.12,000 plus Rs.1000
for every one lakh of debt due or part thereof in excess of Rs.10.00 lakhs subject to a
maximum of Rs.1,50,000/- where an amount of debt due is above Rs.10.00 lakhs.

fee for Review Application?

The fee for Review Application is fifty per cent of the fee paid for the OA.
 Fee Structure
fee for Interlocutory Application?
• The fee for filing Interlocutory Application (IA) is Rs.250/-.

fee for Vakalatnama?

• The fee for filing Vakalatnama is Rs.5/-.

fee for an appeal against the order of the Recovery Officer?

• Rs.12,000/- if the amount appealed against is less than Rs.10 lakhs.
• Rs.20,000/- if the amount appealed against is Rs.10 to 30 lakhs.
• Rs.30,000/- if the amount appealed against is more than 30 lakhs.

fee for perusal of documents?

• Rs.100/- per case.

fee payable for certified copies of documents?

• Rs.5 per page.
 Recovery through Lok Adalats
Term loans, personal loans, credit card loans and housing loans with less
than Rs.10 lakh can be referred to Lok Adalats.
It is a non-formal forum organised by public spirited social workers like
retired judges, public spirited lawyers, and law teachers for bringing about
settlement of disputes between the parties through conciliatory and
mediatory efforts. One important condition is that both parties in dispute
must agree for settlement through Lok Adalat and abide by its decision.

There is no court fee and no rigid procedural requirement (i.e. no need to

follow process given by Civil Procedure Code or Evidence Act), which makes
the process very fast. Parties can directly interact with the judge, which is
not possible in regular courts.
 Bank Investments
Investments by banks may be categorised as follows :
(a) Investment in SLR securities
(b) Investment in Non- SLR securities
RBI has directed banks that the entire investment
portfolio of the banks (including SLR and non-SLR
securities) should be classified under the following three
categories:
• Held to maturity
• Available for sale
• Held for trading
 Contd……
• Held to Maturity
• The securities acquired by the banks with the intention to hold them to
maturity will be classified under ‘held to maturity’. The investments
included under this head should not exceed 25 per cent of the bank’s
total investments. Profit on sale of investments in this category should be
first taken to the profit and loss account and thereafter be appropriated
to the ‘capital reserve account’. Loss on sale will be recognised in the
profit and loss account. securities under HTM category are intended to be
held till maturity and hence are not required to be marked to market.
• Banks are allowed to shift investments to/from HTM with the approval of
the Board of Directors once a year.  Such shifting is normally allowed at
the beginning of the accounting year and no further shifting to/from HTM
is allowed during the remaining part of that accounting year.
 Contd…..
• Available for Sale and held for Trading
• The securities acquired by banks with the intention to trade by taking
advantage of the short -term price/ interest rate movements will be
classified under ‘held for trading’. The securities which do not fall under the
above categories will be classified under ‘available for sale’. The banks will
have the freedom to decide on the extent of holdings under available for
sale and held for trading categories. This will be decided by them after
considering various aspects such as basis of intent, trading strategies, risk
management capabilities, tax planning, manpower skills, capital position.
The investments classified under ‘held for trading’ category would be those
from which the bank expects to make a gain by the movement in the interest
rates/ market rates. These securities are to be sold within 90 days.
• Profit or loss on sale of investments in both the categories will be taken to
the profit and loss account.
 Contd…..

• Investment Fluctuation Reserve

• With a view to building up of adequate reserves to
guard against any possible reversal of interest rate
environment in future due to unexpected
developments, banks are to build up investment
fluctuation reserve (IFR) of a minimum of 5 per cent of
the investment portfolio. IFR should be computed with
reference to investments in two categories, viz, ‘held
for trading’ and ‘available for sale’. Banks are free to
build up higher percentage of IFR up to 10 per cent.
 Remittances
Now-a-days, the following three types of modes
are used for remitting funds:
(a) Bank Draft
(b) RTGS
(c) NEFT
Besides the above, fund transfers can be
done through internet banking and mobile
banking.
 Bank Drafts
A banker’s draft (or demand draft) is a payment order issued by
one branch of a bank upon other branch, instructing the drawee
branch to pay the specified sum of money to the specified
person. A demand draft is always drawn, payable to order. A
demand draft resembles a bill of exchange, the only difference
being that in the former, the drawer (bank) and the drawee
(bank) are same. The definition of bill of exchange in NI Act does
not state that the drawer and drawee have to be different. It
merely states a bill of exchange should be signed by the maker
and that the drawee should be a ‘certain person’. A bank draft
can therefore be treated as a bill of exchange and also a cheque
since it is payable on demand and is drawn on a banker.
 Contd……
Issue of Duplicate Demand Draft
• Duplicate draft, in lieu of lost draft, upto and including Rs. 5,000/-
may be issued to the purchaser on the basis of adequate indemnity
and without insistence on seeking non payment advice from drawee
office irrespective of the legal position obtaining in this regard. Banks
should issue duplicate Demand Draft to the customer within a
fortnight from the receipt of such request. Further, for the delay
beyond this stipulated period, banks were advised to pay interest at
the rate applicable for fixed deposit of corresponding maturity in
order to compensate the customer for such delay.
• Stop payment of a draft is not allowed. When a draft is reported lost,
the bank will simply put a caution note in their record so as to avoid
fraudulent payment
 National Electronic Funds Transfer (NEFT) System

• National Electronic Funds Transfer (NEFT) system

which was launched in November 2005 is becoming
a very popular mode for nationwide transfer of
money from one branch to any other bank branch
participating in the NEFT system. In the month of
January 2010 alone, more than 6 million transactions
were processed through the NEFT system. The
coverage has also increased substantially with
participation of over 63,000 bank branches spread
across the length and breadth of the country.
 Contd…..
• The operating hours would be from 9 am to 7
pm on weekdays and from 9 am to 1 pm on
Saturdays.
• Originator of a NEFT transaction would now be
receiving through a mobile SMS or an e-mail a
positive confirmation in the form of an
acknowledgement containing the date and
time of credit, immediately after the credit is
afforded to the beneficiary account.
Real Time Gross Settlement(RTGS)
• The real time gross settlement (RTGS) timings for
customer and inter-bank transactions on Saturdays
have been extended. The revised timings are:
• Days
• Customer Transactions
• Inter-bank Transactions
• Monday – Friday
• 9:00 hours to 16:30 hours
• 9:00 hours to 18:00 hours
 Charges
• NEFT – Rs.15 per transaction
• RTGS – Rs.25 per transaction
• In NEFT amount upto Rs.2 lacs can be
remitted. For amounts Rs.2 lacs and above
RTGS will be used