Recovery Department

Departmental Vision
Presentation at Board Meeting on 11th and 12th Sept. 2005 By: General Manager (Recy.,Legal Cr. Montg. & Ascrom)
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Introduction
Narsimhan Committee constituted for giving suggestion for improving financial help for commercial banks based on the recommendations of the said Committee. RBI has implemented prudential norms for asset classification, income recognition and provisioning which came into effect from the accounting year which closed on 31st March 1993. Norms have been and are being implemented in a phased manner from the year 1994-95. Due to the implementation of the prudential norms Accrual Concept has been changed to Recoverability Concept in recognizing the income of NPA.
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 Income from NPA is not recognized on Accrual but is booked as income only when it is actually recovered, hence, once an account becomes NPA, interest income accounted on Accrual basis during the year has to be reversed.

Once an account has become NPA interest accrued should not be credited to the Profit & Loss A/c but it can be credited to Accrued Interest Suspense Account by debiting to the customers account.
This practice is followed by several banks. Most of the nationalized banks follow the practice of maintaining a mirror account and the interest due on NPA are recorded. only in the mirror account. Any subsequent recovery in NPA should first be appropriated towards interest arrears and balance, if any, to principal.

RBI Guidelines on NPA As per the extant guidelines of the Reserve Bank of India the

policy of income recognition should be objective and based

on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of bank

has to be done on the basis of objective criteria which

would ensure a uniform and consistent application of the norms. Also, the provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realizable value thereof. 4

Definition of NPA
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 : 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 as indicated in subsequent slide in respect of an Overdraft/Cash Credit (OD/CC). the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops. the installment of principal or interest thereon remains overdue for one crop seasons for long duration crops.

Definition of NPA (Cont.)

The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of RBI guidelines on securitization dated February 1, 2006. 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 of payment.
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Identification of NPAs
Type of Loan Conditions:

Term loan

Installment and/or interest remain overdue for a period of more than 90 days. CC / OD The account remains out of order for a period of more than 90 days. BP / BD The bills remains overdue for a period of more than 90 days in the case of BP & BD Agricultural advances i) Short duration crop Installment of Principal or Interest thereon remains overdue for two crop seasons. ii) Long duration crop Installment of Principal or interest thereon remains overdue for one crop season.

Identification of NPAs
Securitisation transaction: The amount of liquidity facility remains o/s for more than 90 days. The overdue receivables (representing positive mark to market value of a derivative contract) if these remain unpaid for more than 90 days from specified due date.

Derivative transactions:

Out of order
An a/c should treated out of order if i) O/s balance remains continuously in excess of the sanctioned limit/drawing power ii) O/s balance in the principal operating a/c is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days OR credits are not enough to cover the interest debited during the same period.

Overdue
Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank.

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ASSET CLASSIFICATION
Categories of NPAs As per RBI guidelines 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. Substandard Assets With effect from 31st 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 networth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the bank in full. In other words, such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected.
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ASSET CLASSIFICATION (Cont.)

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 all 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.
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ASSET CLASSIFICATION (Cont.)

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. It may be added that an asset may be considered Loss asset if the security value is less than 10% of the outstanding dues.
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INCOME RECOGNITION
Income Recognition Policy Branches should not charge and take to income account, interest on any NPA. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies is to be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the bank as a result of renegotiation and rescheduling of outstanding debt is to be recognized on an accrual basis over the period of time covered under the renegotiated or rescheduled extension of credit.
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INCOME RECOGNITION (Cont.)

If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realized. On an account turning NPA, branch should reverse the interest already charged and not collected for past periods by debiting Profit and Loss account and stop further application of interest. This will apply to Government guaranteed accounts also

Reversal of Income

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INCOME RECOGNITION (CONT.)

In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. Appropriation of recovery in NPAs Interest realized on NPAs is allowed to 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.
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INCOME RECOGNITION (CONT.)

In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), where suit not filed, recoveries effected in the account (including recovery under Public Money Recovery Act) from time to time shall be appropriated in the following manner :

Towards Principal (instalment) Towards unapplied interest

Recovery in suit filed/decreed accounts shall be appropriated first towards legal charges awarded by the court, thereafter interest due and finally principal amount.

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INCOME RECOGNITION (CONT.)

Upgradation of loan accounts classified as NPAs If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as standard accounts. Asset Classification to be borrower-wise and not facility-wise It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit / investment and not others. Therefore, all the facilities granted by the bank to a borrower will have to be treated as NPA and not the particular facility / investment or part thereof which has become irregular.
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INCOME RECOGNITION (CONT.)

. Advances under consortium arrangements Asset classification of accounts under consortium is based on the record of recovery of the individual member bank and other aspects having a bearing on recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and / or bank member bank receiving remittances is not parting with the share of other member bank, the account will be treated as not serviced in the books of the other member bank and therefore, be treated as NPA.

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SARFAESI ACT

Relevant provisions

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When notice can not be given

When Bank has lien on any goods, money or security under Contract Act or any other Law for the time being in force. A pledge of movable within the meaning of Sec.172 of the Indian Contract Act. Any security interest created in agricultural land. Any case in which the amount due is less than 20% of the Principal amount and interest thereon.
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When notice cant be given (contd.)

Any security interest for securing repayment of any financial asset not exceeding Rs.1/- lac Any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso of sub section (1) code of the Civil Procedure, 1908. Any rights of unpaid sellers under sec. 47 of the Sale of Goods Acts.
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When notice cant be given (contd.)

Any conditional sale, hire purchase or lease or any other contract in which no security interest has been created. Creation of any security interest in any air craft or defined in sec. 2 of the Air craft Act. Creation of any security interest in any vessel as defined in clause 55 of sec. 3 of the Merchant Shipping Act.
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When notice can be given

An account is classified as NPA & is not falling in any of the category of cases enumerated in sec. 31. In cases of consortium advances, the notice can be given unless the secured creditors representing 3/4th in value of the amount outstanding as on record date and such action shall be binding on all secured creditors. .

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When notice can be given (contd.)

Notice must contain the contractual dues. Notice must contain the details of the mortgaged property including the boundaries. Since Limitation Act applies to action under SARFAESI, care should be taken that the action is within time. Notice period is 60 days.
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Representation by Mortgagor / Borrower / Guarantor Sec. 13 (3A) If borrower on receipt of notice represents to the Bank or raises any objection, the Bank shall communicate within 1 week of receipt of such representation / objection for nonacceptance of the representation / objection.
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Service of the Notice

Service of Notice may be made by delivering or transmitting the notice at the place where borrower or his agent actually and voluntarily resides or carries on business or personally works for gains by :

Registered post AD. Courier. Any other means of transmission of documents like fax or electronic mail service. If the borrower is a body corporate, the demand notice shall be served on the registered office or any of the branches of such body corporate. 27

Service of the Notice(Contd.)

The demand shall be made borrowers, if more than one. on all

If notice returned unserved then service shall be effected by affixing copy of the demand notice on the outer door or some other conspicuous part of the house / building and also by publishing the contents of the demand notice in two leading newspapers, one in vernacular language having sufficient circulation in that locality.
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Possession of the Movable Property

When amount demanded in demand notice is not paid within time, the Authorised Officer (AO) shall proceed to realize the amount by adopting any of the means provided in sec.13 (4). AO shall take possession of secured asset in the presence of two witness known as Panchs. AO shall draw Panchnama as given in Annexure - I. AO shall make inventory of the secured assets taken into possession in the form as given in Annexure J.

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Possession of the Movable Property (contd.)

AO shall keep the movable property taken into possession in his custody or a person authorized or appointed by AO. AO must sell the movable property immediately if it is subject to speedy or natural decay. AO shall take steps for preservation and protection of the movable property till sold. AO shall obtain valuation, if movable property and fix the reserve price in consultation with the secured creditor.
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Sale of the Movable Property

AO may sell the movable property taken into possession in one or more lots, by adopting any of the following methods :
By obtaining quotations from parties dealing in movable properties or otherwise interested in buying such movable property. By inviting tenders from the public. By holding public auction. By private treaty.
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Sale of the Movable Property (contd.)

In case sale by public auction or by inviting tender from the public, a public notice in two leading newspapers and out of them one in vernacular language having sufficient circulation. The public notice must give the following details : Details about borrower & the secured creditor. Description of movable secured assets to be sold for identification. Reserve price. Time & place of public notice. Depositing of Earnest Money. Sale must be on as is where is and whatever is basis. There should be clear 30 days between the notice to the borrower & public notice and the actual sale. 32

Sale of the Immovable Property

AO must give notice demanding possession. AO must fix possession notice on the outer door or at such conspicuous place of the property. Inventory of articles be also prepared. Possession notice should be published in two leading newspapers, one in vernacular language having sufficient circulation in that locality After possession of the immovable property AO shall take steps for preservation & Protection of Secured assets.

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Sale of the Immovable Property

(Contd.)

AO may sell the immovable property taken into possession in one or more lots, by adopting any of the following methods : By obtaining quotations from parties dealing in movable properties or otherwise interested in buying such immovable property. By inviting tenders from the public. By holding public auction. By private treaty.
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Sale of the Immovable Property

(Contd.)
In case sale by public auction or by inviting tender from the public, a public notice in two leading newspapers and out of them one in vernacular language having sufficient circulation. The public notice must give the following details :
Details about borrower & the secured creditor. Description of immovable secured assets to be sold for identification. Reserve price. Time & place of public notice. Depositing of Earnest Money. Sale must be on as is where is and whatever is basis. There should be clear 30 days between the notice to the borrower & public notice and the actual sale. 35

Sale of the Immovable Property (Contd.)

Sale shall be confirmed in favour of the higher bidder /tender Sale shall be confirmed by the secured creditor Sale shall not be confirmed if the sale price offered is below reserve price. However, AO may with the consent of Secured creditor and the borrower effect the sale at such price The purchaser shall immediately pay 25% of the sale price & the balance on or before the 15th day of confirmation of sale.
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Sale of the Immovable Property

If

(Contd.)

default of payment within the period mentioned, the deposit shall be forfeited and property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold. On confirmation of Sale by secured creditor and if the terms of payment are complied with, the AO shall issue a certificate of sale of the immovable property in favour of the purchaser
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Cases for discussion

UTI v/s Dy. Comm. Central Excise Priority of secured creditors & govt. dues Saptagiri Pee Gee Fruits Processing (P) Ltd v/s UCo Bank

Interpretation of as is where is basis

N. Kandasamy v/s Authorised officer, SBI AO not required to open tenders in the presence of all tenderers Makbool Husain Razakmiyan v/s Bank of Baroda Validity of Title Ulhas Chandra Sahoo v/s Bank of India If highest bidder fails to pay

Akola oil Industries v/s SBI

SARFAESI can be invoked pending winding up proceedings

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Sale of FA (NPA PWO ) to ARC / ASC & Banks /NBFCs / FIS

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What is sale of financial assets?

It is an assignment of secured financial
debt by seller Bank in favour of purchaser (ARC /ASC & Banks/NBFCs/FIs) along with security interest in the securities charged to the seller Bank

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Eligible NPA A/Cs for sale

NPAs (incl. Exposure in bonds/debentures etc.) older than 2 years in books of selling Bank. NPAs less than 2 years can be considered for sale to ARC/ASC only. Outstanding more than 1 crore for a/cs under sole banking. No minimum outstanding balance limit if account in consortium/multiple banking.

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Preferred Accounts for sale

Partial write-off & NPAs (doubtful, loss) with substantial provision. Accounts already acquired by ARCs / Banks / FIs etc. Accounts where recovery, Prolonged due to pending litigation,/ BIFR Ref. Accounts where chances of recovery through compromise are bleak.

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Factors influencing value of asset

Nature of charge on tangible security. Banks exposure in total lending to borrower. Enforceability of security documents. Proper charge registration with ROC. Counter claims if any against Bank. Net worth of promoters / guarantors.
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Benefits to Bank by sale of NPA

NPA account taken off from the books Investment in these transactions is treated as performing asset Elimination of future expenses releasing resources for core operations. Timely resolution of assets becomes possible for Purchaser under

one roof enhancing value of asset

Assignment of debts to ARC restrict the borrower from taking shelter under SICA With 75% debt aggregation BIFR reference stand abated and SARFAESI Action becomes easy

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Common Deficiencies observed in flash reports

Valuation reports older than 6 months Latest ROC search reports not obtained O/s of other banks /FIs not mentioned Facility wise O/s and security details not given Non submission of fresh Inspection reports Latest net worth not obtained Details of statutory dues not mentioned
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Thanks

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