NPA Reduction

Various tools available for NPA recovery and NPA reduction over the years are given as under. A. SARFAESI Act, 2002 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, vests powers with banks and FIs for taking possession and sale of securities without intervention of the courts or tribunals. The Security Interest (Enforcement) Rules, 2002, has also been notified by Government to enable secured creditors to authorise their officials to enforce the securities and recover the dues from the borrowers. The Act also envisages setting up of Asset Reconstruction Companies (ARCs) and Securitisation of banks' nonperforming loans. The RBI has granted Certificate of Registration (CoR) to 14 ARCs so far. In order that ARCs

have a sound capital base and stake in the management of the NPAs acquired, the requirement of owned funds for commencement of business has been stipulated as not less than 15 % of the assets acquired or Rs.100 crore whichever is less. Of the total amount of assets securitised by these companies, the largest amount was subscribed to by banks. B. Debt Recovery Tribunals ( DRTs) Debt Recovery Tribunals have been set up to assist speedy recoveries of banks dues. As on date, there are thirty three DRTs and five Debt Recovery Appellate Tribunals functioning in different states. C. Guidelines on use of forum of Lok Adalat Banks and Financial Institutions (FIs) have been advised to include all NPA accounts, both suit filed and non-suit filed accounts, which are in doubtful and loss category, with outstanding balance up to Rs 20 lakhs for compromise settlement under Lok Adalats.

Among the various channels, the amount of NPAs recovered under the SARFAESI Act, 2002 formed over 70% of the total amount of NPAs recovered in 2011-12. The SARFAESI Act has, thus, been the most important means of recovery of NPAs.

D. Steps relating to filing of suits (i) Banks have been advised to review cases of loss assets outstanding for more than two years and where legal action has not been initiated.

(ii) In May 2001, banks were advised to examine all cases of wilful default of Rs 1 crore and above and file suits in such cases, if not already done. Further, they were also advised to examine whether in such cases of wilful defaults, there are instances of cheating / fraud by the defaulting borrowers and if so, they should also file criminal cases against those borrowers. In other cases, involving amounts below Rs 1 crore, they were advised to take appropriate action, including legal action, against the defaulting borrowers. E. Compromise / One Time Settlement

I) The banks try to eliminate or reduce the NPAs through persuasion, by way of compromises or one-time settlements with the borrowers. The compromise should be a negotiated settlement under which the bank should ensure to recover its dues to the maximum extent possible at minimum expense, and may involve some amount of sacrifice/waiver on the part of the bank.

II) While, Commercial banks can frame their own Board approved policy for compromise settlement of the NonPerforming Assets in terms of RBI Circular DBOD.BP.BC. 81/21.01.040/96 dated July 28, 1995, they are advised from time to time that adequate care should be taken to ensure that the compromise settlements are done in a fair and transparent manner. F. Prudential guidelines on Restructuring of advances by

banks RBI has at various points of time prescribed various types of Restructuring guidelines applicable to different types of borrowers viz. (i)Guidelines on restructuring of advances extended to industrial units under the Corporate Debt Restructuring (CDR) Mechanism, (ii) Guidelines on

restructuring of advances extended to Small and Medium Enterprises (SME) and (iii) Guidelines on restructuring of all other advances. Further, to align the principles governing restructuring of different types of advances, fresh guidelines on the subject of restructuring superseding all the earlier

guidelines on the subject, have been issued on August 27, 2008.

The objective of the CDR framework is to ensure a timely and transparent mechanism for restructuring of the corporate debts of viable corporate entities affected by internal or external factors, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned and is applicable only to multiple-banking accounts/syndicates /consortium accounts with outstanding exposure of Rs.10 crore and above with the banks and financial institutions.

Further, the provisioning requirement for restructured standard assets, including project loans restructured by way of change in date of commencement of commercial operations, has been increased to 2.75 per cent since November 2012. G. Credit Information Companies

With effect from March 2003, dissemination of credit information covering data supplied on suit-filed defaulters in the financial system is being undertaken by Credit Information Bureau (India) Ltd. (CIBIL). Accordingly, such data can now be accessed on CIBILs website. Further, RBI has recently issued Certificate of Registration to three Credit Information Companies viz. (i) Experian Credit Information Company of India Private Ltd. (ii) Equifax Credit Information Services Private Ltd. and (iii) High Mark Credit Information Services (P) Ltd. to commence the business of credit information in March 2010. Accordingly, banks have been advised to submit the list of suit-filed accounts of wilful defaulters of Rs.25 lakh and above as at end-March, June, September and December every year to CIBIL and / or any other credit information company which has obtained Certificate of Registration from RBI in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005. H. Steps relating to Wilful Defaulters

(i) A wilful default broadly includes deliberate non-payment of the dues despite adequate cash flow and good networth; siphoning off of funds to the detriment of the defaulting unit; assets financed either not been purchased or been sold and proceeds have misutilised; misrepresentation / falsification of records; disposal / removal of securities without bank's knowledge; fraudulent transactions by the borrower. (ii) In order to prevent the access to the capital market by the wilful defaulters, a copy of the list of wilful defaulters would henceforth be forwarded by RBI to SEBI as well. It has been decided that the banks and financial institutions (FIs) should initiate penal measures against wilful defaulters like: Not granting additional facilities to them Debarring entrepreneurs/promoters of defaulting

companies from institutional finance for floating new ventures for a period of 5 years etc.

(iii) Further, in case, any falsification of accounts on the part of the borrowers is observed by the banks/FIs, they should lodge a formal complaint against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI), if it is observed that the auditors were negligent or deficient in conducting the audit to enable the ICAI to examine and fix accountability of the auditors. I. Guidelines on purchase / sale of Non Performing Assets In order to increase the options available to banks for resolving their non- performing assets and to develop a healthy secondary market for non- performing assets, where securitisation companies and reconstruction

companies are not involved, guidelines have been issued to banks on purchase/sale of non-performing assets, in July 2005. J. Other Steps Banks have also been advised to:

1. Formulate and implement Loan Policy and Loan Recovery Policy with the approval of the Board of Directors. 2. Establish Recovery Cells at Head Office, fixing of recovery targets for various levels and close monitoring of recovery performance. 3. The Board of Directors of the bank should review slippages in asset classification in the borrowal accounts with outstanding Rs.5 crore and above and review NPA accounts which have registered recoveries of Rs.1 crore and above. Further, Management Committee of the Board should review top 100 borrowal accounts of below Rs.5 crore in each category of NPA i.e., Sub-

standard/Doubtful/Loss (75 in each quarter). 4. Strengthen the risk management systems by putting in place institutional framework for identifying, monitoring and management of credit risk.

5. To put in place robust mechanism for early detection of signs of distress and to use such early warning signal to put in place an effective preventive asset quality management framework, including a transparent restructuring

mechanism in case of viable accounts for to preserving the economic value of such accounts Banks were also advised to have a proper system-generated segment-wise data on nonperforming assets and restructured assets. 6. To strengthen the information sharing mechanism among lenders by making it compulsory for banks to receive/share information on borrowers before sanctioning of loans. *****