CORPORATE ACCOUNTING ASSIGNMENT-II

Submitted by
Tirunagiri pranav sai-17010324066
Division C, 2nd year, B.B.A L.L.B
Symbiosis Law School, Hyderabad
Symbiosis International University, Pune.
September, 2019

Under the guidance of

Asst.Prof.Chandra Shekhar Alladi
Faculty incharge
Recovery mechanism of NPA:

The government of India recognized the need for reformative measures in order to ensure
the decline of NPA’s across various banks. The need for this has emerged from the impact it
has on the Indian economy and its effects on the credit cycle of the country. The present
reformative measures were too ineffective in regulating the NPA’s in the country, it was the
idea of notice issues for enforcement of securities and recovery of dues which was too
mundane and time consuming. To bring in effective remedies, and further for the cause it
has established the tiwari committee. Having gotten it’s name under the chairman ship of
shri tiwarr. The committee reviewed through various aspects of recovery process and
proposed the idea of establishing special tribunals to fasten the recovery process. Amongst
other things the setting up of narasimham committee happened, and the committee
endorsed the aforementioned idea of setting up special tribunals. It came up with the idea
of “Asset Reconstruction fund”. This funds were sanctioned to purchase these
nonperforming assets from banks and financial institutions at a cheaper price and recover
the amounts from primary borrowers, the funds were given much importance in the
committee recommendations.
Based on the Narasimham and Tiwari committee reports speedy debt recovery tribunals
and asset reconstruction funds were sanctioned across the country. The entire corporate
debt recovery system was restructured. Legal reforms were brought into action and
enforcements were brought up across various courts to speed up recovery and efficiently
speed up the debt recovery system. This made a huge impact on the economy as its
methods and examples were implemented successfully.

SARFAESI ACT:
The mechanism of debt recovery was too time consuming and ineffective for banks as the
process of recovery was too hard sometimes because the laws ae favoured to protect the
cotozens and not the banks so the government felt there is need for the banks to have the
power to sell their non performing assets and based on this idea the government of india
appointed a committee under the supervision of T R Andhyarujina, and the committee
recommended all the technicalities in four reports.

The committee reports later lead to the establishment of the securisation and
reconstruction of financial assets and enforcement of security interest (SARFAESI Act), 2002.
This act in general terms allowed banks to bypass the civil course of action and enabled the
enforcement of security factor. The motive behind the act’s establishment was to enable
banks and financial situations to acknowledge long term assets, regulate liquidity, decrease
asset liability and enabling banks to take possession of securities used to obtain loans and
also gave banks the authorities to sell these securities and in turn reducing NPA’s of banks.
This enabled banks to secure the bad loans from companies and individuals by allowing the
banks to sell securities without resorting to civil litigations and prevent companies from
taking shelter under the SICA/BIFR acts as most defaulting companies did. The problem with
civil litigation was it was too time consuming and the judges lack technical knowledge over
the area. Apart form this other legal reforms have also seeded from the committee’s
reports.
Other Legal Reforms:
The problem with the legal system was it protected the defaulting individuals and
companies and not the banks this has resulted in an inclined judicial system to effectively
change this reforms had to be made legally, the problem was banks had issues in securing
loans by sale of securities because most of the defaulters would resort to civil litigation
which required the banks to spend time across courts, while the amount depreciates
drastically in terms of its value in the due course of civil litigation. This has rendered the
mechanism of recovering loans ineffective.

Industrial development bank of India in 1999 was constituted to start recovering large NPA
accounts and for establishing a network of information of large borrowers between banks
and financial institutions this has enabled banks to unite on one front to reduce the amount
of non-performing assets built up over the years.

Corporate Debt restructuring:

Corporate Debt Restructuring instrument has been regulated in 2001 to give an opportune
and straightforward framework for rebuilding of the corporate obligations of Rs. 20 crores
or more with the banks and money related establishments. The CDR procedure would
likewise empower practical corporate elements to rebuild their contribution outside the
current legitimate system and decrease the occurrence of crisp NPAs. It is an intentional
framework dependent on borrowers and loan bosses understanding. It won't have any
significant bearing to records including one money related establishment or one bank rather
it covers different financial records, syndication, consortium accounts with remarkable
introduction of Rs. 20 crores or more by banks and foundations. The CDR framework is
pertinent to standard and substandard records with potential instances of NPAs getting a
need. Notwithstanding the means taken by the RBI and Government of India for capturing
the occurrence of new NPAs and making legitimate and administrative condition to
encourage for the recuperation of existing NPAs of banks, the accompanying measures were
started for decrease of NPAs.