2NPA Mgt & Recovery

8/11/2019 2NPA Mgt & Recovery

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PROGNOSIS-STRATEGIES

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Preventive

Detective

Corrective

STOP


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PREVENTIVE

1. Implementation of NPA MANAGEMENT POLICY

Basic tenets Seeks to lay down banks policy on management &

recovery of NPAs.

Stresses to prevent fresh NPAs by prescribing timenorms for detection of early warning signals fortaking corrective actions

Aims to contain the NPAs to manageable level

Lays down a broad approach for recovery of loansthrough compromise settlements

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MACRO LEVEL

A clear credit policy- keeping in view

the cost of funds Vs.Return on asset

exposure norms

industry / region wise exposure

effective rating system

past experiences

periodical review of policy

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effective market intelligence

periodic dialogue with borrowerScrutiny of financial statements

Control over excess drawings / ODs. periodical evaluation of securities

continuous watch over management ofborrowing company

existence of system to identify border lineNPAs and monitoring of their migration

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TONING UP OF CREDITSUPERVISION & FOLLOW UP

Regular review /renewal of credit limits

Close watch on excess drawals /ODs.

Toning up the Audit & Inspection system

Credit Audit

Effective MIS to identify border line cases

Increased and effective role by controllingoffices

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MICRO LEVEL

Continuous vigil over the conduct of A/Cs

Recognition of early warning signals in theA/Cs

Compliance of pending audit/inspectionirregularities

Up to date documentation / ROC search

Unit inspection- Pre & Post sanction andperiodic.

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PROBLEM LOAN REVIEW &MONITORING

Diagnose the reasons for the deterioration inasset quality and put the account under closemonitoring

Verify the adequacy of cash accruals

Revalidate the assumptions made at the time ofsanction particularly the assessment of creditrisk

Bring to the notice of borrower/guarantor thedeterioration in asset quality and call upon themto remedy the same

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Verify the completeness and correctness ofdocumentation, creation/registration of

charge, insurance cover etc.

Evaluate collateral for liquidity,

marketability and value

Obtain realistic and time bound commitmentfrom borrower/guarantor to arrest thedeterioration- have a dialogue wherepossible

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DETECTIVE-

WARNING SIGNALS

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Internal Records- Look for pressure onthe accounts

Unauthorised excesses;

Turnover increasing /decreasing unusually

Hard core borrowing

Unpaid cheques in or out

Cheques for round amounts


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Frequent requests for increase in facilities

Delays in realisation of bills receivables

Frequent devolvement of LCs and invocation of BGs

Increasing average debit balance

Local news, rumours, information from staff aboutproblems

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Requests for release of security(particularly third party)

Changes in terms of trade

Idle assets

Dead stock

Pressure from creditors

Management changes, succession,

Changes in attitude since last meeting1

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Un cleared effects

Status enquiries in or out

Court judgements

Stopped cheques-in or out

Unusual cash withdrawals

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AUDITED ACCOUNTS

Look for

Evidence of borrowing elsewhere

High gearing

Small surplus or loss

Accounts late or only draft

Two sets of accounts

Auditors certificate qualified

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Other bankers

Revalued assets

Material difference from forecasts toactuals

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VISITS OR INTERVIEWS

Look for

Difficulties in getting hold of promoters/directors

Lack of long term plans

Failure to meet orders

Reliance on one supplier or customer

Diversification

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CORRECTIVE

Action check- list

Discuss with customer

Collect as much information as possible

Carry out a SWOT analysis

Consider what information is available- ismore needed? Visit business premises.

Check the existing security. Is additionalsecurity available?

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Obtain borrowerscommitment or any plans forrepayment, particularly timing and amounts. Getagreements in writing, if possible.

Set objectives for the way forward. Investigateas to what went wrong with original proposal

Take firm control of the position. Ifcommitments are not met take speedy and firmaction.

Keep controlling office informed.

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RECOVERY OF NPAS AVAILABLEMEASURES

Basically two types ofmeasures

1. Legal

2. Non legal

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RECOVERY OF NPAS LEGAL MEASURES

Lok AdalatsIt is an institutions help banks to settle

disputes involving accounts in "doubtful"and "loss" category, with outstanding

balance of Rs.5 lakh (Rs 20 lakh) forcompromise settlement under Lok Adalatsconvened by DRT/DRTAs.

- It proved to be quite effective for

speedy justice and recovery of small loans.

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Debt Recovery Tribunals

The Recovery of Debts due to Banks and FinancialInstitutions (amendment) Act, passed in March2000 has helped in strengthening the functioningof DRTs.

-Provisions for placement of more than oneRecovery Officer,

- Power to attach defendant's property/assetsbefore judgement,

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-Penal provisions for disobedience ofTribunal's order or for breach of any termsof the order and

-Appointment of receiver with powers ofrealization, management, protection andpreservation of property provides necessaryteeth to the DRTs and speed up the

recovery of NPAs in the times to come

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The Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest(SARFAESI) Act, 2002

It provides for enforcement of security interest forrealisation of dues without the intervention of courtsor tribunals.

It also provides sale of assets by banks / FIs toSecuritisation companies / reconstruction companies.

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Recovery of NPAs Legal Measures


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Asset Reconstruction Company:It negotiates with banks and financial

institutions for acquiring distressed assetsand develop markets for such assets.

It will buy NPAs at the pre determineddiscounted value and issue NPA Redemption

Bonds which carry a fixed return.

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Circulation of information on defaulters

Credit Information Bureau of India Ltd. (CIBIL).Suit filed cases and willful defaults/diversion offunds for arriving at credit decision.

Its success depends upon cooperation extended

by the members in supplying required informationon timely basis.

Civil Courts: Recovery through courts is possibleprovided decrees are awarded early.

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RECOVERY OF NPAS NON-LEGALMEASURES

Reminder System

The cheapest mode of recovery is to send reminders

to the borrowers before the loan instalments fallsdue.

Visits to Borrowers Business Premises/ Residence

This is a more dependable measure of recovery

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Recovery Camps

It helps in recovery for small and agriculturaladvances.

Rephasing Unpaid Loan Instalments

Due to natural calamities or for some otherconvincing reasons, unpaid loan instalments may berephased / rescheduled.

Rehabilitation of Sick units

Causes of sickness should be genuine. If project isfound viable, rehabilitation package should beprepared.

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Recovery of NPAs Non-Legal Measures


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RECOVERY OF NPAS NON LEGAL MEASURES

Compromise and Settlement

This is the last resort of recovery.

Banks are free to design and implement theirown policies for recovery and write-offincorporating compromise and negotiatedsettlements with the approval of their Boards,as per broad framework advised in July 1995by RBI.

One Time Settlement Scheme - Specific

guidelines were issued in May 1999 to publicsector banks for one time non discretionaryand non discriminatory settlement of NPAsand subsequent schemes.

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Appointment of Professional Agencies for recovery

Other Measures

- Staff incentives for recovery of hardcore NPAs

- incentives to lawyers to get decrees in record time.

-Close monitoring of suit-filed cases.

- Loan write-off in small advances if chances ofrecovery are remote.

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POINTS TO PONDER UPON & REMEMBER

The NPA Reduction Mantra:

Do not give money but lend

What matter is what foryou are

financing and not what against

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Borrowal accounts in general need real timemonitoring; not post-mortem.

An NPA account need not necessarily mean that the

borrowing company is unviable or sick.

Try to identify and bridge viability gaps of industrialunits.

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Many sick units need nourishment in the formof fresh dose of loan funds to regain health.

One time settlement with wilful defaults maybe good mathematics but bad banking.

Always follow basic lending norms.

Put credit decision on fast track.

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FOR REGULATORS

Loan failures due to malafide decisions warrantfixation of accountability.

Radical legal reforms to expedite suitproceeding.

Say no to loan waivers.

If a unit cannot exist, let it exit.

Facilitate mergers and acquisitions involving sickunits.

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Prevention is better than Cure

In any financial institution, NPAs areinevitable in the loan portfolio. Butefforts should be made to maintain areasonable level of NPAs.

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2NPA Mgt & Recovery