Today we are providing an article with you on NPAs in the banking system and Steps taken by RBI. We hope this article will help in your preparation.
As per the recommendation of Committee on the Financial System (Chairman Shri M. Narasimham, 13th governor of RBI) and considering International practices, the Reserve Bank of India in July 2014 announced prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks.
Now, what are NPAs?
NPA (Non-Performing Asset): It is an asset which ceased to generate income for the bank. The conditions under which an asset becomes an NPA are as follows:
1. If interest or instalment or both of principal remain overdue for a period of more than 90 days in respect of a term loan.
2. If Overdraft/ Cash Credit for an account remains ‘out of order’.
3. If the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
4. If an installment of principal or interest remains overdue for two crop seasons for short duration crops / one crop season for long duration crops.
RBI has classified nonperforming assets into the following three categories based on the period for which the asset has remained nonperforming and the realizability of the dues:
1. Substandard Assets: With effect from March 31, 2005, a substandard asset is one, which has remained NPA for a period less than or equal to 12 months.
2. Doubtful Assets: With effect from March 31, 2005, an asset is classified as doubtful if it has remained in the substandard category for a period of 12 months.
3. 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 rescue or recovery value.
Reasons for NPA:
1. Macroeconomic situations: When a country is not growing on expected lines i.e. GDP is not growing, no demand for goods, than the industry suffers and not able to payback.
2. Increased Interest Rate: The loan is taken at a time when interest rates were much higher than the present interest rate.
3. When some sectors of the economy are doing bad like Infrastructure, Power due to Land acquisition and forest-related issues and environment clearances.
4. Wilful defaulting: When one is able to pay but is not paying like Vijay Mallya.
Now, what does the Bank / FIs do?
Firstly the Bank /FIs inspect whether there are genuine reasons or not for non-repayment of loans.
Here genuine reasons include factors that are beyond one’s control and certain internal, external reasons.
In this case, for the revival of the corporates as well as for the safety of the money lent by the banks and FIs, timely support through restructuring is done. This system of restructuring of loans is called as Corporate Debt Restructuring.
What if the case is not genuine?
In this case, Bank / FIs may
1. refer the case to Debt Recovery Tribunal (DRT).
2. refer to Asset Reconstruction Companies (ARC) as per SARFAESI Act, 2002.
3. file winding up the petition in the court of law.
4. file a criminal case against the wilful defaulter.
Let’s first take the genuine case:
1. Corporate Debt Restructuring:
- It has been implemented by RBI from August 2001.
- It covers only multiple banking accounts or syndicated / consortium loan accounts of corporate borrowers where outstanding exposure is Rs 10 crore or more.
- The accounts are eligible for consideration under the CDR system provided at least 75% of the creditors (by the value of the loan) and 60% of creditors (by the number of the loan) agree to the proposal.
Note: The scheme will not apply to accounts involving only one financial institution or one bank...
In case if the reason of non-repayment is not genuine then Bank / FIs can have following options:
1. Debt Recovery Tribunal (DRT):
- These are established in various cities under “Recovery of Debts due to Banks and Financial Institutions (RDDBF) Act, 1993”.
- Banks / FIs can file an application with DRT or recover dues from persons/companies.
- As per the act, the issue is to be settled in 6 months.
- In this case, the success rate is around 20-30%.
2. Asset Reconstruction Companies (ARC):
- This is formed under the “Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002”.
- It empowers the Banks & FIs to recover NPAs without the intervention of the court.
- It was brought to overcome the inefficiency of DRTs.
- Under this, Banks / FIs have the power to sell their Bad loans.
- The loans which are of Rs 1 lakh and more fall in this category.
- RBI has the power to issue the licence to ARCs. Asset Reconstruction Company (India) Ltd is the first ARC established in India.
3. Filing of Criminal Cases: Criminal cases can be filed against the borrower if the banks feel the non-repayment of the debt is due to ‘wilful default’. The example is Vijay Mallya defaulting on SBI, UCO, United Bank of India.
4. Winding up petitions:
Under the Companies Act, if a borrower fails to pay back the loan, a petition can be filed. For this, a Official liquidator is appointed. It is a long procedure and may not give satisfactory results to banks.
Apart from the steps described above Banks can take other prudential steps, which are:
1.Corrective Action Plan: As per RBI Before the loan becomes an NPA, classify them as
- SMA-0(Special Mention Account) = up to 30 days.
- SMA-1 = 31 to 60 days.
- SMA-2 =61 to 90 days.
In order to take corrective actions.
2. Joint lenders’ forum: RBI has mandated to constitute a Joint Lenders’ Forum at the SMA-2 stage if the loan exposure is more than Rs 100 Crore or more.
3. Strategic Debt Restructuring: RBI has announced to convert debt into equity i.e. Bank will assume the role of management (ownership).
That’s all for NPA.
All the Best
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