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N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

“SRISHTI”, SECTOR – 1, MIRA ROAD (E), MUMBAI – 401 104

NPA Management

Submitted By:Bhavika Thakker

PGDBM FINANCE2007-09

Submitted To

Prof. Jyotsna Arya

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CERTIFICATE

This is to certify that Ms.Bhavika Thakker student of Post Graduate Diploma in Management Studies

(Finance) batch of N. L. Dalmia Institute of Management Studies and Research has satisfactorily

completed final project on “NPA MANAGEMENT” under my supervision and guidance as partial

fulfillment of requirement of PGDBM course, approved by AICTE for the year 2007-09.

Signature: Signature:

Prof. Jyotsna Arya Prof. P. L. Arya

(Project Guide) Director

Place: Mumbai

Date: 31/03/2009

N.L.Dalmia Institute of Management and Research [1]

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ACKNOWLEDGEMENT

No endeavor achieves success without the cooperation of others which goes a long way in shaping and

formulating a project.

I take this opportunity to extend my heartfelt gratitude to Prof. P. L. Arya and my project guide Prof.

Jyotsna Arya who has guided me through the duration of the project with patience and helped

wherever I faltered.

Last but not the least I would like to thank my parents, all my friends and staff members of N. L. Dalmia

Institute of Management Studies and Research who have constantly supported me in all my endeavors.

Ms. Bhavika Thakker

PGDBM (Finance) 2007-09


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N. L. Dalmia Institute Of Management Studies and Research, Mumbai.

PREFACE

This project report titled “NPA Management” describes the Non-performing Assets (NPAs) in the banking sector & the various policies laid down by the RBI as well as public sector banks for their effective management & control. It covers the SARFAESI Act, 2002 in detail.

It does not contain a trend analysis of NPAs in banks, although a few tables & statistics are provided to emphasise their importance on the performance & profit margins of bank


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Table of Contents

Introduction .................................................................................................................. 5

Factors contributing to NPAs ............................................................................................ 9

Asset classification & Provision Requirement ................................................................... 13

Monitoring & Follow up Measures ......................................................................................... 19

Non-Legal Remedies (Compromise Settlement) .............................................................. 21

SARFAESI Act, 2002 ..................................................................................................................... 25

Procedures under the SARFAESI Act ................................................................................ 27

Movable assets ...........................................................................................................................31

Immovable properties ........................................................................................................... 36

Appropriation of sale proceeds ...........................................................................................42

Recovery / Enforcement Agents ....................................................................................... 46

Write off Policy ........................................................................................................................... 48

Bid Policy ...................................................................................................................................... 51

ASCs / ARCs .................................................................................................................................. 52

Board for Industrial & Financial Reconstruction (BIFR) ............................................. 53

Conclusion .................................................................................................................................... 55

References .................................................................................................................................... 57


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INTRODUCTION

on-performing assets & retail banking are closely related. Greater the demand for credit, more is the risk of default, & hence NPAs. So, before looking at NPAs in

detail, let us see what constitutes retail banking.NRetail banking is quite broad in nature - it refers to the dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. Fixed, current / savings accounts on the liabilities side; and mortgages, loans (e.g., personal, housing, auto, and educational) on the assets side, are the more important of the products offered by banks. Related ancillary services include credit cards, or depository services. Today’s retail banking sector is characterized by three basic characteristics:

• multiple products (deposits, credit cards, insurance, investments and securities);

• multiple channels of distribution (call centre, branch, Internet and kiosk); and

• multiple customer groups (consumer, small business, and corporate)

Drivers of retail business in India

First, Economic prosperity and the consequent increase in purchasing power has given a fillip to a consumer boom. Note that during the 10 years after 1992, India's economy grew at an average rate of 6.8 percent and continues to grow at the almost the same rate – not many countries in the world match this performance.

Second, changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries having highest proportion (70%) of the population below 35 years of age (young population). The BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for India.

Third, technological factors played a major role. Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new customers into the banking field. Technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking has contributed to the growth of retail banking in India.

Fourth, the Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation. Considering the fact that retail’s share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams.


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Fifth, decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit.

Credit Risks & NPAs:

However, lending is a business associated with risks. One of the risks being risk of default. Banks being commercial organisations have to continue lending activity to earn profits. Profitability very much depends on how Banks are able to roll over their advances portfolio. Rolling over of advances would be possible only if there is a timely recovery of money lent. Prompt recovery of Loans and Advances by Banks not only increases liquidity and profitability but it also keeps funds cycle moving by continuous lending for the development of the economy.

Following the introduction of Income Recognition and Asset Classification (IRAC norms) and Capital Adequacy norms, Banks have become increasingly sensitive to credit risks and there is a growing awareness of the need to keep Non Performing Assets (NPAs) at a low level. With all Banks having international exposure required to move towards Basel II recommendations, stricter risk assessment norms and provision requirement leading to improved capital adequacy will be the order of the day in the times ahead.

With the recent modifications in IRAC norms and provision requirement announced by the Reserve Bank of India in July 2004, it is implied that an asset will require 100% provision after 48 months from the date of the account becoming NPA, irrespective of availability of any security or not. The 100% provision to be made on an account which does not yield any income to the organisation is a severe strain on the bottom line of the Bank. In this context the management of NPA portfolio assumes paramount importance.


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What is an NPA ?

An asset becomes non-performing when it ceases to generate income to the Bank. Thus, a non-performing asset (NPA) is defined as a credit facility in respect of which the interest and / or instalments of principal has remained ‘overdue’ for a ‘specified period’ of time. The concept of ‘specified period’ is reduced in a phased manner. The shortening of the period is from 4 quarters in 1993 when the concept of IRAC norms was first introduced in India to the present level of 90 days.

Thus from 31.3.2004 an advance or loan (other than direct agricultural advance) shall be classified as an NPA where - a. Interest and / or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan. b. The account remains out of order in respect of an overdraft / cash credit for more than 90 days.

c. The bills remain overdue for a period of more than 90 days in the case of bills purchased and discounted. d. Any amount to be received remains overdue for a period more than 90 days in respect of any other accounts.

In case of direct agricultural advances, w.e.f. 30.9.2004, a loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for 2 crop seasons. In the case of long duration crops, the loan will be treated as NPA if the instalment of principal or interest thereon remains overdue for 1 crop season.

Explanation of some terms used in NPA management Security Interest:

Security Interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes mortgage, charge, hypothecation and assignment

Wilful defaulters:

"A Wilful Default” would be deemed to have occurred if any of the following events is noted :-

The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.


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The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.”

Diversion of funds:

Diversion of funds, would be construed to include any one of the undernoted occurrences:

Utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;

Deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned;

Transferring funds to the subsidiaries / Group companies or other corporates by whatever modalities;

Routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;

Investment in other companies by way of acquiring equities / debt instruments without approval of lenders;

Shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn and the difference not being accounted for.

Siphoning of funds:

Siphoning of funds, should be construed to occur if any funds borrowed from banks / FIs are utilised for purposes un-related to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgement of the lenders based on objective facts and circumstances of the case.


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Factors contributing to NPAs:

According to a recent study conducted by the RBI, the underlying reasons for NPAs in India can be classified into two heads, namely:

1. Internal Factors

2. External Factors

Internal Factors:

a. Diversion of funds for expansion/diversification/modernisation or for taking up new projects

b. Diversion of funds for assisting or promoting associate concerns

c. Time or cost overrun during the project implementation stage

d. Business failures due to product failure, failure in marketing, etc

e. Inefficiency in management

f. Slackness in credit management & monitoring

g. Inappropriate technology or problems related to modern technology

External Factors:

a. Recession in the economy as a whole

b. Input or power shortage

c. Price escalation of inputs

d. Exchange rate fluctuation

e. Accidents & natural calamities

f. Changes in government policies relating to excise & import duties, pollution control orders, etc

g. Government loan waiver scheme


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Other Factors:

Apart from the above factors, there are certain other factors which are responsible for standard assets becoming NPAs. They are :

a. Liberalisation of the economy & the consequent pressures from liberalisation like severe competition, reduction of tariffs, removal of restrictions

b. Poor monitoring of credits & the failure to recognise early warning signals shown by standard assets

c. Promoters’ over-optimism in setting up large projects

d. Sudden crashing of capital markets & the failure to raise adequate funds

e. Granting of loans to certain sectors on the basis of the Government’s directives rather than commercial imperatives

f. Mismatch of funding i.e. using loans granted for short term for long term transactions

g. High leveraging & high cost of borrowing

h. Commitment of wilful defaults sensing that the legal recourse available to collect debts is very slow

Early Warning Signals

The Early Warning Signals (EWS) are those that clearly indicate or show some signs of credit deterioration in the loan account. They indicate the potential problems involved in the accounts so that remedial action can be initiated immediately. In fact most banks have Early Warning Systems for identification of potential NPAs.

Classification of Early Warning Signals

They can broadly be classified into 5 categories:

1. Financial signals

2. Operational signals

3. Banking signals


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4. Managerial signals

5. External signals

Financial Warning Signals

a. Default in repayment

b. Continuous irregularity in the account

c. Development of L/C or invocation of guarantees

d. Deterioration in working capital position or in liquidity

e. Declining sales compared to precious period

f. Substantial increase in long-term debts

g. Rising sales but falling profits

h. Incurring operating losses or net losses

i. Rising level of bad debt losses

Operational Warning Signals

a. Underutilisation of plant capacity

b. Non-payment of electricity bills, wages, etc

c. Frequent labour problems

d. Poor diversification & frequent changes in plan for expansion / diversification / modernisation

e. Evidence of overstocking & aged inventory

f. Loss of important customers

Managerial Warning Signals

a. Diversion of funds & poor financial controls

b. Lack of co-operation from key personnel


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c. Change in management or ownership pattern or key personnel

d. Undertaking of undue risks

e. Fudging of financial statements

Banking signals

a. Frequent request for further loans

b. Delays in servicing of interest

c. Reduction of operations in the account or reduction in bank balances

d. Opening of accounts with other banks

e. Dishonouring of cheques or return of bills sent for collection

f. Not routing sales transactions through the account

g. Delays in submitting stock statements & other data or non-submission of periodical statements

h. Frequent excesses in the account

External Warning Signals

a. Economic recession

b. Introduction of new technology

c. Changes in Government policies

d. Emergence of new competition

e. Natural calamities

f. Weakening of industry characteristics


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ASSET CLASSIFICATION AND PROVISION REQUIREMENT

Standard Assets:

The standard assets consist of assets which are totally regular, safe and conducted as per norms of sanction. However, during the operations of such accounts, some of them, at times, show signs of deviations, sickness, out of order position wherein they became irregular. When such irregularities are noticed, they are classified as ‘Watch Category” assets with Code No. 12 but continues to be a part of “Standard Asset”. These accounts need higher level of monitoring and have to be regularised before these irregularities continue for more than 90 days. Provision requirement for a standard asset (including Watch Category asset) is given below:

0.25% of the outstanding dues in all Standard Assets under SME and Agricultural sector

1.00% of the outstanding dues in all Standard Assets of the A/c’s to Capital Market exposure, personal loan, commercial real estate and residential housing beyond Rs.20/- lakh.

0.40% Of the outstanding dues in all Standard Assets belonging to all other categories.

Categories of NPAs

Banks are required to classify NPAs further into following categories, based on the period for which asset has remained non-performing and realisability of dues.

Sub-standard Asset Doubtful Asset Loss Asset

Substandard Assets:

With effect from 31st March 2005, substandard asset is one which has remained NPA for a period less than or equal to 12 months. Its Asset Code is 20. The provision requirement in substandard asset was earlier flat 10% of the outstanding dues, irrespective of the category of the advance (secured or clean). Now RBI has removed the CAP on the unsecured exposures and individual Bank Boards were given the freedom to formulate their own policy guidelines for prudential norms on unsecured exposures. Simultaneous with this liberalisation, RBI has made norms of provision requirement on unsecured exposure of Banks more stringent. Unsecured exposure is defined as an exposure where the realisable value of security as stipulated and ascertained by the valuation is not more than 10% `ab initio’. That means all clean /


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unsecured advances when they become NPA as substandard asset, will now (w.e.f. 31.3.2005) require a provision at 20% of the outstanding


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balances. As against this, the normal secured advances, when moving to NPA as substandard asset will require 10% of the outstanding balance as provision (no change from existing system). Thus from 31.3.2005 onwards the substandard asset will have 2 segments with different provision requirement as below :-

(a) Substandard – secured assets – Code 21 – provision at 20% of outstanding dues

(b) Substandard – unsecured assets – Code 22 – provision at 20% of outstanding dues

Doubtful Assets:

It consists of 3 stages - Doubtful I, Doubtful II and Doubtful III. The provision requirement in each stage of Doubtful asset will be as under:

Doubtful I (Code 31) - Assets remaining for a period of 12 months in Doubtful category – provision requirement shall be 20% of RVS + 100% of shortfall in security (i.e. NPAs over 12 months upto 24 months)

Doubtful II (Code 32) - Assets remaining for a period of further 24 months in Doubtful category – provision requirement shall be 30% of RVS + 100% of shortfall in security (i.e. NPAs over 24 months upto 48 months)

However, effective June 2008, the provision requirement as per BOI policy shall be 100% for ‘Code 31’ & ‘Code 32’ assets also.

Doubtful III (Code 33) - Assets remaining for more than 3 years in Doubtful category. RBI has now decided that all advances classified as doubtful for more than 3 years (i.e. entering/entered to Doubtful III category) on or after 1st April 2004 shall require a provision of 100% for the secured portion also w.e.f. year ending 31.3.2005. In other words all accounts migrating from Doubtful II to Doubtful III on or after 1.4.2004 shall require 100% provision as on 31.3.2005 and thereafter (irrespective of RVS). As an intermediate measure for smooth transition, RBI had implemented a graded system of provision requirement at 60% and 75% of the RVS + 100% of shortfall for the year ending 31.03.05 and 31.03.06 for accounts which were classified as Doubtful III category as on 31.03.04 (i.e. Stock Doubtful III A/cs). However, these accounts also will require 100% provision from 31.03.07 onwards. As per the existing provisioning norms, all accounts entering into or already classified as Doubtful III will uniformly require 100% provision as on 31.3.07 and thereafter.

Loss Assets – Code 40

A loss asset is one where loss has been identified by Bank or internal or external creditors or RBI inspectors but the amount has not been fully written off. Such an asset is considered uncollectible and of such little value that its continuance is not warranted, even though there may be some small (less than 10%) salvage recovery value. The provision requirement is 100% of net outstanding dues. These loss assets should be gradually written off from the books.


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Some facts about NPAs :

From 1989-95, more than three quarters of members of IMF experienced serious & costly banking crisis (around 63 countries suffered systemic banking crisis in the 1990s)

Direct cost of restructuring the financial system can be typically very high :

55% of GDP in Argentina, 42% in Thailand, 35% in Korea & 10% in Turkey

As at end-March 2007, 82 out of 84 banks operating in India maintained CRAR at or above 9% (corresponding figure for 1995-96 was 54 out of 92 banks)

As on March 31, 2007; NPAs stood at:

Priority Sector Non-priority Sector

Public Sector Banks (PSBs)

50.11% 49.89%

Private Sector Banks 29.22% 70.78%


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MONITORING AND FOLLOW UP MEASURES

With the Income Recognition and Asset Classification Norms becoming stricter, Branches are required to be more alert and proactive in monitoring the accounts. For this purpose, monthly interest application has become a useful tool to tackle potential delinquencies or defaults in standard accounts. To retain the asset quality, Branches should promptly act and :-

Recover the overdues or at least the critical amount through active follow up with borrowers;

Put the accounts under holding on operations in case of temporary cash flow mismatches;

Reschedule the repayment terms as per expected cash flows;

Restructure the dues in keeping with the expected cash flows and gaps in cash flows, if any as per guidelines given in the restructuring policy.

Any one or more of the above actions should be taken before the account becomes NPA

Measures for follow up of Watch Category Accounts / NPA Accounts

The various means of monitoring/resolving NPAs generally available to the Banks are listed below :-

A) Before the account becoming NPA (Watch Category A/c)

1. Close monitoring for compliance of sanction terms to maintain asset quality. 2. Reminders to be sent promptly whenever irregularities are observed.

3. To recover overdues quickly to ensure account does not slip to NPA category

4. Periodic inspection of the unit and charged assets along with analysis of financial data.

5. To restructure the dues before accounts become NPAs. Remedial action includes enhancement of moratorium period, funding of interest, deferment of installments. Such rescheduling /restructuring/ rehabilitation to be done under Bank’s Restructuring Policy / BIFR approved scheme / CDR Mechanism.


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B) After the account becoming NPA – following measures to be initiated for recovering Bank’s dues.

1. Appropriation of liquid securities (TDR, NSC, shares, margin money etc.) and pledged goods, to reduce outstanding balance

2. Disposal of other securities, with the co-operation of borrowers.

3. Restructuring under Bank’s policy, CDR, BIFR etc., for viable units

4. Compromise settlement of dues through negotiation under Bank’s Recovery Policy and special RBI OTS Schemes (in force from time to time)

5. Forum of Lok Adalat and Recovery Camps

6. Recalling the advance

7. Initiating action under SRFAESI Act against charged securities

8. Filing suit in Court / DRT (Debt Recovery Tribunal) – Execution of decree

9. ECGC claim, if any, to be lodged after recalling the advance, reporting the default and follow up for early settlement of the claim

10. Sale of financial assets to ARCs

11. Sale of financial assets to Banks / FIs / NBFCs

12. Lastly, after all the chances of recovery of dues are exhausted, we may resort to writing off of the balance dues

All these means have to be effectively pursued for resolution of NPAs.

Appointment of Nominee Director:

As an effective measure for closely monitoring the NPA accounts where Bank of India’s exposure is substantial or where they are the sole bankers (or in consortium where they have substantial share), they may appoint Nominee Director in consultation with the borrower company. Recommendations for appointing Nominee Director shall be submitted by the Zonal Office for approval at Head Office. A committee of 3 General Managers shall process the requirement and after their clearance, the same shall be submitted to Executive Director and Chairman & Managing Director for approval. The Nominee Director shall be an official of the Bank, not below the rank of Assistant General Manager, who is conversant with the affairs of the company. The appointments (and also changes due to transfer/retirement of officials) shall be subject to annual review.


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NON-LEGAL REMEDIES

(COMPROMISE SETTLEMENTS)

A compromise is a settlement of disputes reached by mutual consent. It is a negotiated settlement with sacrifice component on all the parties to the dispute. It is a non legal remedy for reduction of NPAs of the Bank. Negotiated compromise settlements should be made to maximise the compromise amounts.

Special one-time settlement schemes of RBI announced from time to time like RBI OTS Scheme 2000, Scheme for small borrowers, Scheme for small and marginal farmers and RBI OTS Scheme of 2003, RBI OTS for small and marginal farmers, RBI OTS 2005 for SME etc. are not covered by the following guidelines. Separate guidelines will be issued from time to time for such schemes as per the instructions of the RBI and delegation of powers for approval of such schemes will be advised separately.

The following procedures and systems are applicable for compromise settlement as per Bank’s own recovery policy. Presently there are following 2 different schemes of OTS in BOI.

A] Regular compromise settlement

B] Special OTS for small NPAs / written off accounts with outstanding balances upto Rs.50000/-

A] Regular compromise settlements

Negotiation Process

The Bank should endeavour to maximise recoveries / compromise amounts taking into account various parameters as below:

- age of the NPA. - strength of documentation. - age and stage of proceedings in the suit. - condition and availability of charged and uncharged assets of the borrower/ guarantor. - the possibility of deterioration and alienation of assets leading to threat to security/recovery. - capacity for negotiation by the Bank and the borrower. - Position of group accounts and present status of activity of the borrowers

In the process of negotiation, sacrifice of various components of the dues as below in the order of desirability would be considered –

- penal interest - incidental expenses including inspection/insurance charges. - ECGC/DICGC guarantee fees. - legal expenses incurred and to be incurred. - compounding effect of interest. - uncharged interest


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- Ledger write off is to be considered only when it is unavoidable. The following factors would also be considered while negotiating :

- Time value of money and probable future recoveries compared with the offer amount. - Realisable value of security evaluated on a distress sale basis. - means of borrowers/guarantors other than the security charged in the account or attached in

execution proceedings and their current income if they are engaged in gainful activities. - the amount repayable to DICGC/ECGC on settlement. - if there are credit balances in the name of the borrower in margin or other deposit accounts. - component of amount outstanding and uncharged interest in the total dues (age of NPA) - stage of recovery action such as recall, filing of suit, decree, etc. - strength and weaknesses of bank’s case in respect of documentation, realisation of security,

etc. - cost of maintaining the suit, maintaining the security (godown charges, inspection expenses,

receiver dues, insurance, security wages, etc.) - impact of accepting the compromise proposal on P&L A/c (by way of write back of provisions

and recovery of uncharged interest).

Compromises may be negotiated with –

principal borrower guarantors either for partial payment or full payment parent company other interested parties like drawees of bills, legal heirs, etc.

Eligibility

a) The eligibility criteria for entering into compromises are – i. The account should be classified as non-performing asset. Accounts which have become non-

performing assets, during the course of the year, for which provision is to be made at a future date are also eligible

ii. The default should have occurred due to reasons beyond the control of the borrower iii. Efforts for upgradation either by restructuring or rehabilitation have either failed and/ or may not

yield desired results. iv. The securities, income/ worth of the borrower/ guarantors is not sufficient to ensure full recovery

of the dues. v. Any other reason in which continuation of relationship with the borrower is considered not in the

interest of the Bank. vi. All suit filed/decreed A/c’s, A/c’s under BIFR/AAIFR reference as well as A/c’s considered under

CDR and other restructuring schemes are also eligible to be considered for OTS under Bank’s Recovery Policy.

b) Ineligible Cases


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The following cases are not eligible in the normal course and are not entertained by the regular delegatees below the level of General Manager, HO, ARD

- Wilful defaulters - Cases of malfeasance/ misfeasance - Fraud/ cheating

Before identifying an applicant as wilful defaulter Branch should keep sufficient data / records to prove and establish that the borrower is a wilful defaulter. In the absence of such proof the borrower should be given the benefit of the policy. Even in case of wilful default or fraud accounts, the compromise offers, if valuable in money terms, shall be referred to Head Office through Zonal Office.

Compromise settlement and sacrifice :

The authority for approval is determined by the “sacrifice” proposed under a settlement. The sacrifice is the difference between notional amount due calculated as below and the OTS amount offered. For these purposes the Notional Amount due and sacrifice is arrived at as under –

a) Notional amount due : Considering the age of NPA, nature of asset classification and the ground realities, the Bank has now adopted a two way system of arriving at the notional dues as below :-

(i) In accounts where the asset classification is Substandard or Doubtful for calculating the notional dues, simple interest @ 2% over Bank rate (presently 6% + 2% = 8%) is added to the ledger outstanding balance as on date of NPA/ date of interest ceasing. Simple interest at the above mentioned rate shall be calculated from the date of ceasing interest till the last date of previous month of the submission of the compromise proposal. Value-dating of credits / debits shall be done while calculating the interest from date of NPA / interest ceasing.

(ii) In accounts where the asset classification is “loss asset” or the ledger balances is already written off NO interest shall be loaded to the ledger balances from the date of account classified as NPA.

b) Sacrifice : Amount by which the Notional Amount due exceeds the proposed compromise amount constitutes the sacrifice. Such sacrifice determines the delegated authority who should approve the compromise.


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Payment :

a) The amount of settlement should preferably be paid in one lumpsum within three months from the date of conveying the approval. Interest will not be charged if the payment is made within three months of conveying the approval.

b) In case where the borrowers are unable to pay the entire amount in one lumpsum, the following procedure may be adopted -

Normally minimum upfront/ down payment of 5% of the compromise offer proposed be deposited as token payment in a “No Lien” account. Upfront must be insisted upon; however, it shall not come in the way of entertaining OTS proposal if otherwise acceptable. In case where the compromise amount is expected to be paid by the sale of securities charged to the Bank, the down payment may not be insisted upon.

c) Repayment of compromise to be fixed such that minimum 25% is paid within 3 months.

d) Balance amount of 75% should be recovered in equal monthly / quarterly installments within a period of further 9 months maximum together with interest on reducing balance at the existing PLR from the date of conveying of approval upto the date of final payment. The delegatees shall approve repayment period as per the details given.

Delegation

The delegation for approval of sacrifice in the compromise proposals is as under :-

(Rs. In lakhs)


Managing Committee Full powers

Chairman and Managing Director

Executive Director

General Manager, H.O., ARD

General Manager (Zonal Manager)

Dy.General Manager/ Scale VI (and DGM, H.O.,ARD)

Asst. General Manager/Scale V

Chief Manager Scale IV

Manager (large Branch) Scale III

50.00

37.50

30.00

25.00

20.00

10.00

2.50

1.00

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SARFAESI Act(The Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002)

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is an effective tool in the hands of the Bank to enforce the security interests and recover the dues thereby reducing NPAs. The Act has three segments –

Securitisation and Asset Reconstruction Companies Central Registry Enforcement of Security Interest

The SARFAESI Act enables the Bank wherever the Bank is a secured creditor to enforce security interest for recovery of its dues without the intervention of the Court or Debt Recovery Tribunal provided that secured interest has been properly created in favour of the Bank.

Criteria for invoking provisions of the SARFAESI Act:

Before enforcing security interest, branches should ensure that the borrowal accounts comply with the following criteria –

The contractual dues in the account should be more than Rs.1.00 lakh.

The default must have occurred i.e. the account should have become NPA as per RBI norms.

The security charged to the Bank must be specific, clear and available to the Bank. It must be duly and effectively charged to the Bank and therefore, enforceable if the borrower fails to pay in response to the Notice.

The security documents in the advance account should be in full force on the date of serving the 60 days notice. As an abundant caution, it should be ensured that they are in force even at the time of the Action that will follow for enforcement of security i.e. at least upto one year from the date of serving the notice.

The security documents should be duly filled in and no column should be kept blank.

Either Bank of India must be the sole Banker to the borrower i.e. 100% lending is done by us or in case of joint lending, at least lenders representing 75% of the contractual amount due and out-standing agree to take Action.

In case of Multiple Banking, if the security is exclusively charged, the Bank can proceed as though it is the sole Banker.


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Exemptions :

The following are exempted from the purview of the Act –

Accounts where the contractual dues are less than Rs.1.00 lakh.

When the security interest is created on agricultural land. However, other agricultural related assets like tractor, implements etc. can be enforced, if charged as security to Bank’s advance.

Where the contractual dues remaining unpaid is less than 20% of the principal i.e. total amount disbursed and interest.

Assets under pledge, lien / assets financed under lease or hire purchase are not covered.

Due Diligence Study:

Before invoking the provisions of the SARFAESI Act, a due diligence study should be conducted in respect of the secured assets to be taken into possession covering nature, value of such assets, probability of finding a buyer in the shortest period (it will be better if a buyer is identified before undertaking the exercise) expenses to be incurred in connection with safe-keeping / storage, appointment of security guards, estimated realisable value of the assets in case of sale etc. Branches should keep the above in mind before initiating enforcement Action.

PROCEDURE FOR PROCEEDING UNDER THE SARFAESI ACT:

I. Identification of accounts & Obtention of Approval for Action

The entire NPA portfolio of the Branch should be gone through and accounts fulfilling the eligibility conditions as given above should be identified.

Out of those identified accounts such accounts should be short-listed in which charged security can be taken into possession for sale/lease for recovery of Bank’s dues.

The Branch must put up the proposal before the Competent Authority for approval for Action under the Act as per the prescribed format.

On obtention of approval, 60 days notice(s) should be sent under the signature of the Authorised Officer.

There is no waiting period for issuing notices under the Act. As soon as the account becomes NPA, notices under the Act should be issued after obtaining appropriate approval from Competent Authority.


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II. Issue of notices

Service of proper notice is a pre-requisite for enforcement of security interest. Hence, it should be ensured that proper notices are served on the borrowers/ guarantors who have created the security interest.

The authority for approving proposal for issuing notice and taking Action under the SARFAESI Act is as under :-

(Rs. In Lakh)


Executive Director

General Manager/ Scale VII

Dy. Gen. Manager/ Scale VI

Asst. Gen. Mgr./ Scale V

Chief Manager / Scale IV

Senior Branch Manager (Large Branch) Scale III

Full powers

2500.00

1000.00

750.00

250.00

50.00

10.00

Note: 1. The amounts represent suit claims/ contractual dues.

2. The delegatee approving issue of notice should not have sanctioned the credit

proposal. In such a case, it should be submitted to the next higher authority.

3. The powers are to be exercised by the chief incumbent at the Branch. In respect of administrative/ controlling/ Zonal Offices, designated officers of the rank of Chief Manager/ Scale IV and above may exercise the above delegation within their functional area.

4. At Head Office Level the powers will be exercised by Dy. General Manager (Law/ARD) onwards as per the above delegation.

Other important instructions regarding issuing of notices:

a) Though approval for issuing notices can be given as above, notices are signed by the officer duly authorised by the Zonal Manager as `Authorised Officer’.

b) The period of notice will be 60 days.


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c) Notices can be issued not only to the principal borrower but also to the guarantor if security interest is created by the guarantor. However, if no security is created by the borrower but only by the guarantor then notice can be issued ONLY to the guarantor who has created security and the borrower should be issued usual “RECALL NOTICE”. Notices must be issued in the prescribed format, specimen of which are given in Annexure I & II.

d) The service of the notice is to be made by Regd. Post / A.D., Speed Post, Courier, E-mail, UPC, Fax etc. In case of non-delivery of service, the service is to be affected by affixing the notice on the conspicuous part of the building where the borrower / guarantor resides and / or carries on business and also on the property in which the security interest is created. It may also be published in two leading newspapers, one in vernacular language having sufficient circulation in that locality and the other in English.

e) Where the borrower is a Body Corporate, the Demand Notice shall be served on the Registered Office and also on any of the branches of such Body Corporate as specified under Sub Rule (1) of Rule 3 of Security Interest Enforcement Rules 2002.

f) When there is more than one borrower, the Demand Notice shall be served on each borrower.

g) In case of Joint Financing/Multiple Lending, whenever it is decided to proceed under the Act, all the Banks shall issue their notices separately for their respective dues.

h) The Authorised Officers so issuing the notice as well as monitoring and follow up of the action will have immunity granted for all Action done in good faith and without negligence while exercising the right on the securities created.

III. Objection / Representation received from the borrower on receipt of Notice:

After issuance of notice under Section 13(2) of the SARFAESI Act by the Bank, if any borrower/guarantor having the security interest makes a representation or raises any objection, then the Bank, being a secured creditor, has to consider such representation or objections and if the Bank comes to the conclusion that such representation or objection is not acceptable or tenable, then the Bank has to communicate within one week from receipt of such representation or objection, the reasons for non-acceptance of the representation or objections to the borrower. A three member Zonal Committee headed by Zonal Manager should finalise the reply in all cases irrespective of any amount. It is made clear that at the stage of communication of reasons, it shall not confer any right upon the borrower to prefer an application to the DRT under Section 17 or the Court of District Judge under Section 17A of the said Act.


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IV. Designating Chief Managers and above as Authorised Officers:

In terms of the provisions of the aforesaid Act, the rights of the secured creditor under the Act may be exercised by one or more of his officers authorised in this behalf. As per the definition given in the Rules, “Authorised Officer” means an officer not less than a Chief Manager of a Public Sector Bank or equivalent as specified by the Board of Directors of the secured creditor. The Board of Directors has accorded approval for designating all the officers of the rank of Chief Manager and above of the Bank as “Authorised Officer” for exercising the powers of the Bank under SARFAESI Act, 2002 and for authorising the concerned Zonal Manager and in his absence the Guardian General Manager of the Zone at Head Office or elsewhere to allot specific cases to Authorised Officers.

V. Issuance of Notice

Notices may be sent to the principal borrower/guarantors who have created equitable/legal/Registered mortgage/charge/hypothecation/assignment in the Bank’s favour.

VI. After issuance of 60 days’ Notice Branches need not wait for completion of 60 days statutory notice period to initiate follow up Action. Continuous follow up and personal contacts should be made with the borrowers so that pressure is built up for liquidation of the Bank’s dues.

VII. Accounts referred to B.I.F.R.:.

Bank can issue notice and take possession and other measures under Section 13 (4) of the Act for recovery of the Bank’s dues {where there is no rehabilitation scheme in operation} when BOI is the sole Banker or our dues against the borrowers constitute 75% in value of the amount outstanding against financial assistance disbursed to the borrower/s whose units have been referred to BIFR. Where our Bank is neither the sole Banker nor Bank’s dues constitute 75% as aforesaid, then for taking Action under the Act, the consent of secured creditors representing not less than 75 % in value of the amount outstanding against such borrower is required. Alternatively, in such cases our Bank can give consent to other secured creditors / Lead Bank for taking Action. However, our Bank must issue the Notice under Section 13 (2) for our dues only, after taking permission from appropriate authority. Once the Notice is issued and/or possession of a secured asset is taken or any other measure under Section 13 (4) is taken by any of the secured creditor then the reference before BIFR shall abate and further Action for recovery of Bank’s dues can be initiated / continued before other forums, DRTs etc.

VIII. Enforcement action in suit filed / DRT accounts:

The Government has promulgated an Ordinance on 11.11.04 named as Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Ordinanace,2004. By the said Ordinance, Section 19 of the DRT Act has been amended. The said Ordinance was repealed and the Act was passed and notified in the Gazette on 31.12.04. The amended Section 19 of the DRT Act prohibits the Banks and Financial Institutions from taking


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simultaneous action under the SARFAESI Act as well as DRT Act. Prior to the above said amendment, the Banks were taking simultaneous action for recovery under the SARFAESI Act as well as DRT Act. However, Bank of India has taken a view that the said Amendment Act is not having retrospective effect i.e. the said amendment became effective prospectively from the date of the promulgation of the Ordinance on 11/11/2004. In case of suits pending before the amendment of Section 19 of the DRT Act i.e. suits filed prior to 11/11/04, Bank can always take simultaneous action under the SARFAESI Act as also the DRT Act. As regards the suit filed/decreed cases after 11/11/2004 where the Bank had not taken any action so far under the SARFAESI Act and it now desires to take action i.e. after the issuance of the Ordinance, then in our view a suitable application may be filed before the Hon’ble DRT/Civil Court to keep the Bank’s OA/Suit adjourned with liberty to the Bank to revive the same after the completion of the proceedings initiated under the SARFAESI Act. It is possible that the Hon’ble DRT/Court may not entertain the Bank’s Application in that case the Bank will have to continue the proceedings before the Hon’ble DRT/Court as withdrawing the OA / Suit against the borrowers/guarantors, the Bank may lose its legal right to file fresh OA / Suit as it will be hit by the provisions of the Limitation Act. We may clarify that for issuing Notice under Section 13 (2) of the said Act, permission of DRT/Court is not required. Needless to mention, Branches should ensure that before proceeding under the SARFAESI Act in Pending Suit Filed Accounts, the rights of the Bank as mortgagee/ hypothecatee are not barred by Law of Limitation.

Enforcement Action :

A. If full payment is made during the notice period, no further Action is called for. If part payment is made, the Bank retains the right to claim the balance amount.

B. If the borrower / guarantor fails to meet their liability in full within 60 days from the date of notice then the Authorised Officer may by himself or through empanelled Enforcement Agency take one or more of the following measures:

Take possession of the secured assets

Take over the management of the secured assets.

Appoint a person to manage the assets so taken over.

Issue notice for collection of receivables / book debts

Bank can also sell or lease out the business and take over the management of the Company.

In case the borrower refuses peaceful handing over of the secured assets, Bank can also file an application before the concerned Chief Metropolitan Magistrate /District Magistrate for taking possession of the secured assets.

C. The possession should not be taken as a matter of routine. A due diligence should be conducted in respect of secured assets to be taken into possession covering


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nature and value of such asset, probability of finding a buyer in the shortest period (it will be better if a buyer is identified before undertaking the exercise), expenses to be incurred in connection with safekeeping/ storage, appointment of security guards, estimated realisable value of the assets in case of sale, etc. The total costs and expenses incurred should not be disproportionate to the amount of value of security and recovery expected.

D. Procedure for taking possession/sale of the secured assets

Before taking Possession

i. Where secured assets are intended to be taken in possession, a preliminary visit by the Authorised Officer, if necessary along with the Board Approved Valuer to the site is desirable to assess the likely response of the borrower, realisable value of the assets, the requirement of technical support, manpower and items necessary for effectively taking possession of the secured assets, guarding and/or taking the same in proper custody. If the attitude of the borrower is hostile and it appears to the Authorised Officer that the borrower shall not peacefully handover the secured assets or the premises are found locked, the Authorized Officer must seek the assistance of the Chief Metropolitan Magistrate/District Magistrate in terms of provisions of Section 14 of the Act in consultation with Legal Dept. of the Zone/Bank’s Panel Advocate for taking over the possession of the secured assets.

ii. The decision to take possession of the secured assets will solely depend upon the realizable value of the secured assets and the expenses the Bank is likely to incur towards storage, security, insurance etc. If the realizable value of the secured assets is less than the expenses likely to be incurred by the Bank then before initiating the enforcement Action, the Authorised Officer should bring this fact to the notice of the Zonal Manager and seek the instructions. The Zonal Manager should consider the issue in its entirety and considering the demonstrative effect of the exercise decide the further course of Action.

iii. Having made the assessment as stated in the preceding paras, the Authorised Officer, after making necessary preparation should proceed to take possession. He must have copies of the Notice served on the borrower/guarantor. He should be accompanied by hamal/mazdoors, carpenter (as per requirement) security guards from approved agency, two independent witnesses and a Valuer approved by the Board. He should also carry necessary formats as per Appendix to the Security Interest (Enforcement) Rules for preparation of Panchnama, inventory, Possession Notice, pad locks and other necessary items for putting the secured assets under lock and seal of the Bank wherever necessary. A Sign Board showing Bank’s possession of the site/secured assets may also be carried for putting it up at the site.


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iv. Before taking possession of the secured assets, the Authorised Officer must ensure that the property which is sought to be taken into possession is listed in the notice and the description thereof tallies. For this purpose the Authorised Officer should carry photocopies of the charge creating documents i.e. Memorandum of Entry/Hypothecation Deed etc.

D . 1) Movable Assets

a) Taking Possession

Normally the movable assets are stocks in trade, work in progress, raw material, finished goods, semi finished goods, parts, tools, stores, movable machinery, book debts, receivables etc. or as may be hypothecated/charged to the Bank. Authorised Officer assisted by persons accompanying him shall take possession of the property in the presence of two independent witnesses. Possession should be taken after sunrise and before sunset.

i. Panchnama shall be prepared and signed by the two independent witnesses and the Authorised Officer. The Panchnama should be drawn as nearly as possible in accordance with Annexure III. Necessary details as required in the format, as per facts and circumstances of the case should be mentioned in the Panchnama (Rule 4 (1)).

ii. After taking over the possession, the Authorised Officer shall make or cause to be made an Inventory of the property immediately in the form given in Appendix II to the Rules. The Inventory must give all the requisite particulars of the property e.g. description of the article, estimated value etc. as per requirements in the Annexure IV. Apart from the necessary particulars as required in the format of Inventory, details about quality/quantity, measurements, nature/condition of the property should be mentioned in the inventory. It is to be signed by the Authorised Officer and the borrower or his authorised representative. In case there is refusal by the borrower/representative to sign the inventory, a statement to that effect must be recorded in the Inventory as well as Panchnama and signed by the two independent witnesses and the Authorised Officer.

iii. Authorised Officer shall deliver or cause to deliver the copy of the Inventory to the borrower or any other person entitled to receive it on behalf of the borrower. An acknowledgment should be obtained. In case of refusal, the fact of refusal should be recorded in the Inventory. A copy of the Inventory should be despatched to the


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borrower by Registered Post with acknowledgement due/fax or E-mail. Inventory is to be attached to the Panchnama.

iv. Secured assets shall be kept in the custody of the Authorised Officer or in the custody of any other person authorised or appointed by him in this behalf. The seized assets shall be taken care of in the same manner as the owner of ordinary prudence would take of his own assets. Under no circumstances the possession of the asset should be with the Enforcement Agents appointed by the Bank.

v. The Authorised Officer shall take steps for preservation and protection of secured assets. Wherever the secured assets are not insured or insurance coverage has expired, the Authorised Officer shall take insurance coverage/ continue it till the assets are disposed off. An independent godown/warehouse (as per requirement) should be identified/made available with independent access to the Bank wherein seized assets could be stored and all necessary steps should be taken for protecting and preserving the seized assets including arrangement of security agency for providing security guards to protect the secured assets from theft, pilferage etc.

vi. If the seized assets are subject to speedy or natural decay or the expenses of keeping such assets in custody are likely to exceed its value, the Authorised Officer may direct sale of such goods immediately so as to prevent loss due to decay after completing the aforesaid formalities. In such an event the Authorised Officer shall have to issue Sale Certificate to the purchasers in the prescribed form as given in Annexure V on receipt of Payment. The Sale Certificate shall specify the movable secured assets sold, price paid and the name of the purchaser.

b) Valuation / Sale of the Movable Assets

i. After taking possession of the movable assets and before the sale, the Authorised Officer shall obtain the estimated value of the movable assets from a Valuer approved by Bank’s Board and if considered necessary then fix the Reserve Price of the assets in consultation with the Zonal Manager.

ii. The Authorised Officer or any representative of the Bank should accompany the Valuers at the time of conducting valuation.

iii. Valuers should be advised to furnish a realistic and reasonable value of the assets after taking into consideration the market conditions and the present prices in general.

iv. Wherever prospective buyers are not available for purchasing the unit as a whole, seized assets should be sorted out in different lots for the convenience of effecting sale.

c) Manner of Sale


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The Authorised Officer shall sell the seized assets in one or more lots by any of the following modes to secure maximum price for the assets to be sold:

i. By obtaining quotations from parties dealing in the seized assets or otherwise interested in buying the seized assets.

ii. By inviting tenders from public

iii. By holding public auction or

iv. By private treaty.

d) Sale Notice - To Borrower/owner of assets

The Authorised Officer must serve to the Borrower a Notice of 30 days for sale of the movable assets. Service of Sale Notice is to be done in the same manner as Demand Notice under Section 13(2) of the Act is served. The Act/Rules do not prescribe any format for this notice. This Notice should contain the Reserve Price, fixed if any and mode of sale, place, date and time of sale and should give the borrower an opportunity to participate in the sale process.

e) Publication of Sale Notice in Newspapers

If the sale is being effected by either inviting tenders from public or by holding public auction, a Public Notice in two leading newspapers, one in vernacular language, having sufficient circulation in that locality must be published. Sale can be conducted only after expiry of 30 days from the date on which the Sale Notice was published in the newspaper or after expiry of 30 days from the date of service of the Sale Notice to the buyer/guarantor whichever is later. The Public Notice shall set out the terms of sale, which may include the following:

i. Details about the borrower and Bank.

ii. Description of movable secured assets to be sold with identification marks or numbers if any on them;

iii. Reserve Price, if any, and the time and manner of payment;


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iv. Time and place of public auction or the time after which sale by any other mode shall be completed;

v. Depositing earnest money as may be stipulated by the Bank;

vi. Time and place for inspection of the movable assets;

vii. Any other thing which the Authorised Officer considers it material for the purchaser to know in order to judge the nature and value of the movable assets;

Wherever Sale Notice is being published in newspaper a copy thereof should be sent to the borrower along with 30 days Sale Notice referred above.

f) Inspection by Prospective Purchasers

The prospective purchasers/tenderers will have to be provided with the details of assets under sale and opportunity for inspection. For convenience, a common date and time may be fixed for inspection for all prospective purchasers and intimation to this effect to be made part of the Sale Notice to be published in newspaper.

g) Sale by Public Tender

Wherever sale is to be conducted by Public Tender, all the tenders received should be opened by the Authorised Officer in the presence of the Tenderers and hence date, time and place of opening the Tenders should also be mentioned in the Sale Notice.

h) Sale by other methods than public auction/public tender

Sale by any method other than public auction or public tender shall be on such terms as may be settled between the parties in writing. However, an endeavour should be made to get the maximum sale price for the assets i.e. more than the Reserve Price. Further, if the amount offered is less than the Reserve Price, the property can be sold by the Authorised Officer only with the consent of the Bank and borrower/guarantor i.e. owner of the property.

i) Issuance of Sale Certificate

Where movable secured assets are sold, sale price of each lot shall be paid as per the terms of the public notice or as per terms settled between the parties as the case may be and in the event of default of payment the secured assets shall be liable for sale again. On payment of sale price, the Authorised Officer shall issue Sale Certificate in the prescribed form as given in Annexure V to the said Rules specifying the movable secured assets sold, price paid and name of the purchaser and thereafter the sale shall become


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absolute. The Sale Certificate so issued shall be prima facie evidence of title of purchaser. The possession of the assets sold shall be delivered to the purchaser.

j) Sale of other movable assets

The aforesaid procedure with necessary change shall be followed while taking possession and selling the following movable secured assets also:

- A mortgage, charge, hypothecation of movable property. - Any right or interest in the security whether full or part underlying at debt or

receivable (payable to the Bank). - Any beneficial interest in the property or in a debt or receivable.

k) No Sale or Transfer if Dues are paid

If the dues of the Bank together with all costs, charges and expenses incurred by Bank are tendered to the Bank at any time before sale or transfer, the secured asset shall not be sold or transferred by the Bank.

l) Procedure relating to other secured assets not in possession of the borrower

i. If the secured asset is in the form of a debt (not secured by negotiable instrument) not in possession of the borrower, the Authorised Officer shall obtain possession or recover the debt by service of notice prohibiting the borrower from recovering the debt or any interest thereon and the debtor from making payment thereof to the borrower and directing the debtor to make such payment to the Authorised Officer.

ii. If the secured assets are shares in a body corporate, the Authorised Officer shall serve a notice directing the borrower to transfer the same to the Bank and also the body corporate from not transferring such shares in favour of any person other than Bank. A copy of such notice so sent shall be sent to the concerned Body Corporate’s Registrar to the Issue or Share Transfer Agent, if any.

iii. In case of any other movable property, the Authorised Officer shall serve the notice upon the borrower and the person in possession of such assets, calling upon them to handover the same to Authorised Officer and the Authorised Officer shall take custody of such movable property in the same manner as applicable to movable secured assets as aforesaid.

D. 2) Immovable Properties

1. Taking Possession


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Before taking possession of immovable property the Authorised Officer shall be guided as far as possible by the guidelines as appearing above vide para I (i) to (iv).

i. The immovable property to be taken into possession may be house, residential flat, open plot of land, factory land and building, industrial Gala, warehouse, Plant & Machinery permanently attached to earth etc. As per nature of the property, appropriate preparations should be done for effectively taking possession thereof and keeping the same in safe custody and care.

ii. Possession of the immovable property shall be taken by delivering Possession Notice, to the Borrower/Guarantor whose property is being taken in possession. Duplicate of Possession Notice has to be affixed on the outer door or most visible part of the property itself. If the property is land and large in area, a notice board also can be fixed giving the details of Possession Notice. Where there is refusal to acknowledge the Possession Notice, then the Possession Notice is to be served in the same manner as demand notice issued under Section 13 (2) of the Act is served.

iii. Possession Notice shall be published in two leading daily newspapers (one in vernacular/local language) having wide circulation in that locality.

iv. While taking possession of immovable property including plant and machinery embedded to the earth or permanently fastened to anything attached to the earth, the Authorised Officer or any person appointed by him shall prepare inventory of such assets giving full description and condition thereof including trade mark, capacity, survey nos., extent, boundaries etc. The inventory should also contain all the movable assets/contents found in the premises, which are taken possession or attached to the premises. Such inventory should be verified with two independent witnesses and should be prepared as far as possible in the form given in Annexure IV and should be delivered to borrower or any person entitled to receive it on behalf of borrower (i.e. owner of such assets)

v. The Rules do not specify any Panchnama in case of immovable property but it is advisable to record a Panchnama detailing the fact of taking over of possession, its time, date etc, inventory of movables, if any, signed by two independent witnesses.

vi. In case of taking possession of residential properties under Section 13 (4) (a), if peaceful possession of such residential properties is possible, a Panchnama with two independent witnesses is a must and the Panchnama should contain the details of all the contents of such premises such as furniture, fittings etc. If moveable assets found are not charged to Bank then the assets should be handed over to the true owner against proper acknowledgement. If the same is not possible then Inventory of such movables should be prepared as aforesaid and the immovables should be kept in safe custody and true owner be notified for taking possession along with a copy of Inventory.

vii. Even if possession is obtained under an Order of the Magistrate, a Memorandum recording handing/taking over the possession should be drawn disclosing all the


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contents of such premises such as furniture, fittings etc. followed by handing over of Possession Notice by the Authorised Officer to the borrower and publication of Possession Notice in the newspapers as aforesaid.

viii. If the possession of the immovable property has been taken, the property has to be kept in the custody of the Authorised Officer or in the custody of any other person authorised or appointed by Authorised Officer in this behalf who shall take as much care of the property in his custody as a owner of ordinary prudence would, under the similar circumstances, take of his property. Hence, the assets taken into possession must be maintained with care and all necessary repairs/cleaning up operations be carried out so as to maintain the property in proper condition. Under no circumstances the possession of the property should be given to the Enforcement Agents appointed by the Bank.

ix. The Authorised Officer shall take steps for preservation and protection of secured assets and insure them, if necessary, till they are sold or otherwise disposed of. If the seized assets are already insured by the borrower, the same may be renewed. If not, the same must be insured upto such value as may be deemed necessary and appropriate by the Authorised Officer taking into consideration the realizable value of such property.

2. Valuation / Sale of Immovable Property

i. The concerned branch must be in touch with prospective buyer(s) (preferably before expiry of notice period of 60 days) for selling seized assets in order to ensure that there will not be any depreciation in value of the assets and costs for preserving the assets are minimum.

ii. Before effecting sale of the immovable property taken into possession, the Authorised Officer shall obtain valuation of the property from a Valuer approved by the Board.

iii. The Authorised Officer or any representative of the Bank should accompany the Valuers at the time of conducting valuation. A copy of the Title Deed should be


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taken during such inspection to identify the property and to ensure that the property as per Title Deeds is same as that being valued.

iv. Valuers should be advised to furnish a realistic and reasonable Value of the assets taking into account the market conditions and present property prices in general.

v. The Authorised Officer shall fix the Reserve Price for the property in consultation with the Zonal Manager. In case the approval for Action in the account has been accorded by an authority above the rank of Zonal Manager, then Zonal Manager shall obtain approval of such authority for fixing Reserve Price and accordingly communicate to the Authorised Officer.

vi. After fixing the Reserve Price the Authorised Officer may sell the whole or any part of such immovable property by any of following methods to ensure maximum price of such property :

a) by obtaining quotations from the persons dealing with similar property or otherwise interested in buying such property or

b) by inviting tenders from the public

c) by holding public auction, or

d) by private treaty.

vii. The Authorised Officer shall serve to the borrower a notice of thirty days for sale of the immovable property. Service of Sale Notice is to be made in the same manner as service of Demand Notice is made. The Act/Rules do not prescribe any format for this notice. This notice should contain the Reserve Price fixed, mode of sale, place, date and time of sale and should give the borrower an opportunity to participate in the sale process.

viii. If the sale is conducted by inviting tenders from public or by holding public auction, a Public Notice is to be published in two leading daily newspapers, one in vernacular language, having sufficient circulation in that locality the other in English by setting out the terms of the sale including the following:

a) Name of the Bank and the borrower/guarantor i.e. owner of the property.

b) Description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor.

c) The secured debt for recovery of which the property is to be sold.

d) Reserve Price below, which the property may not be sold.

e) Time and place of Public Auction or the time after which sale by any other mode shall be completed.


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f) Depositing earnest money as may be stipulated by the Authorised Officer of the secured creditor.

g) Any other thing which the Authorised Officer considers material for a purchaser to know in order to judge the nature and value of the property.

Wherever Sale Notice is being published in newspapers a copy thereof should be sent to the borrower alongwith 30 days Sale Notice referred above.

ix. The Notice of Sale should also be affixed on a conspicuous part of the immovable property to be sold. If the Authorised Officer deems fit, the Sale Notice may be put on the Bank’s website also.

x. The Authorised Officer/concerned Branch must make arrangement for facilitating the inspection of property under sale and information to this effect should be mentioned in

the Sale Notice. For the sake of convenience a common date/s and time may be fixed for inspection by prospective bidders/purchasers.

xi. In case of sale by obtaining quotations from interested parties, quotations from at least 3 interested parties should be invited The invitation for quotations should be mailed to as many interested parties as possible. (For example, if the immovable property to be sold is factory land and building, the interested parties could be owners of properties in the neighbourhood, owners of factories engaged in similar Activity etc.).

xii. Wherever sale is to be conducted by Public Tender, all the tenders received should be opened by the Authorised Officer in the presence of the Tenderers and hence date, time and place of opening the Tenders should also be mentioned in the Sale Notice.

xiii. Sale by any method other than Public Auction or Public Tender shall be on such terms as may be settled between the parties in writing.

xiv. Every endeavour should be made to obtain a price above the Reserve Price and the property has to be sold only to the Purchaser who has offered the highest sale price in his bid or tender or quotation or offer. Further, if the amount offered is less than the Reserve Price, the property can be sold by the Authorised Officer only with the consent of the Bank and borrower/guarantor i.e. owner of the property.

xv. Sale by any method can be conducted only after expiry of 30 days from the date on which the Sale Notice was published or from the date of service of Sale Notice to the borrower/guarantor (i.e. owner of the property) whichever is later. Assets shall be sold in favour of the purchaser who has offered the highest price in his bid/tender or quotation or offer to the Authorised Officer and the sale shall be subject to the confirmation by the Bank.


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xvi. On every sale of immovable property, the purchaser shall immediately pay a deposit of twenty five percent of the amount of the sale price, to the Authorised Officer conducting the sale and in default of such deposit, the property shall forthwith be sold again.

xvii. The balance amount of purchase price payable shall be paid by the purchaser to the Authorised Officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the parties.

xviii. In default of payment within the period mentioned as above, the deposit and earnest money shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit all claims to the property or to any part of the sum for which it may be subsequently sold.

xix. On confirmation of sale by the Bank and if the terms of payment have been complied with, the Authorised Officer exercising the power of sale shall issue a Certificate of Sale of the immovable property in favour of the purchaser in the form given in Appendix V to the said Rules. All expenses relating to stamp duty, registration etc. including all costs, charges and expenses in relation thereto are to be borne by the purchaser.

xx. Where the immovable property sold is subject to any encumbrances, the Authorised Officer may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him.

xxi. On such deposit of money for discharge of the encumbrances, the Authorised Officer may issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make the payment accordingly.

xxii. The Authorised Officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified above.

xxiii. The Certificate of Sale issued in respect of property under encumbrances shall specifically mention that the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not.

E. Secured Assets in possession /custody of the Court/Court


NPA MANAGEMENT

Receiver/Official Liquidator/Provisional Official Liquidator

Where the assets to be taken into possession are in possession/custody of the above noted authority, the Authorised Officer can not take possession of such assets without specific and prior permission from the concerned Court etc. This restriction would apply in case of assets belonging to a corporate borrower against which winding up order has been passed by the Company Court.

F. Immovable property in possession of tenants

Sec. 13(4) of the Act empowers the Secured Creditor /Authorised Officer to take possession of the property either Actually or constructively and transfer it by way of lease/assignment/sale and any such transfer of secured assets after taking possession shall vest in the transferee as if the transfer has been made by owner of the assets. However, such deeming power has been given to the secured creditors/Authorised Officers only for the limited purpose of releasing the securities to convey good marketable title to the buyer but property does not vest in the secured creditor/Authorised Officer, who shall not have any power to evict a tenant who is in lawful possession of such property. In such cases, the Authorised Officer can take constructive possession of the property after observing the necessary formalities as provisions of the Rules and as detailed in this Annexure. Such properties can be sold on as is where is basis i.e. subject to tenancy rights/encumbrance. The Authorised Officer can serve notice to the tenants under Section 13 (4) (d) of the Act for payment of the rents to the Bank and on receipt of rent the Authorised Officer can give the tenant a valid discharge by issuing receipts. However, where the tenant does not appear to be bonafide but tenancy appears to have been created in connivance with the borrower then the Authorised Officer should immediately bring facts to the knowledge of Legal Dept. of the Zone for guidance.

G. Constructive / Symbolic possession

In this regard, the properties in possession of the tenants, taking symbolic possession of the properties, as a rule, may not be the appropriate mode and the same may not serve any purpose and there may be complications in cases involving unscrupulous borrowers/owners of the immovable properties. We explain this as under :-

1. Possession is taken in order to hand over the same to the purchaser of the property on confirmation of the sale. Symbolic possession will not ensure Actual possession of the property, which the intending purchaser will require. Apart from that, when the property is not in vacant possession of the Bank, the same may not attract fair value as it should because of the uncertainty and the apprehension in the minds of the intending purchaser about some litigation following the sale in order to thwart the delivery of possession. As such, Actual and vacant possession in the hands of the Bank shall always command highest price as compared to a situation where only symbolic possession is obtained by the Bank.


NPA MANAGEMENT

2. In case symbolic/constructive possession is taken by delivering the copy of Possession Notice, then any unscrupulous owner of such property may try to part with the possession of the property and contend that he has already delivered possession of the property to the Bank against Possession Notice. This situation will be very complicated when the Bank will have to account for the same. No Enforcement Agent need be appointed to take symbolic / constructive possession.

3. Symbolic/constructive possession will have to be converted into Actual possession at the time or after the sale of the property, as vacant possession has to be given to the purchaser of the property unless the purchaser agrees to purchase without insisting for vacant possession. Hence, for aforesaid reasons, it is not advisable to postpone taking of Actual possession, as a rule. However, in specific cases involving special circumstances, symbolic possession may be taken after following formalities e.g. property in possession of tenants or where taking possession of the property will entail large expenses for maintaining and safe guarding the property and the owner of such property is cooperative enough to execute necessary declaration and undertaking in favour of the Bank stating that Bank has taken possession of the property and, at his request, the Bank has again put him in possession of the property as its agent and that he will hold the possession on behalf of the Bank as the agent, and shall be responsible for maintaining the same. Such a person will further undertake that he shall hand over vacant possession of the property back to the Authorised Officer of the Bank within a specific time frame (say within seven days) of being asked to do so, failing which, the Bank can move the Chief Metropolitan Magistrate/District Magistrate u/s 14 of the Act for regaining the possession. The draft of such undertaking may depend on facts and circumstance of each case and can be prepared in consultation with Legal Deptt / Panel Advocate of the Zone.

Appropriation of sale proceeds [Section 13 (7)]

All costs, charges, expenses incurred by the secured creditor are recoverable first from the proceeds of assets sold. Hence proper records / documents pertaining to service of notice, acknowledgement of notice, proof of service, publication of notices etc. and account relating to expenses incurred should be maintained.

After sale of secured assets the appropriation of sale proceeds realized is to be done as per the provisions of Section 13(7) in the following order:

Firstly towards costs charges and expenses incidental thereto, which are recoverable from the borrower. Costs incurred by the secured creditor for preservation and protection of securities, insurance premium and other expenses will be recoverable from the sale proceeds.

Secondly towards the dues of the secured creditor.

If there is any residue it is to be paid to the person entitled thereto in accordance with his rights and interests.


NPA MANAGEMENT

The order of payment contained in this sub-Section gives recognition to the rights of secured creditors to realize their securities in preference to all other creditors and other preferential payments of the dues payable to Government, labour etc.

This provision and order of payment is subject to provisions of Sections 529 and 529A of the Companies Act in respect of companies under winding up. Subject to pari passu charge on the assets of the Company under winding up for workmen’s dues, or pari passu or first charge of any other creditor sub-Section (9) does not recognise priority of any other creditor or claimant over the claim of the secured creditors.

Recovery of Short-fall Amounts

If the sale proceeds realised in the enforcement Action are not sufficient to liquidate Bank’s dues then the Bank will have to file recovery suit / DRT application before Civil Court / DRT for enforcing the personal covenant against the borrower / guarantor. The issuing of notices under the Act does not extend the limitation period and on the date of filing Suit / DRT application for recovery of the dues, the documents must be alive. Hence the limitation period should be kept track of and it should be ensured to file recovery suit / application before Civil Court / DRT before expiry of limitation period for personal decree, notwithstanding issue of notice/ Action under the Act.

Other matters:

APPEAL If any person is aggrieved by any of the measures taken under Section 13 (4) of the Act by the Bank, he may file an application to DRT within 45 days from the date on which such measures have been taken under Section 17 of the SARFAESI Act along with such fee as may be prescribed. For filing of such application no deposit is required to be deposited by the borrower or such person. The DRT has been given power to consider whether Action taken by the Bank to enforce security is in accordance with the provisions of the Act and Rules. If the DRT comes to the conclusion that Action taken by the Bank is not in accordance with provisions of the Act and Rules then by an order it can declare the Action taken by the Bank as invalid and restore possession of the secured assets to the borrower and pass such orders as it may consider appropriate and necessary. The DRT has to pass the orders within 60 days time. However, the said time can be extended by the DRT upto four months. If the DRT does not decide the application within four months time then any party may approach DRAT, for directing DRT for expeditious disposal of the application pending before the DRT.

If any person aggrieved by any Order made by the DRT under Section 17 may prefer an appeal to the Debt Recovery Appellate Tribunal within thirty days from the date of receipt of the order of the DRT along with such fee as may be prescribed. No appeal shall be entertained unless the borrower deposits 50% of the amount of debt due from him or determined by the DRT whichever is less. The Appellate Tribunal may for reasons to be recorded in writing reduce the amount to not less than 25% of the debt.


NPA MANAGEMENT

The properties specifically charged with debt recoverable under the Act are liable to be attached and sold (though the same are not liable to attachment or sale in execution of a decree as per sub-Section (1) of Section 60 of the Code of Civil Procedure, 1908) meaning thereby that the securities specifically charged to the Bank can be enforced. It may be noted that as per Section 60(1)(b) and (c) of CPC, the agricultural produce and the house/building belonging to an agriculturist is not attachable under a decree but the same can be enforceable under the SARFAESI Act if the same is charged to the Bank.

a) Bankers to Act in good faith and reasonably and should not go over board in exercising the power under the Act.

b) No Civil Court can interfere in the lender’s right. The borrower / guarantor who owns the securities can file Appeal before the D.R.T., if aggrieved by the enforcement measures taken by the Bank under Section 13(4) of the Act.

c) All costs/ charges/ expenses incurred by the secured creditor are recoverable from the proceeds of assets sold.

d) Interest calculation for arriving at the contractual dues should be as per the agreement. However, as per judgement of Supreme Court, compounding/ capitalisation of penal interest is not permissible. It should be therefore, verified and compounding effect, if any, in respect of amount of penal interest should be excluded in the amount of claim stated in the notice.

e) The (borrower/guarantor) debtor can not alienate or meddle with the security charged once he receives the Notice under the Act except for repaying the dues of the secured creditor.

f) Right to compensation to borrower

Section 19 of the Act provides that the DRT / DRAT can direct the secured creditor to return to the borrower the assets taken over and also make payment of compensation and costs to him in case DRT / DRAT finds that possession taken was wrongful. Hence adequate care must be taken to ensure that (i) security is valid and enforceable and (ii) the assets belong to borrower / guarantor.

g) Immunity granted to secured creditor and his officers

Section 32 of the Act provides immunity by laying down that no suit, prosecution or other legal proceedings will lie against any secured creditor or any of its officers or Managers exercising any rights of the secured creditor for anything done or omitted to done in good faith.


NPA MANAGEMENT

h) Money, which is due, can be recovered from third party who has acquired the

secured assets of the (borrower/guarantor) debtor by giving notice to him in this regard.

i) The Act covers only the various SECURITIES ACTUALLY CHARGED TO THE BANK.

j) Even if the guarantor’s assets are not charged to the Bank, a copy of the notice served on the Principal Debtor should be endorsed to all such guarantors for invoking their guarantees.

k) Upon enforcement Action as in 13(4), any reference of the Borrower Company, pending before BIFR gets abated. As per the Act, prior approval of BIFR is not required for initiating Action under the Act. However, BIFR shall be informed about our Action under SARFAESI Act and abatement of reference made by the company under SICA.

Approval for Deferment Of Action

In all notice issued accounts where no compromise has been approved/no

recovery is forthcoming, possession should be taken invariably without

exception, after completion of mandatory 60 days notice period.

In case the branch wants to defer taking possession for some valid and cogent reason prior permission from the General Manager (Law) / General Manager (NPA Management) of Head Office should be taken. Such requests for deferment of Action (in notice issued accounts) should be sent to Head Office, ARD, (Securitisation Cell) within a period of 30 days from the completion of the mandatory 60 days period. The Zones should ensure that the borrower’s request for deferment should be justified by payment of reasonable amount commensurate with the dues in the account. The request for deferment should be on merits and in only selected cases.

Even in accounts where compromise proposals are under negotiation/process possession of the secured assets should be taken. As and where the compromise is approved with necessary upfront payment the possession may be released with the condition that repossession will be taken in case of default of payment of compromise accounts as per stipulation/approval.


NPA MANAGEMENT

NPA Accounts where Agricultural Land Has Been Given As Security

Many of the NPA accounts are categorised as non-eligible accounts under the provisions of SARFAESI Act due to the only reason that the land mortgaged to the Bank is an Agricultural Land (AL) which is exempted from the provisions of the Act. However, it is observed that in many such cases commercial/industrial/allied Activities are carried out by the owners on such land without obtaining NA Permission (i.e. getting permission from the competent authority for converting the land from Agricultural use to Non-Agricultural use). Inspections of all such accounts should be conducted and it should be verified whether any commercial/industrial/allied Activity is carried on such agricultural land. If it transpires that the owner is carrying on such Activity then the Bank can always proceed to enforce such a security under the SARFAESI Act. To substantiate the Bank’s Action under the SARFAESI Act, it is necessary that the Bank is having some documentary evidence that the land in question is used for commercial/industrial/allied Activities. It is suggested that the branches approach the local Patwari/Tehsildar/Panchayat/Govt. Dept. and obtain from him a Certificate as regards the Activity carried out on such land as also take photographs to prove that commercial Activity is carried on. Even if the land is declared as Agricultural Land and if any commercial / industrial Activity is carried on or otherwise used for allied non-agricultural purposes, then also Action may be initiated under the SARFAESI Act.


NPA MANAGEMENT

RECOVERY / ENFORCEMENT AGENTS

Recovery Agents

1) Where recovery is not forthcoming, the Bank may explore the avenue of engaging the services of Recovery Agents. These include Government Agencies, NGOs, SHGs, Advocates on the Bank’s panel, reputed Corporate Bodies/Firms and individuals with proven track record.

2) Mostly in cases where there is no tangible security available to the Bank such as Star Suvidha accounts, clean overdrafts, debits due to India Card usage and other accounts may be handed over to the Recovery Agents. Apart from the above, the services of Recovery Agents may also be availed of :-

a) Where the execution proceedings have not yielded any results

b) Where the bids have failed after putting up the suit properties and attached properties for sale

c) Where the Bank has to recover the balance amount of decree after sale of charged and attached assets either through execution of decree or SARFAESI action


NPA MANAGEMENT

3) It may importantly be noted that all out recovery efforts should be made by the Branch staff. Only if ‘in house’ procedures by our own personnel fail to yield the desired results, then only ‘outsourcing’ by engaging the services of Recovery Agents should be resorted to. Moreover, it is advisable to use ‘outsourcing’ only when the account becomes ‘Doubtful’ or ‘Loss’ asset, and at initial stages when the account is in ‘Substandard’ category Branch machinery should be utilised for recovery purposes. In other words, only after completion of 12 months from the date of NPA, services of Recovery Agents are to be utilised.

4) At the time of appointing Recovery Agent, the Bank should enter into an Agreement cum Indemnity with the said Agent wherein the terms of recovery and charges are clearly mentioned. The Original Agreement cum Indemnity duly executed by the Recovery Agent shall be kept on the Bank’s record. Likewise, whilst entrusting the NPA account to the Enforcement Agent under the SARFAESI Act 2002, a letter should be issued to the Enforcement Agency listing out the terms and conditions of our Bank. The duplicate copy of the said letter duly signed by the Enforcement Agent in token of having agreed to the terms and conditions should be kept on the Bank’s records. This procedure shall help to avoid any disputes in future with the Recovery Agent/Enforcement Agent. A specimen of the Agreement cum Indemnity is given in the Annexure – ‘A’

5) It is of paramount interest that the individuals / firms etc. appointed as Recovery / Enforcement Agents are of clean image and good reputation and they do not violate any legal provisions and guidelines issued by RBI / Government.

6) The empanelment of Recovery Agents is done by Zonal Office and is approved by the Zonal Manager.

7) The following aspects should be looked into while approving the Recovery Agents –

a) Past experience, capabilities, reliability should be given due consideration

b) They should be offering their services to Nationalized Banks, Financial Institutions, State Financial Corporations / Agencies

c) Lawyers, Legal firms can also be considered for appointment as Recovery Agents and Enforcement Agents

d) Firms, persons connected with the borrowers/ guarantors (against whom decree

is to be executed) should not be appointed

e) A reference may be obtained from other Banks, Financial Institutions, etc. for empanelling of Recovery Agents and Enforcement Agents. Zonal Offices shall maintain all records and list of the panel of Recovery Agents and Enforcement Agents.


NPA MANAGEMENT

WRITE OFF POLICY

Write off is resorted to in the borrowal accounts when the Bank has exhausted all possible avenues of recovery and there are no more chances for effecting the recovery.

Write off is of two kinds – Prudential write off and Regular write off. The basic difference between prudential and regular write off is that in Prudential write off there is possibility of recovery at a distant future even after write off while in Regular write off there is no/ little possibility of recovery.

It is open to the Bank to resort to partial write off also. Partial write off would be in the accounts classified as doubtful assets, to the extent of provision held on the outstanding and not covered by any security.

I) Regular Write off

- General conditions : A Regular write off will be considered on the happening of (i) and (ii) and any of the (iii) to (vii) below :-

i. Account is classified as Loss Asset.

ii. 100% provision is held in such accounts as at the end of previous accounting year.


NPA MANAGEMENT

iii. Prior approval for waiver of legal action including where account is already time barred/termination of suit proceedings/waiver of appeal etc. should be obtained before considering regular write off. Termination of suit proceedings shall mean that pending legal action shall be taken to the logical conclusion.

iv. All efforts for recovery have been taken to their conclusion, by means of action under SRFAESI Act, legal action, execution of decree, etc. and there is absolutely no prospect for any further recovery

v. In exceptional cases, where the borrower (and guarantor, wherever applicable) has or have expired, or their whereabouts cannot be traced in spite of all efforts, and there is no security which can be realised

vi. Cases where all efforts of recovery have been adopted and the remaining balance and circumstances are such that any further effort is considered cost-ineffective

vii. As a result of a negotiated settlement in any account, where any portion of the outstanding balance, unrealised interest and/or uncharged interest / charges is agreed to be written off or waived, this write off shall be effected after receipt of full compromise amount plus interest if any, as per terms of OTS approved. No specific approval is required for this since the write off is part of compromise settlement duly approved by competent authority

12.1.2. The Authority for approval of sacrifice in a write off proposal will be as under:

(Rs.in lakh)

II) Prudential Write Off


Management Committee Full powers


Executive Director

General Manager, H.O., ARD

General Manager (Zonal Manager)

Dy.General Manager/ Scale VI

Asst. General Manager/Scale V

Chief Manager Scale IV

Manager (large Branch) Scale III

50.00

37.50

30.00

25.00

20.00

10.00

2.50

1.00

NPA MANAGEMENT

Prudential write off should be effected without impacting the accounts at the branch level. In other words, the whole exercise of prudential write-off has to be restricted to selective NPA accounts and as such to be reflected in accounts only at H.O.

- General conditions :

1. Prudential write-off of accounts partially or fully will be adopted in the case of doubtful and loss assets where the following conditions are satisfied:

i. All Doubtful / Loss assets with outstanding of Rs.1-crore and above as of last balance sheet date will be taken up for consideration.

ii. Suit should have been generally filed in the account in case of non-BIFR cases.

iii. All avenues of recovery including rehabilitation / restructuring /compromise must be explored before write off

2. The amount being written-off should be covered by the provisions held in the account at the end of the previous accounting year.

3. In the case of ECGC/DICGC guaranteed accounts, residual amount after adjustment of claim could be written off if there is no prospect of recovery in the near future.

4. In case of BIFR accounts,

i. Where BIFR has sanctioned OTS scheme, outstanding balance in excess of the OTS amount may be written off pending receipt of OTS amount.

ii. If winding up has been ordered by BIFR, amount of shortfall in security may be written off.

iii. If BIFR has sanctioned a Rehabilitation scheme, amount of write-off or waiver of principal or interest under the scheme may be written off (subject to Bank’s right of recompense).

Authority

Authority to approve prudential write-offs vests with the Management Committee.


NPA MANAGEMENT

BID POLICY

Many a times, in spite of Bank successfully obtaining an auction order from court/ DRT, the actual implementation and achieving the benefits thereby are eluding, mainly due to the following reasons:

i. Many a times due to influence exerted by the defendants, no bid offers are received by the Court/ DRTs leading to postponement of the scheduled auction more than once.

ii. Recent instances reveal that in the absence of bidders to the suit properties, Court/ DRTs have indicated to the Bank that such execution petitions would be disposed off as unfructified. This would mean that the Bank’s recourse for recovery is affected adversely.

iii. The defendants form a cartel of prospective buyers with intention to ensure that the properties fetch much lower price than their market value and thus succeed in scuttling Bank’s interest.

iv. Bid Policy empowers the Bank to enter the auction as a prospective bidder/ purchaser.

Scope

In all cases where bid/ auction orders have been issued by the Court/ DRTs etc. and no bid offer is received till the time of auction/ bid, Bank may participate in the bid for purchase of the suit property/ies subject to obtention of approval at the appropriate level.


NPA MANAGEMENT

SALE OF FINANCIAL ASSETS TO ASSET SECURITISATION COMPANIES / ASSET

RECONSTRUCTION COMPANIES (ASCs /ARCs)

a) SRFAESI Act has brought into picture a new dimension of NPA Management for Banks in which Banks can reduce their NPAs by disposing off the NPA to Asset Reconstruction Companies. This policy aims at taking advantage of the provisions of this Act for effective sale of the financial assets and reduction of NPAs and with attendant issues. This policy does not address sale of standard assets, as the issues to be addressed on securitisation of standard assets are different from those of NPAs.

b) SRFAESI Act has 3 broad features -

1. Securitisation & Asset Reconstruction Companies

2. Central Registry

3. Enforcement of Security Interest

c) The guidelines on sale of financial assets to ASC / ARC have prescribed 2 distinctive areas of operation whereby Banks are –

- required to sell the financial assets to ASC / ARC

- invest in ASC / ARC in the form of Security Receipts (SR), Pass Through Certificates (PTC), Bonds, Debentures, etc.

Financial Assets which can be sold:

A financial asset may be sold to the ASC / ARC by any Bank / FI where the asset is-

- An NPA, including a non performing bond / debenture and

- A Standard Asset where:

i. the asset is under consortium / multiple banking arrangements,

ii. at least 75% by value of the asset is classified as non-performing asset in the books of other Banks / FIs and

iii. at least 75% (by value) of the Banks / FIs who are under the consortium / multiple banking arrangements agree to the sale of the asset to ASC / ARC


NPA MANAGEMENT

BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR)

Board for Industrial and Financial Reconstruction is a body constituted under Sick Industries Companies (Special Provision) Act (SICA) 1985. It is a quasi judicial body with powers to initiate legal steps against erring promoters who fail to abide by the regulations of SICA. It has the powers to summon and record evidence and over ride some of the provisions of Company’s Act.

Reference :

All the Sick Industrial companies which are –

a. engaged in manufacturing/ processing activity, employing 50 workers or more

b. registered for 5 years or over

c. whose net worth has completely been eroded as at the end of any financial year.

are required to make reference to BIFR, within 60 days from the date of adoption of annual accounts/ audited balance sheet at the Annual General Body of the concerned company or where the Board of directors have come to the conclusion that the company has become sick Industrial company.

The reference is to be made in `Form A’ annexed to the Act. The secured creditors or any other creditors, Banks and financial institutions can also make a reference about the company. Once a reference is registered, BIFR sends intimation to all concerned parties including Banks, Financial Institutions and Govt. Agencies.

Effect of Reference :

The immediate effect of the reference is that – a. no legal action/ recovery action can be instituted against the borrower company and

the guarantors

b. all pending cases against the borrower/ guarantors are suspended during the pendency of reference.

c. The limitation is suspended for the period for which the reference is pending with BIFR

However, legal proceedings can be instituted/ continued after obtaining the permission of BIFR.


NPA MANAGEMENT

Ineligible Cases :

Shipping companies, Industrial units registered as SSIUs and service units like Hotels, etc. are not eligible for reference.

Bank’s Position :

It is the responsibility of the company making reference to BIFR to send copies of ‘Form A’ along with enclosures to all the secured creditors/ Banks/ Financial Institutions and other agencies. If however, the company does not submit `Form A’ within reasonable time, the same can be called for by the Bank by sending suitable communication to the company.

As soon as the Form A is received, Bank should make a detailed –

A. Study of Form A and Balance Sheets for the detailed analysis in order to verify the facts leading to such sickness, especially –

i. To make critical comparative analysis of all the components of the company’s audited accounts both of revenue and capital nature at least for the last 5 years.

ii. Inconsistencies like overstating/ booking of expenses on major inputs/ understating of income in the later years in a bid to bring the unit under the ambit of SICA

iii. Comparative study on each input (raw material, powers, labour, etc.) to sales ratio

to study abnormal variations.

iv. Abrupt change in accounting system like method of depreciation, providing liabilities not disclosed earlier, write off of book debts, diversion of funds outside the unit by siphoning off funds, in any manner to other group concerns, realisation of book debts by cash without routing through Banking system.

v. Comments of the auditors on the balance sheet and any contradictory stand in

Form A.

B. Prepare a comprehensive status report giving Bank’s observation/ comments on the information given in Form A. In case the reference is to be opposed, specific grounds for opposing the reference are to be brought out. The status report maybe submitted in the format enclosed.

C. After getting the approval from the competent authority, file the status report, with BIFR, through our BIFR Cell, Zonal Office, New Delhi. Copies of Form A may be sent to functional departments in Head Office (either ARD or C&IC).


NPA MANAGEMENT

D. On the date of first hearing, Bank’s stand is to be presented as approved.

CONCLUSION

To ensure long term profitability, banks have to manage NPAs effectively by adopting techniques like :

i. Ensuring that loans are diversified across several customer segments

ii. Introducing robust risk scoring techniques to ensure better quality of loans

iii. Improving the quality of credit monitoring system by designating a separate credit manager or relationship manager for that purpose

iv. Raising the share of non-fund income by increasing service product offerings by better use of technology

v. Reducing operating expenses by upgrading the banking technology

vi. Monitoring early warning signals & taking immediate appropriate remedial action

vii. Adopting credit rating system to identify, measure & monitor the credit risk of individual proposal

viii. Putting certain borrowal accounts which exhibit certain distress signals under a watch list & paying close attention so that they don’t become NPAs

ix. Reducing the impact of operational risks by measuring them & mitigating or insuring them

x. Knowing a client’s profile thoroughly & preparing a credit report by paying frequent visits to the client & his business unit

xi. Appraising credit proposals professionally & insisting on timely delivery of credit

Remedies available

In spite of good credit management in terms of appraising & monitoring of loan assets NPAs do occur. In such cases remedial measures have to be taken. They are :


NPA MANAGEMENT

Non-legal Remedies:

These may be in the form of compromise, mergers & takeovers. The goods pledged or hypothecated may be sold without the intervention of the court. The debts can be assigned in favour of an agency which may come forward to collect debts for a service charge.

Legal Remedies:

The RBI has advised lenders to initiate legal measures including criminal action. Some of the measures available are:

a. Filing of civil suits for the recovery of debts or for the enforcement of the security

b. Filing of suits under the State Recovery Acts

c. Referring the cases to Debt Recovery Tribunals (DRT) & Debt Recovery Appellate Tribunal (DRAT) set up under the Recovery of Debts due to Banks & Financial Institutions Act, 1993

d. Referring cases to Lokadalats constituted under the Legal Services Authorities Act, 1987 which helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. Every award of the Lokadalat shall be deemed to be a decree of the civil court.

e. Resolving large loans via debt recovery mechanisms, most notably the Corporate Debt Restructuring (CDR) mechanism. One Time Settlement (OTS) schemes have been tried with good results.

f. Proceeding against the default borrower under the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act (SRFAESI act), 2002 which came into effect on June 21, 2002. Under the Act, banks & financial institutions are allowed to issue demand notices to defaulting borrowers & to take possession of the secured asset without the intervention of the courts, if the dues are not paid within 60 days of the date of such notice. The provisions of the Act are not applicable to unsecured loans or loans below Rs. 1,00,000 or to loans where the due is less than 20% of the principal amount & interest thereon.

In 2004, the supreme court upheld the validity of the Act by giving one major relief to the borrower-litigant. The earlier provision that the borrower will have to deposit 75% of the disputed amount before appealing has been scrapped. With the implementation of the SRFAESI Act, many lenders have commenced their recovery action against recalcitrant debtors. Since the supreme court has upheld the constitutional validity of the Act, it will go a long way in managing NPAs successfully. Besides, the Act also provides the formal legal basis for setting up Asset Reconstruction Companies (ARC) in India.


NPA MANAGEMENT


NPA MANAGEMENT

REFERENCES

WEB REFRENCES

o www.vedamsbooks.com

o www.zigonperf.com

o www.rbi.org

o www.ssrn.com

o www.economictimes.com

OTHER REFRENCES

Banking

Theory, Law & Practice : Gordon, Natarajan

- RBI Report on Trend and Progress of Banking in India, 2006-07

- RBI Report on Macroeconomic and Monetary developments in 2007-08

- Annual Reports Of Banks


http://www.economictimes.com/

http://www.ssrn.com/

http://www.rbi.org/