Non performing assets causes and management

Non Performing Assets in Banks - Causes and Management - with a check list for Bank Branch Managers/Lending/Credit Managers/Audit Managers/Special Accounts Department Managers

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Non Performing Assets in
Banks
Causes and Management
By
Ramesh Kumar Nanjundaiya

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transmitted. Ramesh Kumar Nanjundaiya 2
Presenter’s background
 RAMESH KUMAR NANJUNDAIYA - MS, MBA
 Associate Partner & Head - Finance/Business set-up and Family Office of M/s. Insta Solu Venture Consultants, LLP, Bangalore,
India
 Alumni of:
 1. The University of Brussels (VUB), Brussels, Belgium – 1978
 2. Boston University, Boston, MA, USA - 1981
 Certified as “Independent Corporate Director”, by World Council For Corporate Governance, London, UK [License #
WCFCG/IID/DCD/2011/1711] – 2011
 Visiting Guest Faculty in “International Marketing” course for final year MBA students at a known institution in Bangalore,
India.
Professional overview
 Dual Master’s degree holder and an accomplished professional with over 30 years’ of experience in banking and the financial sector with
established credentials in Corporate Banking and Financial Management, Venture & PE Capital sourcing, setting up JVs and with forte in
Start ups to promote new commercial banks, ventures, undertaking IPO groundwork & Listing for SMEs.
 Senior banker with working experience gained in known international banks as BNP, SCB, Citibank, EBIL, Barclays Bank, Banque Saudi
Fransi in such diverse countries as the Middle East (GCC) region, West Europe and India.
 Well networked with the business community in UAE, Oman, Belgium, Saudi Arabia and India with strong business acumen and skills to
remain on the cutting edge. Developed ability to drive new business through conceptualising strategies, augmenting & streamlining
networks. Mentored over 250 corporate relationships including SMEs in the last 15 years.
 Trainer in Corporate Banking and Credit, International Trade and Marketing and Business Consultation.
 THE PROGRAM HIGHLIGHTS
 Having gained solid work experience of over 32 years in international banking in such diverse countries as Greece, Belgium, Oman,
Saudi Arabia, India and the UAE, Mr. Ramesh has been able to closely study banking practices at close quarters and derive various
inferences to see the best approach to extend training in banking so that the trained bankers can immediately contribute to the respective
banks and financial organisations. While his approach is very methodical, at the same time he looks at the banking business in the most
practical way so that there is a clear understanding among the participants to appreciate the nature of banking and apply appropriate
techniques in their day to day business so that with a clear understanding of the subject they are able to contribute well to their respective
organisations.

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Presentation details
This is a 2 day course/workshop program and the main highlights are as follows:
Day 1:
Discussion on NPA’s: As they happen, scope and general guidelines as followed in the Indian sub-
continent as well as banks in the Middle East region.
Preventive Measures
Impact of NPA’s on banks: Why is the subject of NPA important
Corporate Account Management: Discussion on general guidelines and check points on loans/working
capital facilities to maintain a healthy loan portfolio.
Day 2:
Reasons for NPA: Categories of Symptoms, Identifying trouble signs or Red Flags in an account.
NPA Account Management: Preventive Measures and timely corrective steps to reduce NPAs.
NPA Resolutions: Compromise settlement ideas, restructuring and rehabilitation. Proceeding under code
of civil procedures.
Sale of NPA to other banks and institutions. The bank may purchase/ sell NPA only on without recourse
basis. If the sale is conducted below the net book value, the short fall should be debited to P&L account
and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.
Negotiating process: For settlement of NPA’s

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Definitions (NPA)
Definition 1: A debt obligation where the borrower has not paid any previously agreed
upon interest and principal repayments to the designated lender for an extended period of
time. The nonperforming asset is therefore not yielding any income to the lender in the
form of principal and interest payments. Whereas All those assets which generate
periodical income are called as Performing Assets (PA).
Definition 2: An asset, including a leased asset, becomes non-performing when it ceases
to generate income for the bank. A non-performing asset (NPA) is a loan or an advance
where; interest and/ or installment of principal remain overdue for a period of more than 90
days. In respect of a term loan the account remains ‘out of order’ in respect of an
Overdraft/Cash Credit (OD/CC), the account become overdue.
Definition 3: Out of Order and Overdue/Past due situation: Wherein the outstanding
balance remains continuously in excess of the sanctioned limit/drawing power. In cases
where the outstanding balance in the principal operating account is less than the
sanctioned limit/drawing power. Additionally there are no credits continuously for 90 days
as on the date of Balance Sheet or credits are not enough to cover the interest debited
during the same period.

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“Out of Order” account illustration
Example: Assume the sanctioned limit is Rs.50.00 Lacs and its *drawing power is Rs.45.00 Lacs.
Quarter 1 (Q1) : Outstanding Balance: Debit Rs. 47.00 Lacs - Assume that the amount is outstanding
continuously from January 01, 2012 to March 31, 2012.
Total interest debited for Q1: Rs.3.00 Lacs. Total credits to the account during this period: Rs.1.00 Lac.
Therefore the account is to be categorised as “Sub-Standard” as the credit in the account is not sufficient
to cover the interest debited during the period. Thus the account is to be flagged and treated as NPA as it
is not in order.
Overdue situation: Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the
due date fixed by the bank. Banks should, classify an account as NPA only if the interest charged during
any quarter is not serviced fully within 90 days from the end of the quarter.
*Drawing Power (DP): The financing limits are granted based on assessment of the working capital
requirement. The assessment factors include various characteristics such as the nature of industry, actual
level of activity for the previous year and the projected level of activity for the subsequent year to arrive at
the working capital requirement. The bank financing limit is thereafter decided after factoring in margins
on the different types of current assets forming part of the working capital. DP is linked to the quantum of
current assets (and current liabilities) owned by the business with appropriate margins. This is generally
fixed on a monthly/quarterly basis depending on the submission of Monthly/Quarterly Information returns
indicating the position of the stock statement, receivables, Work in Progress, payables, etc.

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NPA from a banking angle.
Main indicators
Applies to both individuals and Corporate Facility accounts.
The account remains overdrawn in respect of an overdraft/
cash credit. In other words, Default occurs when a debtor is
unable to meet the legal obligation of debt repayment.
Borrowers may default when they are unable to make the
required payment or are unwilling to honor the debt.
The bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted
Interest and / or installment of principal remain overdue for a
period of more than 90 days in respect of a term loan
In case of Agricultural loans, the installment or interest
remains overdue for two crop seasons

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Preventive Measurement for NPA - Early
Recognition of the Problem:
It has always been the case that by the time banks start their efforts to get involved in a revival process,
it’s too late to retrieve the situation - both in terms of rehabilitation of the project and recovery of bank’s
dues. Identification of weakness in the very beginning is the key. When the account starts showing first
signs of weakness regardless of the fact that it may not have become NPA, assessment of the potential
of revival may be done on the basis of a techno-economic viability study.
Restructuring should be attempted where, after an objective assessment of the promoter’s intention,
banks are convinced of a turnaround within a scheduled time frame. In respect of totally unviable units as
decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to
recover whatever is possible through legal means before the security position becomes worse. The big
challenge is to identify Borrowers with Genuine Intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the
branch level is paramount as they are the ones who has intelligent inputs with regard to promoters’
sincerity and capability to achieve turnaround.
Based on this objective, banks should decide as quickly as possible whether it would be worthwhile to
commit additional finance. The tasks to be done should include investigation of all financial transaction or
business transaction, books of account in order to ascertain real factors that contributed to sickness of the
borrower. Banks may have a panel of technical experts with proven expertise and track record of
preparing techno-economic study of the project of the borrowers. Borrowers having genuine problems due
to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained. By this
way, banks can help in deserving cases and help avert many accounts slipping into NPA category.
Timeliness is key to all these.

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Impact of NPAs upon Banks:
First and foremost they erode current profits through provisioning requirements resulting in reduced
interest and other income. Year on year as the bank’s NPA’s go on increasing, higher provisioning is
required. This adds fuel affecting profitability and impacting the bank’s capital.
A stage comes when they also limit recycling of funds resulting in an increase in assets-liability
mismatches, etc. The other impact would be on the bank’s Capital Adequacy Ratio, ROE and ROA go
down as NPAs do not earn. Bank’s rating gets affected and its cost of raising funds goes up.
The other reasons: Slackness in credit management and monitoring. A lack of co-ordination among
lenders. In their enthusiasm to lend, credit appraisal done hurriedly and sought approvals and disbursed
without completing all necessary documentation.
NPA’s could also result when the banks is unable to gauge the end use of funds by the borrower, delays
in project completion and poor recovery of receivables.
Creation of excess capacities created on non-economic costs. Inability by the corporates to raise capital
through the issue of equity or other debt instrument from capital markets.
Business failures, diversion of funds for expansion\modernization\setting up new projects and helping or
promoting sister concerns. Willful defaults, siphoning of funds, frauds and internal management disputes
in the borrowers company.
External factors also have a role to play as power shortage, price escalation of raw materials, exchange
rate fluctuation, accidents and natural calamities and sluggish legal system. The list can go on and on.
Therefore it is of paramount importance to closely monitor the loan portfolio so as to contain the NPA
situation.
Increase in NPAs leads to a cautious approach to new lending opportunities thereby tending towards
gradual reduction in new business deals as a matter of abundant precaution
Excessive focus on Credit Risk Management, close monitoring of accounts by the concerned department
and the banks internal audit department

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NPA standard classification
3 main levels
1.Substandard Assets – Account that has remained
non performing for a period less than or equal to 12
months.
2.Doubtful Assets – Account that has remained in
the sub-standard category for a period of 12 to 18
months
3.Loss Assets – where loss has been identified by
the concerned bank or internal or external auditors
but the amount has not been written off wholly.

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General provisioning guideline
Standard Assets – general provision of a minimum of
0.15%
Substandard Assets – 10% on total outstanding
balance, 10 % on unsecured exposures identified as
sub-standard & 100% for unsecured “doubtful” assets.
Doubtful Assets – 100% to the extent advance not
covered by realizable value of security. In case of
secured portion, provision may be made in the range
of 20% to 100% depending on the period of asset
remaining sub-standard
Loss Assets – 100% of the outstanding

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Main reasons for NPA occurrence
 Annual review not completed on time
 Poor Credit discipline and imperfect documentation
 Inadequate Risk Management measures
 Funding of non-viable projects
 Improper assessment of clients banking requirements
 Influenced by external forces which leads to the creation of loans which are risky and marginal from the outset
 Internal monitoring system is inadequate.
 Pursuit of profitability at the expense of prudence.
 High decentralization of the lending decision.
 Mismatch of assets and liabilities. Unmanaged sectoral exposure.
 The portfolio is being grown at a rapid rate
 Changes in the lending culture e.g. Where the lending culture changed from centralized to decentralized
 Other macroeconomic policies that are impacting the loan portfolio
 Where internal policies and procedures are allowed to weaken
 Loose underwriting standards
 Growth in interconnected borrowings
 Where lending opportunities are contracting
 Where the financial sector is expanding beyond the capacity of the central bank to effectively regulate and monitor.
 Poor performance by the business sector
 Rising interest rates on loans/OD/discounting
 Eroding margins in the business
 Diversion of funds by promoters

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Other contributing factors for NPAs
While the steep growth in new facilities and credit extension over the years was a welcome sign,
banks FELL SHORT in assessment of the ongoing business relationship and manage the diverse
risks that emerged in the process
Credit control functions were not necessarily independent of the bank’s Marketing and Business
Development functions and thus were slow to correct the effect of serious flaws in policies,
procedures and directions
Credit, Legal and Loan documentation and administration units functioned independently and
were kept away from business lending activities.
Structural transformations and new types of lending products on offer.
Bankers Reports: Inadequate mechanism to gather and disseminate timely credit information
amongst commercial banks.
Large borrowers default: For multi banked customers, effective recovery could be hampered on
account of sizeable and diverse exposure among the banks, extended documentation, no clear
cut mechanism on debt recovery, inadequate legal provisions on foreclosure and bankruptcy and
difficulties in the execution of court decrees.
Risk Mitigants were only the part of a Loan Application and there was little mechanism to monitor
them.

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NPA and Agricultural Loans
Agricultural advances: A loan granted for short duration crops will be
treated as NPA, if the installment of principal or interest thereon remains
overdue for two crop seasons. A loan granted for long duration crops
will be treated as NPA, if the installment of principal or interest thereon
remains overdue for one crop season. The crop season for each crop
means the period up to harvesting of the crops raised as would be
determined by the respective country.
Agricultural advances: Long duration crops would be crops with crop
season longer than one year. Crops, which are not long duration crops,
would be treated as short duration crops Where natural calamities
impair the repaying capacity of agricultural borrowers, banks may
decide on their own as a relief measure - conversion of the short-term
production loan into a term loan or re-schedulement of the repayment
period and the sanctioning of fresh short-term loan Income.

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Export Project Finance and NPA
Situation: There could be instances where the actual importer
has paid the dues to the bank abroad but the bank in turn is
unable to remit the amount due to political developments such as
war, strife, UN embargo, etc. Where the lending bank is able to
establish through documentary evidence the above fact, the
asset classification may be made after a period of one year from
the date the amount was deposited by the importer in the bank
abroad. Please note that the primary responsibility for making
adequate provisions for any diminution in the value of loan
assets, investment or other assets is that of the bank
managements and the statutory auditors.

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NPA AND CREDIT RATING
Credit Rating implies evaluating the creditworthiness of a
borrower by an independent rating agency.
Credit rating agencies generally slot companies into risk buckets
depending on the Industry analysis.
Credit rating is not fool-proof.
Credit rating information is to be treated as an additional source
of information only by the concerned Loan Officer of the bank.
Necessary due diligence of the corporate account portfolio is an
on going process at the bank in order to take necessary
protection and steps so that the health of the portfolio does not
deteriorate.

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Warning signs of the portfolio
Higher migration rates to the NPA portfolio
Creeping up of Liquidity Problems
Growing discontent amongst customers
Above average / below average returns from lending
operations.
Above average requests for excesses/ need for
constant restructuring of facilities
Market Rumors
Market Panic
Abnormal growth of the loan portfolio

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Special Accounts Department
Main Tasks
To study the past trends of NPA
To calculate the weighted of NPA in risk management in Banking
To analyze financial performance of banks at different level of NPA
To evaluate profitability positions of banks
To evaluate NPA level in different economic situation.
To Know the Concept of Non Performing Asset
To Know the Impact of NPAs
To Know the Reasons for NPAs
To learn Preventive Measures

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Main NPA types in banks.
Gross NPAs : Defined as the sum total of all loan assets that are classified as NPAs in
the banks' books as on Balance Sheet date. Gross NPA is the total outstandings of the
portfolio of all the non standard assets like as sub-standard, doubtful, and loss assets.
Net NPAs: Defined as those type of NPAs in which the bank has deducted the provision
regarding NPAs thus showing the actual current outstanding of the bank.
In other words: Gross NPA is the amount outstanding in the borrowers account, in the
books of the bank other than the interest which has been recorded and not debited to the
borrowers account.
Net NPA is the amount of Gross NPA less (1) interest debited to the borrower and not
received and not recognised as income and kept in a interest suspense account, (2)
amount of provision held in respect of NPA’s and (3) amount of claims received and not
appropriated
Net NPA = Gross NPA - (Balance in Interest Suspense account + Claims received if any
and pending for adjustment + Part payment received and kept in suspense account + Total
provisions held).
In countries as India, bank balance sheets contain a huge amount of NPAs. Added to this,
the process of recovery and write off of loans is very time consuming. Therefore the timely
provisions the banks have to make against their NPAs are quite significant. That is why the
difference between gross and Net NPA is quite high.

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Corporate Account Portfolio
Management
Discussion on general guidelines and check points on regular
facility accounts in order to maintain a healthy portfolio.
Information from the borrower: Nurture open communication.
Regularly undertake visit to the borrowers’ plant, warehouse and
office. Make a Call Report.
Analysing financial statements: Quarterly cash flow analysis to
see the cash inflows/outflows.
Quantitative analysis: Check for the financial changes that
produced the cash flow: did cash paid for production increase,
any change in the COGS, any change in the rate of stock
turnover. All these will give an indication of the health of cash
inflows/outflows.

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Corporate Account Portfolio
Management contd
Qualitative analysis:
Sales: Quarter wise check the rate of growth or decline.
Operating cycle: Check Trade debtors, stocks, Trade Creditors
and required working investment.
Any major change in Expenses as COGS, Selling, General and
Administrative expenses.
Capital investment cycle and fixed asset expenditure (CAPEX)
Emphasise on timely receipt of projections for analysis.

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Corporate Account Portfolio
Management contd
Information gathering from other departments
within the bank:
Quarterly Loan activity schedule
Quarterly Loan maturity profile
Details of past due loans if any
Loans approved with exceptions
One-off STL approved during the quarter

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Corporate Account Portfolio
Management contd
Deposit Activity:
Although loan instalment and service is debited
to client’s OD account/current account,
remember cash repays the loan and services
interest.
Look out for overdrafts and withdrawals against
uncollected funds.
Keep a track of owner’s personal account in the
bank and the usage of credit card facility.

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Corporate Account Portfolio
Management – Support
Please note that for any facility the bank extends (be it funded and/or
non-funded or both), apart from accepting the bank’s facility offer letter,
banks need additional support as collaterals, guarantees and
subordination agreements and the documentation is to be perfected.
Please note further that none of these is a substitute for the client’s
creditworthiness as non guarantees serving and repayment.
Support mechanism is only to protect or strengthen the primary source
of repayment and to establish a secondary source of repayment.
The various combination of support mechanism in a facility relationship
depends on various factors as credit quality, legal structure, leverage
and presence of other creditors

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Corporate Account Portfolio
Management – Risk Rating Factors
Factors that should influence the banker’s
judgment of loan servicing and repayment
include:
Risk of doing business in the industry,
Company Management/Owner’s
competence,
General financial condition of the business
including leverage, asset quality, profitability
and cash flow.

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Loan Officers and Industry Risk analysis
Point to be noted:
As a loan officer one needs a clear understanding of the Industry in which the client is
involved. There are two important risk characteristics to understand about the bank’s
borrower’s industry - Cost structure and Profitability.
Industries that have a cost structure with high operating leverage are generally
considered riskier (to the business and to their lending officer) than industries with a
cost structure of low operating leverage.
Operating leverage here refers to a mix of fixed and variable expenses, the higher the
fixed expenses as a percentage of total expenses, the higher the operating leverage.
The actual risk faced by an industry that has high operating leverage depends on
how close to its breakeven sales amount it is operating and how likely it is to face
unpredictable swings in volume and how thin its profit margins are during average or
good times.
Here profitability (for the purpose of identifying industry risk) is measured by profits as
a percentage of sales and by profits as a percentage of total assets.

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Covenants
The most important part of the facility offer letter to a
client are the set of positive and negative covenants.
These are things that the borrower agrees to do and
not to do. Please note that if the borrower fails to
perform in accordance with the covenants, this will
trigger a default. The default allows the lender
(bank) to exercise remedies specified in the
agreement as increase the pricing, strengthen
security, immediate loan repayment, etc.

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Covenants - contd
The point to be noted about Covenant
stipulation is that in the event they trigger
default the bank has the option to take
appropriate action. Here the banker should
be able to gauge if the borrower’s financial
condition and the repayment ability is
satisfactory so that the banker can increase
the protection or allow the borrower to make
alternate arrangements and clear his
outstandings with your bank.

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Types of standard covenants
Financial: There a 4 main types:
Maintain cash flow (interest cover or limiting debt)
Maintain Net worth (stipulate limiting payment of
dividend)
Preserve asset quality (prohibiting the sale of fixed
assets in excess of certain amount)
Control Growth (growth rate should be consistent
with profitability).

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Non Financial Covenants
Business Continuation (prohibit the borrower
from changing its business line during the
currency of the loan)
Full Disclosure (audited financials to be
provided within 120 days of the financial year
end)
Management Quality (Personal guarantees of
key executives)

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Positive Covenants
Life Insurance (key man insurance)
Business Insurance (company’s assets insurance)
Lien (first lien on company’s assets)
Inspection (client’s business premises and
warehouse and books)
Contingent Liabilities
Fixed Assets
Financial ratios, working capital and Net Worth

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Negative Covenants
Remember negative covenant requires the borrower
to obtain the written consent of the bank prior to
implementing any changes in the business that may
violate the loan/OD agreement.
Example of a negative covenant would be to limit
CAPEX.
Event of default means that the borrower is outside
the bounds of the signed agreement.
Representations and warrantees pertains to
statements of existing conditions of the business.

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Preventive Measures
Formation of a Credit Information Bureau.
Release of Wilful Defaulter’s List. Central Bank
of the concerned country to release a list of
borrowers against whom banks have filed suits
for recovery of their funds
Reporting of Frauds to the country’s Central
Bank
Norms of Lender’s Liability – framing of Fair
Practices Code with regard to lender’s liability to
be followed by banks, which indirectly prevents
accounts turning into NPAs on account of
bank’s own failure

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Liaison with Legal
No sooner that the front Office (Relationship Management Team)
reports of certain concerns in a particular account as the account
conduct not being satisfactory and past dues have not been cleared for
3 months, then the bank’s Risk Management Division flags these
accounts for close monitoring and liaises with a newly created Special
Mention Accounts Department in a bank.
As soon as the loan becomes sub-standard, officials from this
department should be informed to undertake market check on the
concerned borrower.
The bank’s Legal Department undertakes a full review of all the
documents held and documentation if any needs to be perfected in
liaison with the Relationship Management Team at the earliest.
The account still continues with the front office or the corporate banking
division and business continues as usual. These accounts will not need
any provisioning at this stage. If the loans/OD have been in excess and
not cleared within 150 days, the account to be transferred to the Special
Accounts Department and the bank’s Legal Department informed
accordingly.

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NPA Resolution
Compromise Settlement Schemes
Restructuring / Reschedulement
Corporate Debt Restructuring Cell
Proceedings under the Code of Civil
Procedure
Sale of NPA to other banks
Liquidation

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NPA Resolution
Banks are free to design and implement their own policies for recovery and write
off compromise and negotiated settlements with board approval
Bank’s can undertake a one-time settlement of small enterprise
loan/outstanding.
Banks are free to design and implement their own policies for restructuring/
rehabilitation of the NPA accounts Reschedulement of payment of interest and
principal after considering the Debt service coverage ratio, contribution of the
promoter and availability of security.
For soft defaulters: A speedy recovery could be initiated as this is a less
expensive and an easier way to resolve.
Corporate Debt Restructuring (CDR): The objective of CDR is to ensure a timely
and transparent mechanism for restructuring of the debts of viable corporate
entities affected by internal and external factors or other legal proceedings. This
generally applies to accounts having multiple banking/ syndication/ consortium
accounts with large outstanding exposure of USD. 2 Million and above. The
CDR system is applicable to standard and sub-standard accounts with potential
cases of NPAs getting a priority.

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transmitted. Ramesh Kumar Nanjundaiya 36
Proceeding under Code of Civil Procedure
Depending on the bank’s internal policy on handling of NPA’s,
depending on the exposure, banks can initiate proceedings under the
Code of Civil Procedure in a Civil court.
The courts are empowered to pass injunction orders restraining the
debtor through itself or through its directors, representatives, etc from
disposing of, parting with or dealing in any manner with the subject
property.
Courts are also empowered to pass attachment and sales orders for
subject property before judgment, in case necessary.
The sale of subject property is normally carried out by way of open
public auction subject to confirmation of the court. The foreclosure
proceedings can be initiated by filing a mortgage suit.

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transmitted. Ramesh Kumar Nanjundaiya 37
SALE OF NPA TO OTHER BANKS
Generally the procedure followed is as follows:
A NPA is eligible for sale to other banks only if it has remained a NPA
for at least two years in the books of the selling bank
The NPA must be held by the purchasing bank at least for a period of
15 months before it is sold to other banks but not to bank, which
originally sold the NPA.
The NPA may be classified as standard in the books of the purchasing
bank for a period of 90 days from date of purchase and thereafter it
would depend on the record of recovery with reference to cash flows
estimated while purchasing
The bank may purchase/ sell NPA only on without recourse basis
If the sale is conducted below the net book value, the short fall should
be debited to P&L account and if it is higher, the excess provision will be
utilized to meet the loss on account of sale of other NPA.

38. All rights reserved. Not to be copied and/or
transmitted. Ramesh Kumar Nanjundaiya 38
Factors Affecting the Acceptance of Proposal
by Bank
Bank’s Documentation.
Security value. Realizable sale value.
Bank’s ability to sell.
Ability & Source of the borrower.
Ability & Source of the guarantor.
Vulnerability of the borrower/guarantor.
Time frame.
Strength and Zeal of bank's field staff.
What message is bank sending out (No in a fraud case.)
Banks Policy.
Success rate.

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transmitted. Ramesh Kumar Nanjundaiya 39
Settlement of NPA procedures
Thorough study of the case
Find out our strengths and weaknesses in the case.
Find out the vulnerable point/weaknesses of the
borrower.
Follow-up with the Borrower and Guarantors.
Visit factory/Collaterals/residence.
Find out properties not charged to the bank.
Indicate that Bank is willing to compromise.

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transmitted. Ramesh Kumar Nanjundaiya 40
Role of outside agency
Assist and Prepare Viability study
Undertake independent Stock Audits
Credit Audit of borrowers
Undertake Verification and Vetting of Documents
Assets & Share Valuation
Carry out Due Diligence Study for Business Restructuring
Preparation of Scheme of Arrangement
Consultancy on Taxation aspects
Monitoring of Accounts

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transmitted. Ramesh Kumar Nanjundaiya 41
Lessons to contain NPA’s in banks
Preservation of your customers
Create new opportunities for businesses that
have a ready domestic market
Avoid the “Herd Effect”
Practice Early Rehabilitation
Ease the penalties
Limit credit card facilities
Limit exposure to overseas residents
Tighten underwriting standards

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transmitted. Ramesh Kumar Nanjundaiya 42
Challenge: For Banks NPA Department or
Special Accounts Department
Time:It is well known that the recovery process has always been slow, with no
guarantee of delivery or a convenient means of quick response. The limitation of
a traditional phone call to handle a data exchange has also been a major
shortcoming for efficiently negotiating collections interaction with a customer.
A new mind set: This is the order of the day to make recovery a pleasant
experience for collectors and consumers alike-one that helps banks
demonstrate empathy to consumers while ensuring that loan defaults are
minimized. Efficiency and agent empowerment are the keys. Despite
remarkable technology-driven advances, collections remain labor-intensive, and
the cost of human capital is a big drain on the bank’s expense.
Business Metrics: The functional business metrics are reduced charge-offs, total
value collected, and number of customers retained. But for leading indicators,
managers have traditionally focused on interim operational metrics such as
accounts-per-collector, calls-per-account, penetration rate, agent idle time, and
so on. The theory was that if the agents performed well against operational
metrics, the functional business metrics would follow suit. In the present
challenging time this may not hold much weight as the name of the game is
bottom line results.

43. All rights reserved. Not to be copied and/or
transmitted. Ramesh Kumar Nanjundaiya 43
Guard your bank’s portfolio
I hope you enjoyed the sessions and the
sharing of knowledge and experience was
useful.
There is a set of questions below for you to
attempt.

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transmitted. Ramesh Kumar Nanjundaiya 44
Questions
Give some examples to contain NPA’s in banks.
What is the role of outside agency in resolving NPA’s
What are some of the procedures to settle NPA’s
Can NPA’s be sold to other banks
List some of the positive covenants
Why are covenants important
What are the types of NPA’s
State 10 reasons for NPA occurrence
Define “Out of Order” accounts.
Give a definition of NPA
Define Business Metrics

45. The Indian Securitisation Act - 2002
For years, Indian banking and institutional lenders have had a major complaint – they were
criticised for their inability to control their burgeoning non-performing assets (‘NPAs’) (bad debt
lump), but when it came to recovery and reducing bad debts, they had little power. When a loan
goes into default, it has been operationally difficult for lenders to take control of the collateral, or
to utilise recovery procedures designed for a company that goes into bankruptcy.
The existing environment of weak creditor rights has been a major cause of NPAs building up in
the banking system. The Civil Courts were found ineffective, hence came the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 (‘RDDBFI Act’).
The RDDBFI Act envisages a summary procedure for ascertainment of dues, but it fails to
execute court orders or decrees in an effective way.
The Government in June 2002 introduced a new law entitled The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘the Act’) that
aims to simplify the process of recovery of bad loans from wilful defaulters. The Act provides the
first legal framework that recognises securitisation, asset recovery and reconstruction.This article
seeks to examine the scope of the Act, especially in relation to recovery of dues and the various
issues and problems arising on its implementation.
All rights reserved. Not to be copied and/or
transmitted. Ramesh Kumar Nanjundaiya 45

46. The Indian Securitisation Act - 2002
Salient provisions of the law
– The Act gives a formal statutory framework for transactions relating to securitisation
and asset reconstruction in India.
– The Act promotes setting up of asset reconstruction and securitisation companies
to take over the NPAs accumulated with banks and public financial institutions. It
provides special powers to lenders and securitisation/asset reconstruction companies
to enable them to take over the assets of borrowers without first resorting to courts.
– The banks and financial institutions (‘FIs’) have now been given powers to enforce
their security without filing suits or cases before the courts and hence they can now
realise their loans speedily.
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transmitted. Ramesh Kumar Nanjundaiya 46