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Y  Y

 

Y  

    
Y
 

R   
 
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 ſout of orderƀ in respect of
an overdraft/ cash credit
The bill remains overdue for a period of more
than 90 days in the case of bills purchased and
discounted
The installment or interest remains overdue for
two crop seasons in case of short duration crops
and for one crop season in case of long duration
crops

 

  
% 
 
 ! ! " #  $
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Y
utandard Assets ź general provision of a
minimum of 0.25%
uubstandard Assets ź 10% on total
outstanding balance, 10 % on unsecured
exposures identified as sub-standard & 100%
for unsecured ſdoubtfulƀ assets.
Doubtful Assets ź 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 ź 100% of the outstanding

 

  
 %
%
/ 
oor Credit discipline
Inadequate Credit & Risk Management
Diversion of funds by promoters
Funding of non-viable projects
In the early 1990s u s started suffering from
acute capital inadequacy and lower/ negative
profitability. The parameters set for their
functioning did not project the paramount need
for these corporate goals.
The banks had little freedom to price products,
cater products to chosen segments or invest
funds in their best interest
 

  
 %
%
/ 
uince 1970s, the uC s functioned as units cut
off from international banking and unable to
participate in the structural transformations
and new types of lending products.
Audit and control functions were not
independent and thus unable to correct the
effect of serious flaws in policies and directions
anks were not sufficiently developed in terms
of skills and expertise to regulate the
humongous growth in credit and manage the
diverse risks that emerged in the process

 

  
 %
%
/ 
Inadequate mechanism to gather and
disseminate credit information amongst
commercial banks

Effective recovery from defaulting and overdue


borrowers was hampered on account of
sizeable overhang component arising from
infirmities in the existing process of debt
recovery, inadequate legal provisions on
foreclosure and bankruptcy and difficulties in
the execution of court decrees.

 

  
Y %  
 
Drain on rofitability
Impact on capital adequacy
Adverse effect on credit growth as the
bankerŽs prime focus becomes zero percent
risk and as a result turn lukewarm to fresh
credit.
Excessive focus on Credit Risk Management
High cost of funds due to NAs

 

  
%/

  / 
All uC Žs average Net NA Ratio for 2005-06 is
1.22 (As per R IŽs utatistics)
The banks have been able to report lower NA
percentage mostly by providing against or
writing off NAs.
The provision to certain extent was facilitated
by higher profits on account of treasury
management
The better Net NA ratio was also facilitated by
higher credit off take resulting in larger asset
portfolio/ book size.

 

  
 Y  Y"
 Y /

Formation of the Credit Information ureau
(India) Limited (CI IL)
Release of Wilful DefaulterŽs List. R I also
releases a list of borrowers with aggregate
outstanding of Rs.1 crore and above against
whom banks have filed suits for recovery of
their funds
Reporting of Frauds to R I
Norms of LenderŽs Liability ź framing of Fair
ractices Code with regard to lenderŽs
liability to be followed by banks, which
indirectly prevents accounts turning into
NAs on account of bankŽs own failure
 

  
 Y  Y"
 Y /

Risk assessment and Risk management
R I has advised banks to examine all cases
of wilful default of Rs.1 crore and above and
file suits in such cases. oard of Directors
are required to review NA accounts of Rs.1
crore and above with special reference to
fixing of staff accountability.
Reporting quick mortality cases
upecial mention accounts for early
identification of bad debts. Loans and
advances overdue for less than one and two
quarters would come under this category.
However, these accounts do not need
provisioning
 

  
 Y  Y
 ,/ 
Compromise uettlement uchemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
roceedings under the Code of Civil rocedure
oard for Industrial & Financial Reconstruction
( IFR)/ AAIFR
National Company Law Tribunal (NCLT)
uale of NA to other banks
uale of NA to ARC/ uC under uecuritization and
Reconstruction of Financial Assets and
Enforcement of uecurity Interest Act 2002
(uRFAEuI)
Liquidation
 

  
%$&$ !!$! $
anks are free to design and
implement their own policies for
recovery and write off incorporation
compromise and negotiated
settlements with board approval
upecific guidelines were issued in May
1999 for one time settlement of small
enterprise sector.
Guidelines were modified in July 2000
for recovery of NAs of Rs.5 crore and
less as on 31st March 2007.

 

  
Restructuring and Rehabilitation
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Lok Adalats
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!!*
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, outside the purview of IFR, DRT or
other legal proceedings
The legal basis for the mechanism is provided by the
Inter-Creditor Agreement (ICA). All participants in the
CDR mechanism must enter the ICA with necessary
enforcement and penal clauses.
The scheme applies to accounts having multiple
banking/ syndication/ consortium accounts with
outstanding exposure of Rs.10 crores and above.
The CDR system is applicable to standard and sub-
standard accounts with potential cases of NAs getting
a priority.
ackages given to borrowers are modified time & again
Drawback of CDR ź Reaching of consensus amongst the
creditors delays the process
 

  
R
 !
The banks and FIs can enforce their securities by
initiating recovery proceeding under the Recovery if
Debts due to anks and FI act, 1993 (DRT Act) by filing
an application for recovery of dues before the Debt
Recovery Tribunal constituted under the Act.
On adjudication, a recovery certificate is issued and the
sale is carried out by an auctioneer or a receiver.
DRT has powers to grant injunctions against the
disposal, transfer or creation of third party interest by
debtors in the properties charged to creditor and to
pass attachment orders in respect of charged
properties
In case of non-realization of the decreed amount by
way of sale of the charged properties, the personal
properties if the guarantors can also be attached and
sold.
However, realization is usually time-consuming
uteps have been taken to create additional benches
 

  
*%%% 
For claims below Rs.10 lacs, the banks and FIs can
initiate proceedings under the Code of Civil rocedure
of 1908, as amended, 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, where the DRT Act is not
applicable, can be initiated under the Transfer of
roperty Act of 1882 by filing a mortgage suit where
the procedure is same as laid down under the CC.
 

  

 R 

IFR has been given the power to consider revival


and rehabilitation of companies under the uick
Industrial Companies (upecial rovisions) Act of
1985 (uICA), which has been repealed by passing of
the uick Industrial Companies (upecial rovisions)
Repeal ill of 2001.
The board of Directors shall make a reference to
IFR within sixty days from the date of finalization
of the duly audited accounts for the financial year at
the end of which the company becomes sick
The company making reference to IFR to prepare a
scheme for its revival and rehabilitation and submit
the same to IFR the procedure is same as laid down
under the CC.
The shelter of IFR misused by defaulting and
dishonest borrowers
It is a time consuming process
 

  
   ,%Y , #
/ ,
In December 2002, the Indian arliament passed the
Companies Act of 2002 (uecond Amendment) to
restructure the Companies Act, 1956 leading to a new
regime of tackling corporate rescue and insolvency and
setting up of NCLT.
NCLT will abolish uICA, have the jurisdiction and power
relating to winding up of companies presently vested in
the High Court and jurisdiction and power exercised by
Company Law oard
The second amendments seeks to improve upon the
standards to be adopted to measure the competence,
performance and services of a bankruptcy court by
providing specialized qualification for the appointment
of members to the NCLT.
However, the quality and skills of judges, newly
appointed or existing, will need to be reinforced and no
provision has been made for appropriate procedures to
evaluate the performance of judges based on the
standards
 

  
, 3
 4
A NA is eligible for sale to other banks only if it has
remained a NA for at least two years in the books of
the selling bank
The NA 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 NA.
The NA 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 NA only on without
recourse basis
If the sale is conducted below the net book value, the
short fall should be debited to &L account and if it is
higher, the excess provision will be utilized to meet the
loss on account of sale of other NA.

 

  
uARFEuI Act 2002
uARFEuI provides for enforcement of security
interests in movable (tangible or intangible assets
including accounts receivable) and immovable
property without the intervention of the court
The bank and FI may call upon the borrower by
way of a written legal notice to discharge in full his
liabilities within 60 days from the date of notice,
failing which the bank would be entitled to
exercise all or any of the rights set out under the
Act.
Another option available under the Act is to
takeover the management of the secured assets
Any person aggrieved by the measures taken by
the bank can proffer an appeal to DRT within 45
days after depositing 75% of the amount claimed
in the notice.

 

  
uARFEuI Act 2002
Chapter II of uARFEuI provides for setting up of
reconstruction and securitization companies for
acquisition of financial assets from its owner,
whether by raising funds by such company from
qualified institutional buyers by issue of security
receipts representing undivided interest in such
assets or otherwise.
The ARC can takeover the management of the
business of the borrower, sale or lease of a part or
whole of the business of the borrower and
rescheduling of payments, enforcement of security
interest, settlement of dues payable by the
borrower or take possession of secured assets
Additionally, ARCs can act as agents for recovering
dues, as manager and receiver.
Drawback ź differentiation between first charge
holders and the second charge holders
 

  
Whether uecond
Amendment to Companies
Act and uARFEuI rovide
effective and compatible
enforcement

 

  
 $$!5

The second amendment and uARFEuI are a
leap forward but requirement exists to make
the laws predictable, transparent and
affordable enforcement by efficient
mechanisms outside of insolvency
No definite time frame has been provided
for various stages during the liquidation
proceedings
Need is felt for more creative and
commercial approach to corporate entities
in financial distress and attempts to revive
rather than applying conservative approach
of liquidation
 

  
 $$!5

Tribunals have largely failed to serve
the purpose for which they were set
up. NCLT would be over-burdened with
workload. Change in eligibility criteria
for making a reference would itself
generate a greater workload.
The second amendment stops short of
providing a comprehensive bankruptcy
code to deal with corporate
bankruptcy.

 

  
 $$!5

Does not introduce the required roadmap of
the bankruptcy proceeding viz:
Application for initiating
Appointments & empowerment of trustee
Operational and functional independence
Accountability to court
Monitoring and time bound restructuring
Mechanism to sell off
Number of time bound attempts for restructuring
Decision to pursue insolvency and winding up
utrategies for realization and distribution
Need for new laws & procedures to handle
bankruptcy proceedings in consultation with
R I
 

  
  
% 

,Y
 

Y  

 

  
Factors Affecting the Acceptance of
roposal by ank
ankŽs Documentation.
uecurity value. Realizable sale value.
ankŽs ability to sell.
Ability & uource of the borrower.
Ability & uource of the guarantor.
Vulnerability of the borrower/guarantor.
Time frame.
utrength and Zeal of bank's field staff.
What message is bank sending out (No in a fraud
case.)
anks olicy.
uuccess rate.

 

  
reparation utage
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 orrower and
Guarantors.
Visit factory/Collaterals/residence.
Find out properties not charged to the bank.
Indicate that ank is willing to compromise.

 

  
ROLE OF CHARTERED ACCOUNTANTu
Assist and repare Viability study
Conduct usiness, Assets & uhare Valuation
Carry out Due Diligence utudy for usiness
Restructuring
Verification and Vetting of Documents
reparation of ucheme of Arrangement
Consultancy on Taxation aspects
Monitoring of Accounts
Credit Audit of borrowers
utock Audits

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