Book - Credit Monitoring & NPA - 31!3!2013

PREFACE Banking business is directly dependent on economic conditions in the country. Due to liberalization, our economy is not insulated.
It will have impact of economic conditions of other countries also. This we have witnessed lower rate of GD and II . This has adversely affected the growth in Banking Industry on the one hand and poses a threat of mounting ! " on the other hand. In view of this #redit $onitoring has gained more importance. #redit $onitoring starts from the date bank parts with the funds. %ne of the illars of our Business olicy Guidelines is continuous improvement in assets &uality. In spite of best efforts, if we could not saved account from downgrading, then immediate steps need to be taken for recovery'up gradation of the account. The book contains guidelines on #ompromise, D(T, )"(*"+)I "ct etc. "n attempt has been made to give the field level functionaries a concise notes on various aspects of credit monitoring and ! " $anagement. I have a pleasure to place this book for all Barodians. I trust this book will be useful to the credit officers'branch for day to day work. ,owever this cannot be a substitute of our Book of Instructions, circulars - various policies. If you have any suggestions to improve the &uality of this book, please send it by e mail on sc.ahmedabad.bankofbaroda.com.
Date/01.20.10 lace/ "hmedabad
3 4amlesh atel5 DG$ - rincipal I'#
Baroda Academy Minds
Inventing Methods for Igniting
INDEX
)r !o 1.. 6 0 : 9 ; < = > 12 11 16 10 1: 19 1;
!ame of the Topic SECTION I CREDIT MONITORING #redit $onitoring / revention is better than cure +arly 7arning )ignals "nd *ollow 8p Tools for #redit $onitoring (eserve Bank %f India Guidelines *or (estructuring (estructuring %f "dvance "ccounts )$+ Debt (estructuring #D( BI*( SECTION II NPA MANAGEMENT ! " $anagement / !eed of ,our Guiding rinciples of Domestic (ecovery olicy 6216 #auses "nd #onse&uences %f !on? erforming "ssets I"(# !orms (ecovery @ !on Aegal $easures (ecovery @ Aegal $easures olicy for (ecovery in *raud "ccounts )ummary
age !o 9 11 6; 09 91 <1 <= => >2 >< 120 162 10; 19= 1;1
SECTION I - CREDIT MONITORING

`Credit Monitoring- Prevention is better than c re! #redit $onitoring is an important part of #redit $anagement. Banking means accepting the deposits from the public for the purpose of lending. It is obligatory for Banks to make payment of these deposits on demand or after eBpiry of the contractual period. *or making timely payment to depositors, we need fund i.e. timely return of money lent. The e&uilibrium will be maintained only if the money lent by the bank is also returned back well in time. "s we know that lending of money has its own risk,Thus Banks should be very cautious at the time of lending and should continue to follow up till the total money is repaid by the borrower. #redit $onitoring has become unevitable for safeguarding the bankCs interest. #redit monitoring starts the moment bank parts with the fund and continues till the li&uidation of account in toto. But in real sense #redit monitoring starts the moment bank identifies the borrower.Good begin half done. In credit decision, appraisal of the borrower is very important and if selection of borrower is done properly at the beginningD then the monitoring part will also be easy. If we carefully track small?small, significant changes in the financial situations of the borrower or turnover in the account or we Eust watch the activity at the time of first default, it may ease to curb the situation and can be handled. But for this Banker is supposed to remain in touch with the borrower and need to pay full attention on monitoring. !ow a days where entire banking industry is facing the problem of rising ! "s and the problem of non?performing assets has shaken the entire Indian banking sector, the monitoring part can play a vital role in prevention of slippage and taking corrective measures in the beginning of problem. *or better credit monitoring, we are to keep our eyes and ears open and follow the different guidelines of the bank.It is easy to find out any adverse features in its beginning and may take corrective measure at once. There is a need to strengthen the credit monitoring process at the branch level. roper credit monitoring should be emphasized. There should be proper flow of information from the units regarding their financial area, annual accounts, stock reports etc., which would enable the banker to know the need based credit re&uirement of borrower and warning signals for taking &uick remedial action. If credit officer of the branch can keep a watch on the following points, credit portfolio of the branch may remain almost healthy. Turnover in the account Timely repayment of interest and installments Timely submission of )tock )tatements, F$(, information demanded by Bank, "udited financials, apers for (enewal Inspection of the unit on regular intervals Baroda Academy Minds 3 Inventing Methods for Igniting
(egular conversation with the borrower provides timely help to the borrower in genuine cases within the policy guidelines of the bank. Timely (eview of the facility #ompliance of terms and conditions #omparison of performance with proEections Transaction in the account "nalysis of the performance of the unit with Industry trend In the following chapters we have tried to discuss various monitoring tools which will useful for better #redit $anagement. be
EAR"# $ARNING SIGNA"S AND %O""O$ &P ' ic( )ites The early warning signals The incipient sickness )pecial mention accounts The follow up of advance accounts Definition of willful Defaulter Guidelines on financing of willful defaulter
Ear*+ $arning Signa*s (eserve Bank of India has issued broad guidelines on preventing )lippage to ! "s by recognizing the problems early and corrective measures to restructure the accounts after an obEective assessment of the viability of the unit and promoterGs intention 3and his stake5. Bank shall put in place G+arly "lert )ystemG that captures early warning signals in respect of accounts showing first signs of weakness. The following features may be treated as early warning signals. "ppropriate #redit $onitoring )ystem has been in places at B## and at Honal level' (egional level in order to take care of the above. #ontinuous irregularities in cash credit' overdraft accounts such as inability to maintain stipulated margin on continuous basis or drawings fre&uently eBceeding sanctioned limits, periodical interest debited remaining unrealized. %utstanding balance in cash credit account remaining continuously at the maBimum without appropriate turnover. *ailure to make timely payment of installments of principal and ' or interest on term loans #omplaints from suppliers of raw materials, water, power etc about non payment of bills !on submission or undue delay in submission or submission of incorrect stock statements - other control returns and statements. "ttempts to divert sale proceeds through accounts with other banks Downward trends in credit summations *re&uent return of che&ues or bills )teep decline in production figures Baroda Academy Minds 5 Inventing Methods for Igniting
Downwards trends in sales and fall in profits (ising level of inventories, which may include large proportion of slow or non moving items Aarger - longer outstanding in bills accounts Aonger period of credit allowed on sale *ailure to pay statutory liabilities 8tilization of funds for purposes other than running the units !ot furnishing re&uired information' data on operations in time 8nreasonable variations in sales' receivables Devolvement of D G installments and non?payment within a reasonable period. *re&uent devolvement of A#s and non?payment within a reasonable period *re&uent invocation of BGs and non?payment within a reasonable period !on?payment of bills discounted or under collection. oor financial performance in terms of declining sales and profits, cash losses, net losses and erosion of net worth etc. Incomplete documentation in terms of creation'registration of charge'$ortgage etc. !on?compliance of terms and conditions of sanction. Inci,ient Sic(ness )ickness in a unit at its initial stage is called Incipient )ickness. !o unit becomes sick suddenly eBcept due to natural calamities like flood, riots or fire or change in government policies and bad intentions. Generally sickness erupts in the unit slowly and such units generally throw signals. These signals may be of financial or non?financial in nature. )ome of the signals are as under/ #ontinuous Irregularity in cash credit account. Aow capacity utilization. rofit fluctuations, downward trend in sales and stagnation or fall in profits followed by contraction of the share of the market. ,igher rate of reEection of goods manufactured. (eduction in turnover. 7henever the borrower is in financial difficulty, he may open a separate account with another bank and deposits all collections therein. *ailure to pay statutory liabilities Aarger and longer outstanding in the bill accounts Aonger period of credit allowed on sale documents negotiated through the bank and fre&uent returns by customer of the same #ontinuous utilization of cash credit facilities to the hilt and failure to pay timely installment of principal and' or interest on term loan. !on?submission of periodical financial data' stock statement, etc. in time. *inancing capital eBpenditure out of funds provided for working capital purposes Decrease in working capital. " general decline in that particular industry. (apid turnover of key personnel. +Bistence of a large number of law suits against the borrower. Baroda Academy Minds 6 Inventing Methods for Igniting
(apid eBpansion and too much diversification within a short time. Diversion')iphoning of funds. "ny maEor change in the share holdings. *re&uent re&uests for G)top paymentG of che&ues. !on compliance of irregularities pointed out in Inspection, "udit (eports.
S,ecia* Mention Acco nts *or early recognition of slippage and timely interventions, it is suggested that banks introduce a new asset category between I)tandardJ and I)ub?standardJ for their own internal monitoring and follow up. This asset category may be in line with international practice of I)pecial $ention "ssetsJ used by 8.)."., )ingapore, etc. 6. "n asset may be transferred to this category once the earliest signs of sickness' irregularities are identified. This will help banks to look at account with potential problems in a focused manner right from the onset of the problem, so that monitoring and remedial actions can be more effective. 0. %nce these accounts are categorized and reported as such, proper top management attention would also be ensured. :. Introduction of a I)pecial $entionJ category of assets would be on the basis of not only overdue position in the account but also other factors, which reflect sickness'irregularities in the account. The following types of accounts in standard category shall be brought under special mention a'cs/ i. Irregularity in the account for 02 days. ii. !on?compliance of terms - conditions for 02 days 3unless the )anctioning authority has given eBtended time period for compliance 5 iii. !o turnover in 7orking #apital account for 02 days. %o**o- , o. Advance Acco nts "s the health of the advance truly lies on proper follow?up, it is obligatory on the part of the authorities concerned to eBercise sufficient care to monitor the account. Branch should keep close watch on account like routing of turnover, diversion of funds, proper utilization of funds, fre&uent eBcesses and stock inspection remarks etc. )uch controls would provide advance information for taking appropriate decision in order to avoid slippage of the account. )ome of the maEor post sanction follow?up systems devised by the bank are/ )ubmission of #ontrol (eturns by the borrower viz., )tock )tatements, Fuarterly Information )ystem' (eturns etc., and scrutiny of the same, periodical Inspection of )ecurities, ensuring end use of funds.
The follow up of advances is a sum of all activities starting from the date of disbursement to the date of recovery of last installment'amount. The important obEectives of follow?up of credit facilities are/ 1. To ensure proper end use of funds. *unds should be used for the purpose, for which these are given. It should not be used for any other purpose. 6. To ensure that the operations of the borrower are on eBpected lines both physically and financially. 0. To test the assumptions of lending. "dvance is granted on the basis of proEections. "ll proEections depend on a bundle of assumptions. $any of such assumptions can and do go wrong. "ctual working only shows whether the assumptions have proved correct or not. $ost important are capacity utilisation, costs incurred, price level, market conditions etc. :. To ensure that the terms and conditions of sanction are satisfied. 7hile sanctioning an advance, bank stipulates certain conditions to be satisfied, such as restrictions on declaration of dividend, eBpansion in capacity, or ac&uisition of fiBed assets, repayment of private borrowings etc. 9. To ensure that the securities offered'charged are and continue to be in order. hysical eBistence, valuation, &uality turnover etc. are important. ;. To detect whether any danger signals are developing indicating sickness. $any a time, warning signals are thrown up indicating the eBistence'emergence of a problem situation. roper follow?up action only can take care of such situation. <. To see whether there is any change in management structure, reconstitution, death or resignation of a key person leading to the possible failure of the firm. =. To eBamine whether there is any change in the environment affecting the unit, like Government olicies, +conomic situations, crop failures etc. >. To evaluate the operations of the borrower in a constructive way and to advise'devise measures for correction' improvement etc. This will re&uire a total study of the operations, results and trends of the borrower. 12. To formulate future programme'lines of action in the light of the operational results or records. 11. To anticipate problems and reorient plans of action in order to contain such problems effectively. This re&uires the banker to take a futuristic view of things and advise the borrower suitably. $i*. * De.a *ter Based on recommendations of working group on willful defaulter (BI has w.e.f. $ar 6226 instructed as under/ " 7ilful defaulter is one who has ade&uate resources ' cash flows ' net worth to pay the dues, but deliberately does not pay, or siphons funds to the detriment of the unit, misrepresents ' falsifies the records or conducts fraudulent transactions. " willful default would be deemed to have occurred if any of the following is noted/
The unit has defaulted in meeting its payment'repayment obligations to the lender even when it has the capacity to honor the said obligations. The unit has defaulted in meeting its payment 'repayment obligations to the lender and has not utilized the finance from the lender for the specific purpose for which finance was availed of but has diverted the funds for other purposes. The unit has defaulted in meeting its payment 'repayment obligations to the lender and has siphoned off the funds such that funds are not utilized for the specific purpose for which finance was availed of nor are the funds available with the unit in the form of other assets. The unit has defaulted in meeting its payment 'repayment obligations to the lender and has disposed off ' removed the assets without the knowledge of the bank. *urther, default in honoring the settlement by the party to be treated as willful default as per the recent Eudgment by Delhi ,igh court dated 6>.11.29. "s per (BI guidelines, every bank is re&uired to submit a list of suit filed accounts of willful defaulters with outstanding 3*BK!*B5 of (s.69 lacs and above, at the end of every &uarter 3$arch, Lune, )eptember and December5 to #IBIA or any other (BI registered credit information company and a list of non suit filed accounts of willful defaulters to only (BI. G ide*ines on .inancing o. -i**. * de.a *ter/ In order to prevent the access to the capital markets by the willful defaulters, a copy ot the list of willful defaulters 3non?suit filed accounts5 and list of willful defaulters 3suit filed accounts5 are forwarded to )+BI by (BI and #IBIA respectively. !o additional facilities should be granted by any bank ' *I to the listed willful defaulters. In addition, the entrepreneurs ' promoters of companies where banks ' *Is have identified siphoning ' diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development *inancial Institutions, Government owned !B*#s, investment institutions etc. for floating new ventures for a period of 9 years from the date the name of the willful defaulter is published in the list of willful defaulters by the (BI. 8nits becoming sick on account of, willful default, unauthorised diversion of funds, should not be considered for rehabilitation and steps should be taken for recovery of bank dues.
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TEST #O&R &NDERSTANDING )tate whether the following statements are True or *alse 1. #lassification of the borrower as 7ilful Defaulter will not have any impact, as he can raise the funds from marked. 6. 0. more rovisions for classification of Borrower as wilful defaulter are applicable only to those borrowers whose outstanding is of (s 69 lac and above. If any irregularity persists in any borrowal account for a period of 02 days or then we have to classify the account as )pecial $ention "ccount. :. If in a borrowal account there are no overdues, but compliance of terms of sanction is pending for 9 weeks, then the account will be classified as )pecial $ention "ccount. 9. Incomplete documentations is not a early warning signal. "!)7+() F " 1 *"A)+ 6 T(8+ 0 T(8+ : T(8+ 9 *"A)+
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CREDIT MONITORING TOO"S ' ic( )ites 0ario s too*s o. Credit Monitoring )tock ' Book Debt "udit $onthly $onitoring (eport #redit "udit - Guidelines concurrent auditors for large borrowal accounts +Bit policy for high risk borrowers +nd 8se of *unds (eview ost )anction (eporting 3 )(5 !orms for (isk based inspection'verification of stock - BDs #redit (ating Internal Inspection ")#(%$ I1,ortant Too*s o. Credit Monitoring/ 1. $onitoring day to day operations in the account at least on a test basisD 6. )tock' book?debts statementsD 0. (eview of the accountD :. eriodical inspection ' verification of the securities charged to the bankD 9. #redit (ating at stipulated intervalsD ;. )atisfying upon whether the borrower is paying statutory dues ' +lectricity bills telephone bills ' wages etc. in time. <. *inding whether the borrower has recently cut?down any maEor activity ' eBpenses which he was doing otherwise in ordinary course of business. =. 4eeping an ear to the market news ' reports. >. $eeting with the borrowers and discussing with him, besides the business, what else he is doing ' planning and whether something is bothering him in business or in personal life like family separation, sickness of important person in the family, heavy financial commitment of personal nature etc. 23 Stoc( 4 )oo( Debt A dit "s per eBtant guidelines, maEor features for )tock'Book Debt "udit are as under/? M The eBisting practice of conducting stock inspections and book debts verification by branch officials and random inspection by concurrent auditors to continue as per guidelines.
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M "nnual )tock'Book Debt "udit 3i.e. covering the period 1st "pril to 01st $arch every year5 is to be carried out in all accounts having fund? based working capital limits 3including D" A# limit5 of over (s. 9.22 crores with our Bank. M The )tock "udit'Book Debt "udit may be conducted at more fre&uent intervals 3i.e. more than once a year5 if deemed necessary by the Bank. M Initially, this stock audit to be restricted to sole banking accounts, accounts under multiple banking and consortium accounts where our Bank is the leader of the consortium. M anel of #hartered "ccountants ' #.". firms for entrusting )tock "udit 7ork to be finalized by Honal "uthorities. 53 Month*+ Monitoring Re,ort/ The purpose of $$( is to ensure and facilitate &ualitative supervision of the bankJs credit portfolio. The $$( will provide information on early warning signals with a view to trigger timely corrective actions. These will facilitate slippage prevention and impairment of credit &uality The basic purpose is to ensure that branches are following the guidelines of loan policy, (ecovery policy, (eview of the accounts, #ompliance of terms and conditions, #redit rating and other monitoring tools available for the purpose %bEectives/ 1. )lippage prevention and improve the credit rating 6. +arly detection of warning signals, potential ! ", incipient sickness. 0. To initiate timely and corrective action for preventing impairment. :. To take necessary action for follow up and review of credit facility. 9. To ensure that no revenue leakage in respect of (%I or charges ;. 7eak rated accounts )O)-6, B and # rated, (escheduled, #D( accounts are to be closely monitored. 8nder the system, branches are re&uired to submit monthly monitoring reports as under/? M "dvance accounts of (s.12 crores 3*BK!*B5 through Honal %ffice to #orporate #entre within 12 days of reporting date 3i.e. by 69th of every month5 *or a better and efficient system of monitoring of large advances bank has introduced a web based centralized solution for credit monitoring reports for advances accounts with *B and !*B eBposure of (s 12 crores and above . ,ence submission of $$(s in word format for advances account of (s 12 crore and above has been discontinued. The )oftware can be opened through the *inacle )ystem by entering the following 8()/ spgrs.bankofbaroda.co.in'cremon 1. Branch 8)+(ID / Branch "lpha #ode 6. assword / Default password is bob160:N The branch should change the password. !ew password should contain = characters with alpha, numeric and special characters. Baroda Academy Minds 13 Inventing Methods for Igniting
0. In case of eBisting account only necessary changes in the data are to be made in the all parameters like outstanding, overdues, date of review etc. :. !ew account should be opened through system. M Honal $anager to monitor all advance accounts above (s.9 crore to (s.12 crore 3*BK!*B5 based on the $$( received through (egional %ffice. The Hones will also submit copies of the $$(s of these accounts to B## for further monitoring. M (egional $anager to monitor all accounts above (s.1 crore to (s.9 crores 3*BK!*B5 based on $$(s received from branches. (egional %ffice will also submit copies of the $$(s of these accounts to Honal %ffice for further monitoring. M Branch $anager to monitor accounts of (s.1 crore and below. *urther (egional %ffices are also to monitor/ ? "dvance accounts with eBposure of (s.69 lacs to (s.1 #rore based on Fuarterly $onitoring (eports received from Branches ' )crutiny of ")#(%$ data. "dvance accounts with eBposure of (). 1 lacs to (s. 69 lacs based on scrutiny of ")#(%$ data. "ccounts #ausing #oncern/ (egional %ffices are to submit a summary report in the prescribed format on advance accounts causing concern/ 7ith eBposure above (s. 1 crore to (s. 9 crore alongwith copy of $$(s to B## with a copy to Honal %ffice at monthly interval, within < days of reporting date of $$( i.e. before 66nd of every month. 7ith eBposure above (s. 69 lacs to (s.1 crore alongwith copy of Fuarterly $onitoring (eport 3F$(5 to B## with a copy to Honal %ffice at &uarterly interval within < days of reporting dates of F$( which are 19 th $arch, 19th Lune, 19th )eptember and 19th December. "s regards to accounts causing concern, officials from (%'H% may take appropriate decision to visit such accounts on case? to?case basis, to conduct on the spot study of the unit and discussions with the borrower for taking timely remedial actions to prevent slippage in the account. 73 Credit A dit 8 G ide*ines ". "s per the recommendations of !arang #ommittee, (BI has advised all banks to have lending mechanism for large advances soon after the sanction. B. The obEectives of credit audit areD 3i5 (eview sanction process and compliance status of large loans 3ii5 Improvement in &uality of credit portfolio. 3iii5 (ecommend corrective action to improve credit &uality, credit administration Baroda Academy Minds 14 Inventing Methods for Igniting
and credit skill of staff. 3iv5 ick up early warning signals and suggest remedial actions. #. #ut off limit for the account ? 3i5 +Bisting accounts with *B K !*B limit of (s. 12 crores and above, 3ii5 *resh sanction including increase' adhoc with limit (s. 9 crores and above 3iii5 9O of the accounts of the (egion on random basis with sanction limit of (s. 1 crores and above but below (s. 12 crores. D. !o #redit audit for ! " accounts . +. The credit audit is re&uired to be carried out within 0 to ; months from the date of sanction' review. *. #redit audit of eligible accounts of one region is to be carried out by officers of another region within the zone. G. The credit auditor has to study conduct of the account, turn over in the account, eBcess drawing, return of che&ues, inter?firm transactions and compliance of terms and conditions and will submit the report in prescribed format directly to #I"D with a copy to respective branch, (egional office, Honal office - HI# through soft copy 93 A,,oint1ent o. conc rrent a ditors .or *arge borro-a* acco nts . 7ith a view to curb the mounting ! ", a continuous on sight monitoring of the borrowal accounts is essentials. %ur bank has decided to appoint #oncurrent auditors for the purpose. "ccounts falling under the criteria are as under/ ? 3i5 "ccounts with eBposure of (s. 69 crores and above with BK rating as per old credit rating models and B%B?; as per new rating 3ii5 "ccounts with eBposure of (s. 12 crores and above with B - # rating as per old rating models and B%B?< - below as per new rating . 3iii5 In case of sole banking or multiple banking, concurrent audit should be introduced immediately 3iv5 .In case of consortium accounts where we are leader and account falling under any of the above criteria, a Eoint decision is to be taken by the consortium banks. 7here we are not leader, impress upon the lead bank and members to introduce the concurrent audit. The concurrent audit to be entrusted to empanelled firm of #hartered "ccountants. The Honal ,ead will allot the assignment to these firms. It is to be noted that such assignment to be restricted to three acco nts per firm of #". 7herever concurrent auditor is appointed, bimonthly stock inspection is to be carried out by the branch as per eBtant guidelines. Baroda Academy Minds 15 Inventing Methods for Igniting
#oncurrent auditor will submit his monthly report regularly. Branches to offer their comments' action initiated etc to the respective regional offices. The stipulation of concurrent audit, as above, is to form a part of the sanction' review terms and conditions and to be advised to the borrowers. The fee for concurrent audit as finalized by the #ID is to be borne by the borrowers. :3 E;it ,o*ic+ .or high ris( borro-ers/ 3i5 To identify the borrowers accounts at the right time for eBit. The early warning signals, market report, Govt. policies etc. are to be studied to identify the account for eBit. *ollowings are the list of early warning signals'resources for identifying the borrowers for eBit/ ? 3ii5 Deterioration of credit rating for last two years from IB%B?;J to downwards. 3iii5 *inancial performance is deteriorating during last two years. 3iv5 The borrower has started suffering from li&uidity crunch. 3v5 #onduct of the account? poor turn over, return of che&ues for financial reasons, consistent overdue in the account ,. *inancial indiscipline. 3vi5 The &uality'value of the assets charged to the bank is deteriorating steadily 3vii5 The borrower is resorting to high cost borrowings to keep afloat. 3viii5 he regulators are scanning the borrowerJs activity. 3iB5 !ame of directors' promoters '#ompany appear in the default list of (BI'+#G# etc. 3B5 The revenue authorities are raising high value claims on the borrower. 3Bi5 Top management team of the borrower is fre&uently changing or dispute among the directors' promoters. 3Bii5 #ontinuously re&uesting for eBcess' adhoc etc. 3Biii5 "ccount with us is regular but with other bank, highly irregular. 3Biv5 The industry trend is sunset. Action ,*an/ 0. #lose monitoring of such accounts. :. !o eBcess'adhoc to be considered. 9. Inform the borrower about banks disinclination to take any additional eBposure. ;. )trategy for hand holding, cut back, take out financing etc. to be adopted. 7herever needed, gradually to reduce our eBposure. <. The &uarterly operative limits should be strictly enforced. =. In case of consortium, no further increase to be accepted. >. Try to recover the entire dues without any loss to the bank. 12. " compromise or %T) can also be initiated by waiver of penal interest and reduction in rate of interest from contractual rate, up to Base (ateK:O, for last 16 months. In case if the borrower is not in a position to pay one time' lump sum payment, a re&uest can be considered for a maBimum up to 16 months with a stipulation to pay 69O as upfront payment. 11. "ll sanctioning authorities would eBercise the powers to eBit the account up to their DA . Baroda Academy Minds 16 Inventing Methods for Igniting
The adverse observations are to be immediately reported to the sanctioning authority and measures be taken for correction of the same. #oncurrent "udit is also prevalent in the Bank, as an additional support )ystem, which takes care of reporting to the higher management directly on various areas that are to be reported as per the terms of services for which engaged, including revenue leakage, documentation, other relevant observations etc. pertaining to borrowal accounts. <3 End &se o. % nds In view of recent spurt in capital market (BI has directed that Branches should ensure that the loans sanctioned by bank, particularly the general purpose loans are used for the purpose for which the same are sanctioned and not diverted to the capital market. The Branches should continuously monitor end use of funds and obtain certificates from the borrowers certifying that the funds have been used for the purpose for which these were obtained and not diverted to the capital market. 3(ef/ B##'B('120'66 dt. 1=.21.62115 In light of the above instructions by (BI, the following systems and procedures are advised to be followed by the branches strictly/ 3i5 7hile processing any proposal, the purpose for which the advance is given is to be clearly understood ' appraised in the proposal. 3ii5 "fter sanction and at the time of disbursement, it is to be ensured that the disbursements are made only in relation to the purpose for which the advance is sanctioned. 3iii5 In respect of 7orking #apital accounts, a continuous monitoring is re&uired to ascertain the nature of payments made and whether such payments are related to the purpose of advance or not 3iv5 The monthly stock statements, FI) ' F$( statements are to be thoroughly checked for the reasons they are submitted for and not in a routine manner. 3v5 "ll disbursements in term loans to be directly made to the supplier after ensuring that sufficient margin is routed through the account. 3vi5 The assets such ac&uired must be inspected at the earliest possible date and the inspection report containing the details and specifications of the asset are to be kept in records. 3vii5 The original invoices ' bills relating to the purchase of assets with clear details and specifications of the asset should be obtained and kept in records. 3viii5 7herever it is not possible to make direct payment and the nature of re&uirement is such that disbursements are to be made only to the credit of their accounts, permission from the sanctioning authorities' competent authorities should be obtained at the time of sanction itself. 3iB5 In respect of Term Aoans'Demand Aoan, the purpose for which the loans are re&uested for should be ascertained at the time of the initial application and on sanction, should be ensured that the funds are utilized for the said purpose only. 3B5 In no case, the amounts are to be credited to their operative accounts and allow them to divert the funds elsewhere.
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3Bi5 In such cases, invariably an undertaking to be obtained from the borrowers for the end use of funds and their auditorJs certificate to be obtained and kept in records. 3Bii5 7herever there is specific re&uirement for infusion of promotersJ contribution ' margin towards ac&uiring assets, it is to be ensured that the funds are routed through the Bank account with us, with discreetly in&uiring about the source of funds brought in. "n auditorJs certificate from their regular auditor may be obtained to substantiate the contribution ' margin. The branches are also advised to strengthen their follow?up and credit monitoring activities and the post sanction supervision may be strictly adhered by the following/ 3i5 scrutiny of the periodical progress reports and operating ' financial statements of the borrowers 3ii5 visits to the assisted units and inspection of securities charged to the banks 3iii5 periodical scrutiny of the books of accounts of the borrowers 3iv5 )tock audits as per eBtant guidelines. 3v5 %btention of certificates from the borrowers that the funds have been utilized for the purposes approved 3vi5 +Bamination of all aspects of diversion of funds during internal audit ' inspection of the branches and at the time of periodical reviews. 63 RevieReg *ar Revie#redit facilities sanctioned to borrowers are subEected to annual review 3eBcept A"B%D, staff loans and the accounts where facilities sanctioned are for a period less than one year etc.5 as per the prevailing guidelines. ,owever in case of borrowal accounts enEoying credit facilities of (s.12 crores and above and where the credit rating of the account is B%B?< or below the account should be reviewed on half?yearly basis. The accounts are re&uired to be reviewed on or before the due date. The review takes a comprehensive view on various issues covering financial health, borrowerJs performance and prospects, &uality of the management, conduct of the account, compliance, etc. The review will also evaluate the impact of deficiencies observed during inspection ' #oncurrent ' statutory ' #redit "udit ' (BI inspection and rectification thereof. Branches have been authorized by the Board to review advances accounts with limit upto (s. 62 lacs pending receipt of audited financial statements, provided the conduct of the account is satisfactory in terms of/ ? 3i5 Turn over in the accounts. 3ii5 *ulfillment of repayment obligations 3interest ' installments5 3iii5 "de&uacy of securities, drawing power, insurance coverage etc. 3iv5 (ectification of inspection irregularities 3other than non?submission of financial statements5 18 Baroda Academy Inventing Methods for Igniting Minds
3v5 #ompliance of all terms and conditions of previous sanction =vi> Satis.actor+ trend in ,rod ction and 4 or sa*es as ,er ,ro?ections3 3vii5 Documentation and mortgages in the account being complete, valid and enforceable. 3viii5 )ubmission of income taB ' sales taB returns filed with the statutory authorities as per time schedule prescribed, wherever applicable. 3This will also indicate about the sales and profitability of operations.5 The obEective of the above system ' procedure is to ensure timely review of advances accounts so that the slippage of the accounts to ! " category on technical grounds may be avoided. ,owever branches should nevertheless obtain latest financial statements within a reasonable time after the review is conducted and satisfy themselves as to the financial parameters emerging out of the Balance )heet ' rofit - Aoss a'c. In case any adverse features are observed in the financials of the borrower, Branches should immediately initiate appropriate action as warranted. Short Revie- 4 Stat s Note/ The bank has also the practice of )hort (eview ' )tatus !ote, which is done when it is not possible to carry out a comprehensive (egular (eview of the account within the stipulated period pending receipt of certain particulars' information or where the account is placed under special monitoring, etc. #onsecutive )hort (eviews shall be restricted to t-o -ith a 1a;i1 1 ,eriod o. si; 1onths for each short review. But in eBceptional cases, the neBt higher authority 3not below the level of #hief $anager5 may do more consecutive )hort (eviews after satisfying himself about the need for the same and reasons duly recorded. (elaBation is also provided to restructured accounts and accounts under rehabilitation where for a variety of reasons only, )hort (eviews may have to be done till such time the unit'account becomes normal and healthy. 7here there is impairment of borrowerJs &uality indicated through various adverse features like default, diminution in value of security etc., suitable communication and if need be a )hort (eview ' )tatus !ote should be placed before competent authority for perusal, direction and necessary action. Revie- o. Priorit+ Sector Advances3 =re.3 )CC4)R42@7459A dt3 7@3@A322> 4eeping in view to cope up with rush of farmers borrowers at a time and reduce the repetitive laborious work in filling up the information which is already available in the system, a Me1orand 1 o. revie- .or s1a** *oans nder Agric *t re and Govern1ent S,onsored Sche1es 3falling under the business line of (ural - "gri. Banking5 is available for accounts where there is no need to analyze the balance sheet, in ")#(%$ package. The ath for generating the review reports and forwarding letter is as below/ P(eports'(eports'(ural "nd "gri?I'065 $emo. of (eview of small Aoans 8nder "gr. Govt. )pon. )chm.Q and. P(eports'(eports'credit monitoring?I'605 Aist of (eview of small Aoans? ).Q Baroda Academy Minds 19 Inventing Methods for Igniting
"dvantages of this system are/ 3i5 Branch need not to prepare a review proposal. It can be generated from ")#(%$ with basic details along with balance outstanding and overdue etc. under each credit facility of the borrower. Branch only has to verify the same, insert details of inspection &ueries and present status as well as the decision of the branch. 3ii5 "ll overdue proposals can be generated 3iii5 Branch can maintain the record in individual borrowers file which will facilitate at the time of inspection for the review of accounts. A3 Post Sanction Re,orting =PSR> Bank follows a ost )anction (eporting. The features are/ 3i5 #overs all sanctions and credit decisions viz., *resh ' Increase '(enewal ' (eEection ' "dhoc ' +Bcess ' $odifications ' 7aivers 'restructuring ' rescheduling etc., eBcluding sanction of staff advances, A"B%D 3i.e. post sanction reporting of A"B%D and )taff Aoans is not re&uired5. 3ii5 Broad parameters relating to sanction are only eBamined by the )( authority whereas the sanctioning authority shall take care of all procedural details on credit appraisal, ade&uacy of security, documentation etc. 3iii5 %bservations of )( authority are to be attended immediately, which shall also serve as guide to the sanctioning authority for future. 3iv5 Disbursement of credit facility'ies is not to be withheld merely for want of observations of the competent authority on )(. 3v5 "ll )anctions in respect of *und?Based and !on *und?Based credit limits 3eBcluding A"B%D - )taff Aoans5 are to be reported to )( "uthority on monthly basis in the prescribed format. ,owever, enclosures such as "ppraisal !ote, latest financials, credit rating sheets etcD for sanctions up to (s. 12 lacs, in case of rural and semi urban branches and upto (s 69 lac in case of $etro and 8rban branches 3(s. 9 lacs for (etail Aoans5 need not be sent with the prescribed formats for )(. 3vi5 #opies of #redit roposals with *und Based and !on *und Based sanctioned limit aggregating above (s. 12 lacs in case of rural and semi urban branches and above (s 69 lacs in case of $etro and 8rban branches 3retail loans above (s. 9 lacs5 should be forwarded to )( authority within 0 days of sanction along with "ppraisal !ote, latest financials with necessary comments by the sanctioning authority, latest credit rating sheet, gist of maEor adverse features and non?compliance of stipulated terms and conditions and the sanctioning authorityJs comments there on. 3vii5 The )( authority is re&uired to clear the proposal from )( angle within a period of @02? days from the date of receipt of proposal. If the )( authority has not made any observation within the said period, it will be presumed that the )( authority has no observation to make and the proposal is cleared from )( angle. . B3 Nor1s .or Ris( based ins,ection4veri.ication o. stoc( 8 )Ds/
20
rime )ecurities charged for 7# limits as per B%B("$ rating Aatest #redit (ating is "K for %ld rating B%B 1 to B%B0 as per #(I)IA Aatest #redit (ating is " for %ld rating, B%B: - B%B9 as per #(I)IA Aatest #redit (ating is BK for %ld rating, B%B?; - Below as per #(I)IA *iBed "ssets charged against Aoans #onsortium "ccounts Inspection of #ollateral securities (etail Aoans/ ,ousing Aoan %verdraft "gainst roperty Two wheelers ' #ar loan ' Traders Aoan - rofess. Aoans
eriodicity ,alf Rearly Fuarterly Bi?$onthly ,alf yearly 3Lan - Luly5 "s fiBed by #onsortium "nnually %n every disbursement - thereafter once in ?0? years. %n disbursement - then annually %nce in a year and the gap between two inspection should not be less than 12 months
3i5 %ver and above inspection as mentioned above the sanctioning authorities shall have to visit the borrowers once in a year 3ii5 Inspection of collateral to be carried out preferably once in a year for all types of facilities. 3iii5 To carry out compulsory annual stock audit' book debt audit in all account having fund based working capital limits including D" Aetter of #redit of over (s. 9.22 crores. This stock audit is to be done by panelled chartered accountant once in a year. 2@3 Credit Rating "s per eBtant guidelines, #redit rating cycle is yearly in case of borrowal accounts enEoying credit facilities of (s. 6 lacs 3 *und Based and !on? *und Based5 and above. In case of accounts below (s 69 lac credit rating is to be done for taking credit decision ,but pricing is delinked. *or account of (s 69 lac and above credit rating is important for taking credit decision and also for pricing. "t time of review if there is downgrading in #redit (ating, we have to ascertain the reasons and the same should be discussed with the borrower and corrective steps should be taken to improve the health of the account. In case of accounts above (s 9 crores , we should ask the borrower to get the account rated from approved eBternal #redit (ating "gencies. 223 Interna* Ins,ection =R)IA >/ Inspection is a control tool to ensure that day to day activities of the branch, its management, lending decisions, safety of the BankJs funds are in conformity with the Baroda Academy Minds 21 Inventing Methods for Igniting
administrative instructions 'guidelines issued from time to time - in furtherance of corporate obEectives. The obEectives of internal inspection are/ 3i5 To scrutinize the completeness - enforceability of the documents taken for advances - other facilities. 3ii5 To carry out physical checking, &ualitatively and &uantitatively of stocks other assets charged to the bank by pledge, hypothecation or mortgage. 3iii5 To ascertain for sanction for advances 3iv5 To verify prompt - regular submission of periodical- statutory returns 3v5 To verify asset classification of advances 3vi5 To ascertain position of income recognition 3vii5 +nsure that &ualitative rectification has taken place Besides, )tatutory "udit carried by )tatutory "uditor, (BI" is a comprehensive feedback to the management about the degree of compliance of BankJs norms, classification of assets, and &uality of advance portfolio. etc.The compliance is monitored through rectification certificate. 25. Branch to collect periodically details of various statutory dues paid by the borrower e.g. payment of )ales TaB')ervice TaB'+Bcise Duty, $+)B Bills ,TD) etc 273'IS State1ent To know the estimates and performance of the borrower branch to call the FI) statements from all borrowers who are enEoying working capital limits of (s 1 crore and above of entire banking system. )tatement FI) I eriodicity %ne week before the commencement of the &uarter for which it relates 7ithin siB weeks after end of the &uarter, for which it relates 7ithin two months after close of the half year. Branch action Branch to compare the estimates of sales with proEections. *or maEor variance branch to discuss it with borrower. Branch to check the level of estimated current assets and current liabilities and also the operative limit. Branch to modity the operative limit in *inacle and "scrom #ompare the performance with estimates given in FI) I and also with roEections given earlier. #heck the variance . Discuss the reasons with borrower. #ompare the performance with the proEections and check the variance. Discuss the reasons with borrower and take suitable corrective steps.
FI) II
FI) III
293 E;change o. In.or1ation in case o. Consorti 1 4M *ti,*e )an(ing Acco nts3 7hile sanctioning a loan branch should obtain details of eBisting facilities enEoyed by the borrower from various banks and financial institutions. Then every &uarter branch should Baroda Academy Minds 22 Inventing Methods for Igniting
eBchange the details of credit facilities with the other Banks and *Is and also ensure the eBchange of information by them. In case of #onsortium advances eBchange of information should be done amongst the members and consortium meeting should be hold at least once in a &uarter. Branch should also obtain a certificate by a professional, preferably from #ompany )ecretary 3 but if it is not possible then from #hartered "ccountant or #ost "ccountant 5regarding compliance of various statutory prescription which are in vogue. 2:3 Co1,*iance o. observations o. PSR a thorit+C Stat tor+ A ditorsC Conc rrent A ditorsC Observations received on MMR3 2<3 )ranch to .o**o- .o**o-ing ti1e bo nd sched *e o. .o**os*i,,age3 3?< @ o days 5 <?02 days Due Date of +$I) < days before % day 3 due date 5 2?;th day <th day =th ?>th day 12th day 19th day 61st?69th day 02th day 01?;2 days 0<th?:2 day :1st @ ::th day :9th day 9;th ?;2th day , .or ,revention o.
;1?>2 days
<2th ?<6nd day Before =2th day Before >2th day
"ction to be initiated )ystem generated )$+ reminder )ystem generated )$) 6nd reminder #ollection of +$I )ystem generated )$) 0rd reminder 1st Telephonic contact and 1st written (eminder 3 system generator 5 ersonal $eeting of Branch official with Borrower 6nd Telephone contact )ystem generated 1st (egistered (eminder ersonal meeting of official from circle office alongwith branch official with borrower 0rd telephonic contact and 1st telephonic contact with the guarantor 6nd (egistered (eminder with a copy to guarantor ersonal $eeting of official from ,% alongwith branch'#% with the borrower ersonal contact with borrower'family members or guarantors at residence 'work place by the incumbent 0rd (egistered reminder with copy to guarantor. ersonal and 'or telephonic contact with guarantor at his residence. ersonal contact by incumbent himself again with borrower'guarantor'family members 23 Inventing Methods for Igniting
263 ASCROM S#STEM Genesis ASCROM S#STEM/ "sset #lassification and #redit $onitoring )ystem. +arlier ")#(%$ software was developed in D%) and coded in *%S (%. It was designed to capture comprehensive profile of "dvance portfolio at &uarterly interval and was implemented in all Domestic branches of the Bank in )eptember 1>>=. The present ")#(%$ )R)T+$ is developed in TB D%T!+T as front end for user interface and $) )FA )+(T+( as Back end data base. It is implemented in all domestic branches since " (IA 622<. Data is now captured at monthly interval. The ")#(%$ )ystem in our bank at present is taking care of/ ? 3i5 "sset #lassification and provisioning as per I("# norms. 3ii5 #omputation of #apital #harge on #redit (isk as per B")+A II (e&uirements 3)tandardized "pproach5 3iii5 )ubmission of #IBIA data. 3iv5 "A$ (eport for "dvances. 3v5 Generation of various $I) reports. TEST #O&R &NDERSTANDING / 01 Credit audit is based on recommendations of a) Vyas Committee b) Kapoor committee c) Narang Committee d) Zilani Committee e) Damodaran Committee S ort re!ie" is carried out " en a) # en borro"er "ants additional facility before due date. b) # en borro"er "ants to close t e account "it in $ mont s. c) # en borro"er "ants to close t e account "it in % mont s d) # en it is not possible to carry out regular re!ie" on account of pending information. e) # en account becomes N&' &S( in respect of ad!ances is related to follo"ing type of ad!ances. a) (estructured accounts. b) 'll types of sanctions and credit decisions c) 'll types of sanctions and credit decisions e)cept staff loans and *'+,D . d) 'll types of sanctions and credit decisions e)cept staff loans and *'+,D- *oans against NSC.KV&s and */C policies. e) 'll types of sanctions and credit decisions e)cept 0old *oan 24 Inventing Methods for Igniting
02.
0$.
01.
*arge borro"ers en2oying facility of (S 10 crores and abo!e s ould be re!ie"ed a) ,n yearly basis " en credit rating is +,+3% or belo" b) ,n 4uarterly basis " en credit rating if +,+3% or belo" c) on alf yearly basis " en credit rating is +,+35 or belo". d) on alf yearly basis " en credit rating is belo" +,+36 e) ,n yearly basis " en credit rating is +,+ 7 or belo" &S( aut ority is re4uired to clear t e proposal from &S( angle "it in period of a) %0 days from t e date of receipt of proposal. b) $0 days from t e date of receipt of proposal. c) 80 days from t e date of receipt of proposal. d) No date is fi)ed for suc purpose. e) 120 days from t e receipt of proposal. Submission of C/+/* data is done t roug a) 'SC(,9 system b) :inacle c) a;b d) None e) Cloret (+/' stands for a) (is< +efore /nternational 'd!isors b) (is< +efore /ndian 'dministrators c) (is< based /nternal 'udit d) None oft e abo!e. e) (egular +ranc /nspection and 'udit
07.
0%.
05.
06. /n case of t e "or<ing capital facilities "it Credit rating upto +,+$- t e prime securities c arged under "or<ing capital facility "ill be inspected
a) =alf >early b) ?uarterly c) +i39ont ly d) 'nnually
e) No specific periodicity 08. is Stoc<.+oo< Debt 'udit @i.e. co!ering t e period 1st 'pril to $1st 9arc e!ery year) to be carried out compulsorily in all accounts a!ing fund3 based "or<ing capital limits @including D' *C limit) of o!er (s 33333 crores "it our +an<. a) 10 crore b) 1 crore c) 27 crore d) 7 crore e) $ crore
25
10.
#ut off limit for the #redit "udit in respect of eBisting accounts with *B K !*B limit of (s. ?????? crores and above. a) 7 crore b) 1 crore c) 10 crore d) 2 crore e) $ crore "it :+ A N:+ limit of
11. Cut off limit for t e Credit 'udit in respect of fres accounts (s. 333333 crores and abo!e. a) 7 crore b) 1 crore c) 10 crore d) 20 crore e) 27 crore 16.
The credit audit re&uires to be carried out the audit within ??? to ??months from the date of sanction' review. a5 1 to 6 months b5 6 to 0 months c5 0 to ; months d5 ; to 16 months e5 ; to > months
1$. +orro"al accounts "it credit rating of +,+ 1 or 7 - t e periodical inspection in respect of current assets is to be done - once in BBBBBBBBBBBBBBBB a) si) mont s b) t ree mont s c) t"o mont s d) four mont s e) 12 mont s 11. Consecuti!e S ort (e!ie"s s all be restricted to 333 "it a ma)imum period of 3333 mont s for eac s ort re!ie". a) 1 time. $ mont s b) 2 times . % mont s c) $ times. 1 mont s d) 1 times only e) 1 times .%38 mont s 17. /n case of (etail *ending sanctions abo!e (s. 3333 lacs- copies of 'pplication3cum3 'ppraisal Note s ould be sent to &S( aut ority "it in t ree days of sanction. a) 10 lacs b) 7 lacs c) 5 lacs d) 17 lacs e) /rrespecti!e of loan limit Baroda Academy Minds 26 Inventing Methods for Igniting
'NS#C(S F " F " 1 c > d 6 d 12 c 0 c 11 a : c 16 c 9 b 10 b ; a 1: b < c 19 b = a
RESER0E )AND O% INDIA G&IDE"INES %OR RESTR&CT&RING ' ic( )ites +ligibility criteria for restructuring of advances "sset classification norms Income recognition norms rovisioning norms !ormal provisions rovision for diminution in the fair value of restructured advances )pecial (egulatory Treatment for "sset #lassification
27
Genera* Princi,*es and Pr dentia* Nor1s .or Restr ct red Advances The principles and prudential norms laid down here are applicable to all advances including the borrowers, who are eligible for special regulatory treatment for asset classification. E*igibi*it+ criteria .or restr ct ring o. advances 1 Banks may restructure the accounts classified under GstandardG, Gsub?standardG and GdoubtfulG categories. 6 Banks can not reschedule ' restructure ' renegotiate borrowal accounts with retrospective effect. 7hile a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The process of re? classification of an asset should not stop merely because restructuring proposal is under consideration. The asset classification status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring ' rescheduling ' renegotiation. In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of supervisory concern. 0 !ormally, restructuring can not take place unless alteration ' changes in the original loan agreement are made with the formal consent ' application of the debtor. ,owever, the process of restructuring can be initiated by the bank in deserving cases subEect to customer agreeing to the terms and conditions. : !o account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case? by?case basis, depending on merits of each case. Illustratively, the parameters may include the (eturn on #apital +mployed, Debt )ervice #overage (atio, Gap between the Internal (ate of (eturn and #ost of *unds and the amount of provision re&uired in lieu of the diminution in the fair value of the restructured advance. The accounts not considered viable should not be restructured and banks should accelerate the recovery measures in respect of such accounts. "ny restructuring done without looking into cash flows of the borrower and assessing the viability of the proEects ' activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns ' action. 9 7hile the borrowers indulging in frauds and malfeasance will continue to remain ineligible for restructuring, banks may review the reasons for classification of the borrowers as willful defaulters specially in old cases where the manner of classification of a borrower as a willful defaulter was not transparent and satisfy itself that the borrower is in a position to rectify the wilful default. The restructuring of such cases may be done with BoardGs approval, while for such accounts the restructuring under the #D( $echanism may be carried out with the approval of the #ore Group only. Baroda Academy Minds 28 Inventing Methods for Igniting
; BI*( cases are not eligible for restructuring without their eBpress approval. #D( #ore Group in the case of advances restructured under #D( $echanism ' the lead bank in the case of )$+ Debt (estructuring $echanism and the individual banks in other cases, may consider the proposals for restructuring in such cases, after ensuring that all the formalities in seeking the approval from BI*( are completed before implementing the package. Asset c*assi.ication nor1s (estructuring of advances could take place in the following stages / 3a5 before commencement of commercial production ' operation 3b5 after commencement of commercial production ' operation but before the asset has been classified as Gsub?standardG 3c5 after commencement of commercial production ' operation and the asset has been classified as Gsub?standardG or GdoubtfulG. 1 The accounts classified as Gstandard assetsG should be immediately re?classified as Gsub? standard assetsG upon restructuring. 6 The non?performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per eBtant asset classification norms with reference to the pre?restructuring repayment schedule. 0 "ll restructured accounts which have been classified as non?performing assets upon restructuring, would be eligible for up?gradation to the GstandardG category after observation of Gsatisfactory performanceG during the Gspecified periodG. : In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre?restructuring payment schedule. 9 "ny additional finance may be treated as Gstandard assetG, up to a period of one year after the first interest ' principal payment, whichever is earlier, falls due under the approved restructuring package. ,owever, in the case of accounts where the prerestructuring facilities were classified as Gsub?standardG and GdoubtfulG, interest income on the additional finance should be recognised only on cash basis. If the restructured asset does not &ualify for upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt. ; In case a restructured asset, which is a standard asset on restructuring, is subEected to restructuring on a subse&uent occasion, it should be classified as substandard. If the restructured asset is a sub?standard or a doubtful asset and is subEected to restructuring, on a subse&uent occasion, its asset classification will be reckoned from the date when it became ! " on the first occasion. ,owever, such advances restructured on second or Baroda Academy Minds 29 Inventing Methods for Igniting
more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subEect to satisfactory performance. Inco1e recognition nor1s Interest income in respect of restructured accounts classified as Gstandard assetsG will be recognized on accrual basis and that in respect of the accounts classified as Gnon? performing assetsG will be recognized on cash basis. Provisioning nor1s 1 Normal provisions Banks will hold provision against the restructured advances as per the eBisting provisioning norms. 6 Provision for diminution in the fair value of restructured advances 3i5 (eduction in the rate of interest and ' or reschedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. )uch diminution in value is an economic loss for the bank and will have impact on the bankGs market value of e&uity. It is, therefore, necessary for banks to measure such diminution in the fair value of the advance and make provisions for it by debit to rofit Aoss "ccount. )uch provision should be held in addition to the provisions as per eBisting provisioning norms and in an account distinct from that for normal provisions. *or this purpose, the erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. *air value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the eBisting rate charged on the advance before restructuring and the principal, discounted at a rate e&ual to the bankGs B A( as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. *air value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate e&ual to the bankGs B A( as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. The above formula moderates the swing in the diminution of present value of loans with the interest rate cycle and will have to follow consistently by banks in future. *urther, it is reiterated that the provisions re&uired as above arise due to the action of the banks resulting in change in contractual terms of the loan upon restructuring which are in the nature of financial concessions. These provisions are distinct from the provisions which are linked to the asset classification of the account classified as ! " and reflect the impairment due to deterioration in the credit &uality of the loan. Thus, the two types of the provisions are not substitute for each other. Baroda Academy Minds 30 Inventing Methods for Igniting
3ii5 In the case of working capital facilities, the diminution in the fair value of the cash credit ' overdraft component may be computed as indicated above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components 37orking #apital Term Aoan and *unded Interest Term Aoan5 would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components. 3iii5 In the event any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at (e.1'? till maturity of the security. This will ensure that the effect of charging off the economic sacrifice to the rofit - Aoss account is not negated. 3iv5 The diminution in the fair value may be re?computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in B A(, term premium and the credit category of the borrower. #onse&uently, banks may provide for the shortfall in provision or reverse the amount of eBcess provision held in the distinct account. 3v5 If due to lack of eBpertise ' appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances eBtended by small ' rural branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at five percent of the total eBposure, in respect of all restructured accounts where the total dues to bank3s5 are less than rupees one crore till the financial year ending $arch 6210. The position would be reviewed thereafter. 0 The total provisions re&uired against an account 3 normal provisions plus provisions in lieu of diminution in the fair value of the advance5 are capped at 122O of the outstanding debt amount. S,ecia* Reg *ator+ Treat1ent .or Asset C*assi.ication 1 The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated, will be available to the borrowers engaged in important business activities, subEect to compliance with certain conditions as enumerated below. )uch treatment is not eBtended to the following categories of advances/ i. #onsumer and personal advancesD ii. "dvances classified as #apital market eBposuresD iii. "dvances classified as commercial real estate eBposures
31
The asset classification of these three categories accounts as well as that of other accounts which do not comply with the conditions enumerated below, will be governed by the prudential norms in this regard described above. E*e1ents o. s,ecia* reg *ator+ .ra1e-or( The special regulatory treatment has the following two components / 3i5 Incentive for &uick implementation of the restructuring package. 3ii5 (etention of the asset classification of the restructured account in the pre?restructuring asset classification category Incentive .or E ic( i1,*e1entation o. the restr ct ring ,ac(age During the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. ,owever, as an incentive for &uick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which eBisted when the reference was made to the #D( #ell in respect of cases covered under the #D( $echanism or when the restructuring application was received by the bank in non?#D( cases/ 3i5 7ithin 162 days from the date of approval under the #D( $echanism. 3ii5 7ithin >2 days from the date of receipt of application by the bank in cases other than those restructured under the #D( $echanism. Asset c*assi.ication bene.its )ubEect to the compliance with the under noted conditions in addition to the adherence to the prudential framework laid down/ 3i5 an eBisting Gstandard assetG will not be downgraded to the sub?standard category upon restructuring. 3ii5 during the specified period, the asset classification of the sub?standard ' doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period. ,owever, these benefits will be available subEect to compliance with the following conditions/ i5 The dues to the bank are Gfully securedG. The condition of being fully secured by tangible security will not be applicable in the following cases/ Baroda Academy Minds 32 Inventing Methods for Igniting
3a5 ))I borrowers, where the outstanding is up to (s.69 lakh. 3b5 Infrastructure proEects, provided the cash flows generated from these proEects are ade&uate for repayment of the advance, the financing bank3s5 have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows. 3c5 $icro *inance Institution accounts, which are standard at the time of restructuring, even if they are not fully secured. ,owever, this relaBation is granted purely as a temporary measure and would be applicable to standard $*I accounts restructured by banks upto 01st $arch 6211. ii5 The unit becomes viable in 12 years, if it is engaged in infrastructure activities, and in < years in the case of other units. iii5 The repayment period of the restructured advance including the moratorium, if any, does not eBceed 19 years in the case of infrastructure advances and 12 years in the case of other advances. The aforesaid ceiling of 12 years would not be applicable for restructured home loansD in these cases the Board of Director of the banks should prescribe the maBimum period for restructured advance keeping in view the safety and soundness of the advances. Aending to individuals meant for ac&uiring residential property which are fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented are risk weighted as under the new capital ade&uacy framework, provided the ATT is not more than <9O , based on board approved valuation policy. ,owever, the restructured housing loans should be risk weighted with an additional risk weight of 69 percentage points to the risk weight prescribed already. iv5 romotersG sacrifice and additional funds brought by them should be a minimum of 19O of banksG sacrifice. The term GbankGs sacrificeG means the amount of Uerosion in the fair value of the advance above. *urther, the additional funds re&uired to be brought in by the promoter should generally be brought in up front . ,owever, if the banks are convinced that the promoters face genuine difficulty in bringing their share of the sacrifice immediately and need some eBtension of time to fulfill their commitments, the promoters could be allowed to bring in 92O of their sacrifice , i.e. 92O of 19O, upfront and the balance within a period of one year. *urther, in case the promoters fail to bring in their balance share of sacrifice within the eBtended time limit of one year, the asset classification benefits derived by banks will cease to accrue and the they will have to revert to classifying such accounts as per the asset classification norms. v5 ersonal guarantee is offered by the promoter eBcept when the unit is affected by eBternal factors pertaining to the economy and industry. vi5 The restructuring under consideration is not a Grepeated restructuringG.
Disc*os re ReE ire1ents on Advances Restr ct red b+ )an(s / Baroda Academy Minds 33 Inventing Methods for Igniting
1. "s per paragraph 1; of (eserve Bank of India $aster #ircular !o. DB%D !o. B .B#.>'61.2:.2:='6216?10 dated Luly 6, 6216 on rudential norms on Income (ecognition, "sset #lassification and rovisioning pertaining to "dvances the banks should disclose in their published "nnual Balance )heets, under U!otes on "ccountsG, Information relating to number and amount of advances restructured, and the amount of diminution In the fair value of the restructured advances under the following categories/ I. )tandard "dvances (estructuredD fl. )ub?)tandard "dvances (estructuredD and iii. Doubtful "dvances (estructured. 8nder each of the category above, advances restructured under #D( $echanism, )$+ Debt (estructuring $echanism and other categories of restructuring are re&uired to be shown separately. 2. The 7orking Group 37G5 constituted by (BI to (eview the eBisting rudential Guidelines on (estructuring of "dvances which was chaired by )hri B. $ahapatra had recommended that once the higher provisions and risk weights 3if applicable5 on restructured advances 3classified as standard either ab Initio or on upgradatton from NPA
category) revert back to the normal level on account of satisfactory performance during the prescribed period, such advances should no longer be required to be disclosed by banks as restructured accounts in the Notes on Accounts in their Annual !alance "heets. #o$ever, the provis%#i for diminution in the fair value of restructured accounts on such restructured accounts should continue to be maintained by banks as per the e&isting instructions. 'he () also recommended that banks may be required to disclose* +. details of accounts restructured on a cumulative basis e&cluding the standard restructured accounts $hich cease to attract higher provision and risk $eight ,+f applicable)++. provisions made on restructured accounts under various categories- and +++ details of movement of restructured accounts.
.. "ccordingly, (eserve Bank of India vide their circular !o. DB%D.B .B#. !o. =2'61.2:.106'6216?10 dated 01.21.6210 has advised that the banks should henceforth disclose in their published "nnual Balance )heets, under U!otes on "ccountsG, information relating to number and amount of advances restructured, and the amount of diminution In the fair value of the restructured advances as per the format given in the "nneBure. Detailed instructions relating to the disclosure are also given In the "nneB. /. The above disclosure re&uirements will be effective from the financial year 6216?10. These disclosures need to be "udited at the time of "nnual dosing henceforth starting with *R ending $arch,6210. So1e Genera* Princi,*es .or Restr ct red Advances 15 Banks may restructure the accounts classified under GstandardG, Gsub?standardJ and GdoubtfulG categories. 65 Banks cannot reschedule' restructure' renegotiate borrowal accounts with retrospective effect. 05 !ormally, restructuring cannot take place unless alteration'changes in the original loan agreement are made with the formal consent' application of the borrower. Baroda Academy Minds 34 Inventing Methods for Igniting
:5 !o account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. 95 Borrower classified as a willful defaulter ' borrower indulging in frauds and malfeasance will continue to remain ineligible for restructuring. The restructuring of such cases may be done only with BoardJs approval. ;5 BI*( cases are not eligible for restructuring without their eBpress approval. <5 It may be noted that while the general principles norms inter?alia stipulate that GstandardG advances should be re?classified as Gsub?standardG immediately on restructuring, all borrowers 3eBcept consumer and personal advances, advances classified as capital market and real estate eBposure5 will be entitled to retain the asset classification upon restructuring, subEect to the conditions as enumerated by (eserved Bank of India and advised by respective functionaries from time to time like PIncentive for &uick implementation of the restructuring packageQ etc. =5 ,owever, eBtension in repayment tenor of a floating rate loan on reset of interest rate, so as to keep the +$I unchanged provided it is applied to a class of accounts uniformly will not render the account to be classified as I(estructured accountJ. >5 "ll restructured accounts which have been classified as non?performing assets upon restructuring, would be eligible for up?gradation to the IstandardJ category after observation of Isatisfactory performanceJ during the Ispecified periodJ. )pecified eriod means a period of one year from the date when the first payment of interest or installment of principal falls due under the terms of restructuring package. 125In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre restructuring payment schedule. 115"ny additional finance may be treated as Istandard assetJ, up to a period of one year after the first interest ' principal payment, whichever is earlier, falls due under the approved restructuring package. If the restructured asset does not &ualify for up gradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt. 165In case a restructured asset, which is a standard asset on restructuring, if again subEected to restructuring on a subse&uent occasion during period within which the concessions were eBtended under the terms of the first restructuring, it should be classified as substandard.
35
TEST O% &NDERSTADING )tate whether following statements are true or false. (estructuring can be done in advances accounts which have been classified as loss. In case of "dvance given to )$+ the standard account will shift to )ubstandard #ategory , after restructuring. )tandard ,ousing Aoan account, if restructured , will go to sub standard #ategory. "dditional advance given at the time of restructuring, will remain in in standard category for specific period. (estructured account attracts additional provision of 6O even though it is in standard category. %nce the borrower has made re&uest for restructuring the account, the I("# norms will not be applicable. In case of sanctioning additional loan during the restructuring the ! " account, bank book interest on additional loan on cash basis. 7hile considering restructuring, bank to ensure that unit will become viable with in a period of < years in case of unit is not infrastructure unit. "t the time of restructuring borrower has to bring 19O of additional funds up front or in stages. "t the time of restructuring of account bank can convert of its loan into +&uity.
;. <. =. >. 12.
"!)7+()
F !% 1 "nswers *alse
6 *alse
0 True
: True
9 True
; *alse
< True
= True
> True
12 True
36
RESTR&CT&RING O% AD0ANCE ACCO&NTS ' ic( )ites #oncept of (estructuring #auses of )ickness? Internal causes- +Bternal causes roblems (elating to roEect *ormulation and Implementation roblems (elated to roduction roblems (elating to $arketing roblems (elating to *inance roblems (elating to $anagement roblems "ttributable to Banks Detection of )ickness (estructuring of )ick units Determining Tiability of )ick 8nits !on?viable 8nits Techno +conomic Tiability )tudy Technical "ppraisal *inancial "spects $arketing and #ommercial "spects $anagerial "spects Drawing up of a (estructuring )cheme General Guidelines for Drawing?up of a (estructuring )cheme (ight of (ecompense #o?ordination between Banks and %ther *inancial Institutions $onitoring - *ollow?up of (estructuring )cheme (evival of )ick 8nits by $erger or "malgamation of the ,ealthy 8nits (ephasement, (e?schedulement and (estructuring #ut back arrangement Restr ct ring PThe basic obEective of restructuring is to preserve economic value of units, not ever greening of problem accounts. This can be achieved by banks and the borrowers only by careful assessment of the viability, &uick detection of weaknesses in accounts and a time? bound implementation of restructuring packages.Q "ny commercial activity is undertaken with the sole obEective of earning profit. In other words it can be said that any investment in a commercial activity should generate cash at a desired level. " decision to invest money in a particular activity ' proEect shall only be made when investor is reasonably confident that it is most likely that the proEect shall generate cash at a desired level for a desired number of years. In the same way while financing the proEect the bank satisfy itself that the proEect shall generate enough cash for servicing the debt, interest and principal over number of years as envisaged. It is in the interest of all Baroda Academy Minds 37 Inventing Methods for Igniting
stakeholders that the proEect performs as envisaged. But some times the things do not move in the desired direction and the performance of the proEect do not match the performance as envisaged. The word PrestructuringQ of a loan denotes and implies a process of modifications'variations over an eBisting sanction terms and conditions. The modification or variations may be necessitated due to changes in financial and economic proEections and events, 3which changes with financial - economic situations of the country5 and as such the originally proEected results may not be considered achievable in the future. These loans are presently distressed and re&uire fresh appraisal, and sanction support. The restructuring thus involves renegotiation and reschedulement' rephasement of eBisting loan componentsD additional sanctionsD funding and modified terms and conditions. Thus the word IrestructuringJ involves process and a detailed study. In banks restructuring of small loans are being done, based on a letter from the borrower without a detailed process though the sanctions are done within discretionary power. In few cases, The underlying reasons though genuine, are invariably not documented. The (BI eriodically issues circulars and guidelines on restructuring and re?schedulement on various business, agricultural segments and other sectors. The issues of such special guidelines on agriculture are prompted by natural calamities and by economic, commercial and geographical needs and re&uirements. Before accepting restructuring of accounts, we should ensure that financial viability is established and there is a certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined based on acceptable viability benchmarks such as (eturn on #apital employed, D)#(, Gap between I(( and cost of *unds etc. as evident from future #ash *lows. !o restructuring should be accepted without looking into #ash *lows of the borrower and assessing the viability of the proEect. The entire process of restructuring can be divided in following three stages/ 1. To eliminate the reasons' causes attributed for under performance if the causes of sickness are not temporary but within the control of borrower' banker nature. This part of the process is known as Business rocess (e? engineering. 6. To carry out the Techno @ +conomic Tiability study and to forecast the future cash inflows after Business rocess (e?engineering. 0. To eliminate the irregularities of the eBisting Debt due to under performance and to keep the Debt at the level which can be serviced by the envisaged cash inflow after Debt (estructuring. Detailed technical, economical, financial and managerial appraisal should be carried out to find out how much profit will be generated as per the Business rocess (e?engineering. The future cash inflow should be established even if the sickness is being caused by eBternal reasons and nothing can be done to improve the performance. The study so conducted should cover various aspects relating to technical, financial, commercial and managerial appraisal. Baroda Academy Minds 38 Inventing Methods for Igniting
Ca ses o. Sic(ness 3i5 The causes of )ickness in an Industrial 8nit can be broadly classified into two categories/ Internal causes. +Bternal causes. 3ii5 7hile IInternal #ausesG are those causes which can be attributed to the $anagement of the unit, the +Bternal causes are those which are attributable to factors outside the purview'control of the romoters'$anagement'Banks etc. 3iii5 Both Internal and +Bternal causes can be again attributed to problems of proEect implementation, production, marketing, finance and management. Prob*e1s Re*ating to Pro?ect %or1 *ation and I1,*e1entation +very roEect is supposed to generate income so as to meet its obligations to debtors'banks etc. within a stipulated time. Its inability to do so may be due to reasons of faulty proEect formulation and proEect implementation. )ome of the factors which lead to such a situation could be summarized below/ 3i5 !on?availability of the land at the selected site due to various reasons.3ii5 !on? availability'difficulty in procuring materials for construction of factory etc.3iii5 Delay in delivery of machines'Bankruptcy of supplier.3iv5 Delay in tying up financial arrangements. 3v5 Inability of the promoters in bringing in their contribution.3vi5 Delay in disbursement of loan etc. due to various reasons.3vii5 Delay in raising of resources through ublic Issues due to unfavorable market conditions etc.3viii5 Delay in getting power and water connection and environmental clearance.3iB5 Delay due to change of Government, Government olicies etc.3B5 Diversion of funds by the promoters. Prob*e1s Re*ated to Prod ction There may be certain factors which affect the production of the desired end product. They are/ 3i5 7rong miB of products. 3ii5 Defective'obsolete'inappropriate technology.3iii5 !on? availability of raw materials.3iv5 *re&uent interruptions in supply of power, water, spares etc.3v5 8nsatisfactory performance of certain machines or fre&uent break downs.3vi5 Aack of preventive maintenance.3vii5 oor &uality control leading to deterioration in &uality of end product and reEection of end products.3viii5 Transport bottlenecks.3iB5 #hange in Government olicies. Prob*e1s Re*ating to Mar(eting Baroda Academy Minds 39 Inventing Methods for Igniting
+ven if &uality goods are produced as per eBpectations, unless they are sold, the unit will not be viable. "s such, there are many problems relating to marketing which could be summarized as under/ oor &uality of end product.3ii5 #ompetition from better substitute products or similar products.3iii5 8nrealistic estimates of demand of the product.3iv5 Inappropriate product miB. 3v5 oor efforts for sales promotion.3vi5 #ancellation of bulk orders.3vii5 !on?adherence to delivery schedule.3viii5 Improper costing and pricing system.3iB5 Booking large orders with longer delivery schedule without escalation clause etc. Prob*e1s Re*ating to %inance There are many problems relating to finance for meeting the resources need of the proEect. They are/ 3i5 Defective financial planning. 3ii5 #ost overrun due to delay in implementation of proEect. 3iii5 Inability of promoters to raise their level of contribution. 3iv5 ,igh interest burden due to high cost of Debt'+&uity.3v5 Inade&uate 7orking #apital *inance.3vi5 Inefficient receivables $anagement.3vii5 Diversion of funds to other proEects. 3viii5 Blockade of funds in unproductive assets.3iB5 Aack of credit facilities from suppliers.3B5 Drawings by Directors' artners etc. Prob*e1s Re*ating to Manage1ent There are many problems relating to Internal $anagement and "dministration which lead to sickness of units. They are/ 3i5 Dispute among partners'promoters. 3ii5 Aack of managerial skills, trained manpower etc. for specialized functions. 3iii5 Aack of co?ordination between various departments. 3iv5 oor industrial relations. 3v5 oor discipline among staff'workers. 3vi5 !on?availability of skilled manpower. 3vii5 !o succession planning. 3viii5 "bsence of olicy on ,uman (esources Development. Prob*e1s Attrib tab*e to )an(s !ot all the problems can be attributed to the $anagement and other agencies for the sickness of the unit. There could be reasons attributable to the Banks also. )uch as/ 3i5 8ndue delay in appraising and sanctioning of #redit *acilities for no fault of the borrowers.3ii5 Inade&uate sanction of credit facilities.3iii5 Aack of understanding of the roduction and $arketing need of the unit leading to inade&uate financing.3iv5 (igid attitudes and policies of the bank.3v5 Aack of understanding and co?ordination between the partners ' promoters and bank officials. Detection o. Sic(ness 3i5 "n early detection of G)icknessG in an industrial unit can lead to taking appropriate steps to arrest the tendency and revive the unit to normal health. 40 Baroda Academy Inventing Methods for Igniting Minds
3ii5 *or this, proper noting of various symptoms'signals emanating from various sources is most essential. 3iii5 *ollowing is illustrative list of symptoms'signals that indicate sickness/ 3a5 #ontinuous irregularity in bank account of borrower. 3b5 Aow capacity utilization. 3c5 )tagnation or downward trend in sales. 3d5 ,igh rate of reEection of goods. 3e5 (eduction in credit turnover. 3f5 Default in honoring statutory liabilities. 3g5 Aonger and larger outstanding in bills receivable a'c. 3h5 *re&uent re&uests for eBcess'adhoc facilities. 3i5 *re&uent re&uests for reduction in margin and attempts at over?valuation of stocks. 3E5 #ontinuous full utilization of cash credit limit with little turnover. 3k5 *ailure'delay in submitting stock statements and other operational data. 3l5 )low turnover'over stocking of Inventory. 3m5 "larming increase in Debtors and #reditors levels. 3n5 Diversion of short term funds for long term uses. 3o5 (apid turnover of key personnel. 3p5 )pate of litigations against the borrower. 3&5 *re&uent changes in management. 3r5 #ontinuing cash losses resulting in erosion of !et worth. 3s5 *re&uent return of che&ues due to financial reasons. 3t5 *re&uent re&uests for G)top paymentG of che&ues. 3u5 Irregularities pointed out in Inspection, "udit (eports. 41 Baroda Academy Inventing Methods for Igniting Minds
The above are only illustrative and not eBhaustive. 3iv5 " vigilant Branch $anager'officer can sense the trouble brewing due to one or more of the above incidents and relate them properly. *or this, a constant dialogue with the borrower should be established and the account should be put under close monitoring and scrutiny. 3v5 Branch should immediately take a view as to whether such symptoms are temporary or they are indicators of deteriorating health. 3vi5 Based on the above, branch should decide whether to rehabilitate the unit or to recall the facility and start recovery proceedings. 3vii5 If the unit is likely to be viable, then a viability study should be undertaken for formulating a nursing programme. 3viii5 Guidelines on viability study and (estructuring of )ick 8nits should be followed. 3iB5 If the account is to be recalled and recovery proceedings are to be initiated, branch may resort to any of the following strategies/ 3a5 !egotiating a compromise settlement. 3b5 *iling of suit for decree. 3c5 7riting?off the account. Restr ct ring o. Sic( nits Deter1ining 0iabi*it+ o. Sic( &nits 3i5 %nce the branch forms an opinion that the sick unit can be made viable if some special measures for rehabilitating the unit are taken up in time. )uch measures will involve close co?operation between the bank, the borrower and other "gencies. 3ii5 *or determining viability both the borrowers and the bank may have to forego certain rights and grant some concessions within the overall guidelines of (BI. The viability of the unit should be eBpected within a definite time period. *urther, time and efforts can be spared only to those units which have definite'reasonably good chances of recovery. Non-viab*e &nits 3i5 8nits which do not fulfill the criteria for viability as above will be classified as !on?viable units. 3ii5 *urther, units which, in the opinion of the bank, are perceived to be non?viable even without undertaking a viability study are to be treated as non?viable. 42 Baroda Academy Inventing Methods for Igniting Minds
3iii5 8nits becoming sick on account of willful mismanagement, willful default, unauthorized diversion of funds, disputes among partners ' promoters etc. should not be considered for (estructuring and steps should be taken for recovery of bank dues.
Techno Econo1ic 0iabi*it+ St d+ 3i5 To ascertain the viability of a sick unit, detailed technical, economical, financial and managerial appraisal should be carried out to find out whether sufficient profit will be generated within the period of (estructuring and whether the unit will be able to achieve positive G!et worthG. 3ii5 The study so conducted should cover various aspects relating to technical, financial, commercial and managerial appraisal. )alient features of each of the above aspects are given below. Technica* A,,raisa* The detailed technical appraisal may cover following points/ 3i5 7hether the eBisting manufacturing process needs any up gradation or whether any new process should replace the eBisting one. If so, a detailed cost benefit analysis may be given. 3ii5 4eeping in view the market demand of the product, whether there is a need to increase production capacity to make the unit viable. 3iii5 7hether there is any need to change the product miB and whether the eBisting machinery needs modification'up gradation to meet the demands of changed product miB. 3iv5 If the sickness is due to fre&uent breakdown of machinery, whether any replacement'additional machinery is re&uired to optimize production. 3v5 7hether the production time can be reduced by change in layout, increasing production time, etc. 3vi5 7hether any change in the location of plant is re&uired keeping in view the availability of (aw $aterial, ower, 7ater, $arket, Aoading orts, *iscal Incentives offered by Government - +nvironmental aspect. %inancia* As,ects *ollowing aspects may be considered while undertaking a *inancial "ppraisal/ Baroda Academy Minds 43 Inventing Methods for Igniting
3i5 8ndertake a critical assessment of the various financial parameters like #urrent (atio, Debt?+&uity (atio, Ai&uidity osition, #omposition of #urrent "ssets and #urrent Aiabilities, #ash *low, *unds *low, (eceivable $anagement, Inventory $anagement etc. 3ii5 7herever re&uired, valuation of assets may be carried out to ascertain the true position. 3iii5 "scertain the funds re&uired for modernization 'eBpansion' upgradation of fiBed assets including lant and $achinery. 3iv5 "scertain the level of 7orking #apital re&uired for sustaining the level of production re&uired for achieving viability. 3v5 +stimate the margin re&uired to be brought in by promoters for meeting additional funds re&uirement. 3vi5 "scertain the sources of funds re&uired for the above, keeping in view the guidelines of (BI, Government of India, *inancial Institutions, Banks etc. in respect of romoterGs contribution, Debt +&uity (atio, $argin re&uirement etc. 3vii5 "scertain the repayment capacity of the unit keeping in view the eBisting and proposed cash flow estimates. 3viii5 +nsure that the assumptions on reliefs and concessions are in tune with the guidelines of (BI etc. 3iB5 If any merger or amalgamation of the unit with some other unit is envisaged, its feasibility should be eBamined from all angles. Mar(eting and Co11ercia* As,ects 3i5 +stimate the future demand for the product line of the unit and suggest whether diversification in product line is re&uired and if so, whether the eBisting machinery and its capacity can absorb the new products easily. 3ii5 7hether any change in the configuration i.e. packing, pricing, publicity etc. of the product is necessary to meet the market demand. 3iii5 #onsider changing the product miB keeping in view the profit margins and necessity for optimizing the profitability. 3iv5 #onsider whether any tie?up is re&uired with any eBternal agency for marketing and its cost benefit analysis may be worked out. Manageria* As,ects The following issues may be considered while appraising the $anagerial and "dministrative dimensions/ Baroda Academy Minds 44 Inventing Methods for Igniting
3i5 7hether the eBisting management is competent to continue the operation and revive the unit as per the scheme. If not, whether a change in the management group is proposed. If so, the nature of new group should be identified. 3ii5 7hether the managerial staff leading important functions like *inance, urchase, roduction, $arketing and ersonnel are competent, capable and efficient to turn around the unit. If not, identify the personnel that need to be changed, and the department that needs to be strengthened. 3iii5 7hether delegation of authority, reporting relationship etc. are in tune with the obEective of turnaround. If not, a functional managerial set?up is to be suggested. 3iv5 7hether Industrial (elations $anagement is effective and is efficient. If not whether the unitGs Aabour olicy, ersonnel olicy, ,($ olicy etc. needs a review. 3v5 7hether the systems, procedure, $I) etc. are functional and efficient. Dra-ing , o. a Restr ct ring Sche1e 3i5 Based on the various aspects of viability as above, a (estructuring scheme is to be prepared which gives inter?alia rofitability +stimates, #ash *low +stimates, roEected Balance )heet, roEected Internal (ate of (eturn etc. 3ii5 The above scheme should be prepared based on the various guidelines of (BI, BI*(, Bank etc. 3iii5 *or Industries falling under the purview of BI*(, the (estructuring package is to be prepared by an G%perating "gencyG to be appointed by the BI*(. 3iv5 *or other units, the (estructuring )chemes are to be drawn up by the financing banks and financial institutions. 3v5 In the case of consortium finance, the lead bank and the bank having the neBt largest share in the limits may associate in preparing the (estructuring proposal. 3vi5 In the case of multiple banking, two maEor banks having maEority share may prepare the package. 3vii5 "s per directives of (BI, the decision of the Aead Bank or the maEor banks in preparing the scheme should be binding on all other participating institutions and accepted by them. 3viii5 In order to sort out any problem that may arise in respect of co?ordination or other issues relating to formulation and implementation of the (estructuring package in respect of ))I'$)+ units, )tate level Inter?Institutional #ommittees 3)AII#5 have been set?up in all states. The committee is represented by )tate Industries Department, )tate *inancial #orporations, )tate Industrial Development #orporations, maEor banks operating in the Baroda Academy Minds 45 Inventing Methods for Igniting
)tate, IDBI, )IDBI, I#I#I, I*#I, (BI etc. The convener is R)I and its ,eriodicit+ is genera**+ E arter*+3 Genera* G ide*ines .or Dra-ing- , o. a Restr ct ring Sche1e 3i5 The important obEective that is to be kept in mind while drawing up a (estructuring )cheme is that the unit should be viable at the end of the (estructuring period. Tiability will mean ade&uate cash flow to meet its obligations and attaining positive net worth. 3ii5 The scheme should be prepared complying with all the guidelines of (BI, )tate Government, #entral Government in respect of (eliefs, #oncessions, )acrifices, romoters #ontribution, I((, D)#(, Debt +&uity (atio etc. 3iii5 "ll the institutions participating should agree to the schemes in toto. 3iv5 The institutions should obtain necessary authority'permission from their competent authority for granting of reliefs' concessions etc. % nded Interest Ter1 "oan 3i5 Interest debited to the cash credit account and not recovered so far should be segregated and transferred to a separate Term Aoan account called *unded Interest Term Aoan 3*ITA5.3ii5 !ormally repayment of such interest should be ensured between 0 to < years.3iii5 !ormally there should be no writing off of funded interest. ,owever, in eBceptional cases where writing off is considered absolutely unavoidable, no prior approval of the (BI would be necessary. $or(ing Ca,ita* Ter1 "oan The irregular portion in the cash credit account other than the unpaid interest, penal interest'damages should be converted into a 7orking #apital Term Aoan with a definite repayment schedule. Sharing o. Cash "osses 3i5 #ash losses would normally be reflected not only by irregularity in cash credit accounts with the banks, but also in non?payment of statutory dues, workersG dues and overdue creditors. *urther, cash losses are also likely to be incurred during the initial period of implementation of the (estructuring programme till the unit reaches the break?even level. 3ii5 The cash input re&uired for meeting a part of overdue statutory liabilities, workersG dues and pressing creditors forming part of the package may be shared between the participating banks and institutions on 92/92 basis. *urther, cash losses, i.e. losses from the time of implementation of the package upto the point of break?even as proEected, would be borne by the financial institutions which will also provide the margin money for additional working capital limits.
46
3iii5 7here no term lending institution is involved, the cash inputs mentioned above as also the proEected cash losses would be borne'shared by Industrial (econstruction Bank of India. 3iv5 Pena* Interest4da1ages charged to the Term Aoan account can be waived from the accounting year the unit started incurring cash losses continuously. Pena*t+4da1ages charged in cash credit account are to be waived. Right o. Reco1,ense This is the (ight available to the creditor to recover the amount of interest and installment sacrificed while accepting a (estructuring proposal after the unit has been revived fully. This is only a (ight and it is left to the option of the individual Banks'*inancial Institutions etc. whether to eBercise this right or not. ,owever, branches should incorporate this clause in the package and in case of any difficulty refer the matter to #orporate #entre. Co-ordination bet-een )an(s and Other %inancia* Instit tions 3i5 *or sanctioning and implementation of a viable (estructuring scheme, it is essential that there should be proper co?ordination and co?operation between various banks and financial institutions. 3ii5 "ll the participating banks and financial institutions should endeavour to take a positive approach towards the process of (estructuring. 3iii5 They should ensure that the scheme once approved by the Aead Bank must be got approved by the competent authority of each bank and reliefs and concessions granted thereafter. 3iv5 8sually all participating banks and financial institutions fall in line with the scheme. 3v5 7ith a view to avoiding delays in finalization of the (estructuring programme, the (eserve Bank of India has advised the term lending institutions to associate with maEor financing banks or at least the lead bank, where there is a formal consortium arrangement, in the eBercise right from the stage of taking up the viability study. This will give the financing banks an opportunity to eBpress their views about the various deficiencies in the management and conduct of accounts etc. The financing banks will also be able to give their reactions to the various concessions proposed in the (estructuring package. This would also facilitate to ensure that the working capital re&uirements indicated in the package are need?based and conform to the inventory and receivable norms as per the first method of lending permitted in such cases. This would further ensure that the concessions'reliefs re&uired to be provided by the banks as part of the package are e&uitable vis?V?vis those from the institutions and other agencies involved and also facilitate prompt compliance'implementation of the (estructuring programme, once it has been agreed upon in a Eoint meeting. 3vi5 7henever a term lending institution calls a Eoint meeting for the above purpose, the following guidelines should be adhered to/ 47 Baroda Academy Inventing Methods for Igniting Minds
3a5 "n eBperienced official should be deputed to participate as and when the term lending institutions take up the viability study and work out a package for the grant of assistance'reliefs. 3b5 The Bank should be represented at a sufficiently senior level whenever a Eoint meeting is convened, so that the decisions taken therein could be implemented &uickly by all the concerned banks after obtaining the clearance from the competent authority, where re&uired. 3vii5 (eserve Bank of India has further advised the term lending institutions that wherever the proposed (estructuring package involves reduction of interest, margin etc., which will need its prior approval, full details of such reliefs'concessions should be submitted to it at least one month in advance to the Eoint meeting. Sanctioning o. Restr ct ring Pro,osa*s 3i5 "ll (estructuring schemes involving certain reliefs ' concessions ' waivers ' write?off should be sanctioned by a competent authority in the bank irrespective of the fact that it is approved by BI*('consortium etc. 3ii5 The sanction should specifically authorise the granting of proposed concessions 'reliefs and also granting of further financial assistance in the form of Term Aoans - 7orking #apital re&uirements. ReE ire1ents o. Sic(4$ea( &nits "s per (eserve Bank of India guidelines 7orking #apital re&uirements of sick'weak units may be assessed on the basis of *irst $ethod of Aending. Monitoring 8 %o**o-- , o. Restr ct ring Sche1e 3a5 $ere sanctioning of a (estructuring package would not revive a sick unit. It should be ensured by all parties that the scheme is implemented both in letter and spirit. 3b5 The financing banks should ensure that the reliefs ' concessions are granted eBpeditiously and additional financial assistance, if any, is sanctioned at the earliest. 3c5 %n their part the management of the sick unit, should eBtend fullest co?operation in eBecuting of documents, getting the various sanctions etc. from the Board and other *inancial Institutions, bringing of margin money, providing corporate guarantee wherever re&uired etc. 7herever personal guarantee of Directors is stipulated it must be obtained without fail. 3d5 If our bank is the Aead Bank, we should call a meeting of the participating banks for finalizing modalities of implementation of the scheme.
48
3e5 "ll relevant documents properly stamped and eBecuted are obtained and verified by Aegal Department. 3f5 The mortgages, wherever applicable, have been properly created and are valid and enforceable. 3g5 7herever re&uired, registration with (egistrar of #ompanies etc. are done and certificates are kept on record. 3h5 The disbursements are made as per the scheme and as per progress in implementation of the scheme. 3i5 Fuarterly progress report on the progress of implementation of the scheme should be submitted to #entral %ffice as per guidelines issued from time to time. 3E5 Branches should conduct regular )tock Inspection etc. and maintain a close monitoring on the conduct of the account. "ll usual guidelines issued by the bank from time to time regarding control, follow?up and monitoring of such accounts should be adhered to. 3k5 Branches should obtain from the units monthly information covering the following pointsD i5 roduction ? &uantity ' values 3product wise5 ii5 )ales ? &uantity ' value. iii5 rofitability and Internal surplus. iv5 7orking #apital $anagement e.g. collection of debts, maintenance of inventory, creditors etc. This information may be called at regular intervals.v5 osition of Bank borrowings.vi5 Industrial relations.vii5 ower supply position. 3l5 The units should submit other usual statements as per our re&uirements. The information so obtained should be studied carefully and critically. The (egional'Honal %ffice should be kept informed of the progress made since implementation of the nursing programme. 7herever variance is observed, comments should be furnished and modifications, if any, in the nursing programme suggested. 3m5 Branches should have continuous rapport with the borrower and understand the difficulties, if any. They should particularly keep a watch on the factors which were responsible for the sickness of the unit. 7herever felt necessary, branches should approach (egional %ffice for arranging on the spot study of the working of the unit. Reviva* o. Sic( &nits b+ Merger or A1a*ga1ation o. the Fea*th+ &nits In some cases it is possible that some healthy unit may show an interest in taking over the management of the sick unit, either by way of merger or by amalgamation. Identi.ication o. e;,erts to 1anage sic( nits / 1. There are units in small, medium and large sectors which become sick due to inefficient management or other management deficiencies' weaknesses. )uch units can be rehabilitated by handing over their management to persons who are eBperts in management, finance and'or technical areas. There are also turn?around specialists available today. Bank may in suitable cases hand over the management of sick units to 49 Baroda Academy Inventing Methods for Igniting Minds
management eBperts or turn?around specialists with the consent of the borrowers or under the provisions of )ecuritization "ct 6226. Bank may prepare a list of turn?around specialists and management eBperts who would be willing to manage the sick units financed by the Bank with a view to rehabilitate them. 6. Honal $anagers shall prepare lists of turn?around specialists and management eBperts and make suggestions to the corporate centre in the case of individual accounts. The specialists ' eBperts will charge their professional fees which may be substantial. The fee will have to be borne by the borrower till the unit generates surplus after meeting the current dues. !o ownership right of ' lien on the unit will vest with the specialist' eBpert. 0. "ccounts with eBposure below (s. 69 lakhs may not be considered for rehabilitation with the involvement of outside eBperts.
Re,hase1ent (ephasement is rescheduling with enhancing the repayment period only. In genuine cases of (etail loans granted to individuals, the rephasement can be considered by (egional "uthority provided repayment period shall not eBceed ;2 years of the age of borrower in respect of salaried individuals and ;9 years of age in respect of others. (ephasement can be considered for Term Aoan and Demand Aoan for a maBimum of ; months. %ther terms and conditions shall not be changed ' modified. Re-sched *e1ent It is changing the attern of debt service obligation from e&uated monthly installment to ballooning schedule or descending schedule without considering any enhancement in repayment period and &uantum of outstanding. 1. 6. 0. :. (etaining eBisting repayment period. !ot eBceeding the eBisting outstanding eBposure. 7ithout changing the nature and &uantum of eBisting credit facilities. 7ithout sanctioning any fresh credit facility or additional limit whether within the eBisting outstanding eBposure.
Restr ct ring In (estructuring following may be considered @ 1. 6. 0. :. #hanging eBisting repayment period and 'or #hanging eBisting outstanding eBposure and' or #hanging the nature and &uantum of eBisting credit facilities )anctioning any fresh credit facility or additional limit whether within the eBisting outstanding eBposure or beyond. 50 Inventing Methods for Igniting
9. ;. <.
otentially viable units may be assisted by restructuring or sanctioning additional finance after satisfying about the viability of the unit. *resh credit re&uirements shall be done after critically analyzing funds flow in conEunction with cash flow of the unit ' borrower. I)pecial Investigative "uditJ to ensure that there is no diversion of funds.
A restr ct ring o. an acco nt 1a+ invo*ve G 1. 6. 0. :. 9. ;. <. (efund of penal interest. (eduction in rate of interest 3with or without retrospective effect5. *unding of core irregularity as working capital term loan 37#TA5. *unding of unpaid interest as funded interest term loan 3*ITA5. (eschedulement of installments in eBisting term loan and ' or, *resh ' additional term loan ' working capital facilities. !o restructuring of willful defaulters accounts or accounts where frauds are committed shall be attempted. =. "ll #-I ' )$+ ' riority )ector and (etail borrowal accounts may be restructured. The restructuring ' rescheduling with or without sacrifice in respect of principal and ' or interest, may be considered either @ Before commencement of commercial production, "fter commencement of commercial production but before the asset has been classified as sub standard, "fter commencement of commercial production and after the assets has been classified as sub standard. C t )ac( Arrange1ent " borrowerGs account may have become ! " due to unserviced interest, A.#. devolvement, eBcess allowed to meet statutory dues, wages, insurance premium etc. or reduction in drawing power. "ny credit coming into the account will, in the routine course, be appropriated completely towards the over?dues. The borrower under such circumstances opens a current account with another bank and routes all sales proceeds through that account. #onse&uently, the bank not only fails to recover its legitimate dues but also faces the problem of erosion of security. 8nder this circumstance, the bank can consider allowing operations, on merits, till a revival package is prepared and sanctioned or an acceptable compromise proposal is submitted by the borrower, upto sanctioned amount or outstanding with a suitable cut?back, say, ranging from 9 to 12O 3or more5 of the credits in the account to reduce'wipe?out the eBcess' overdues in the account. +Bperience shows that substantial amount can be recovered by allowing operations with cut?back arrangement. "ll (egional $anagers are authorised to allow operations in the account up to sanctioned limit or the outstanding with suitable cut back arrangement which would eventually lead to reduction in the outstanding in the account. Branch $anagers are allowed to permit operations in such account with a cut back arrangements for period upto 0 months from the date of such cut back arrangement permitted by them. Fand Fo*ding O,erations 7hile identifying and implementing (estructuring package, Gholding operationG for a 51 Baroda Academy Inventing Methods for Igniting Minds
period of siB months may be considered. This will allow small scale units to draw funds from the cash credit account at least to the eBtent of their deposit of sale proceeds during the period of such Gholding operationG. This w i l l f a c i l i t a t e t h e s m o o t h r u n n i n g o f the business
TEST O% &NDERSTANDING )T"T+ *%AA%7I!G )T"T+$+!T T(8+ %( *"A)+ 1. In case of reschedulement of loan account, total repayment period is eBtended. 6 .In case of rephasement of loan account, the repayment period is enhanced . 0. (estructuring of Aoan account is a combination of rephasement and reschedulement along with additional eBposure, acceptance of sacrifice , segregation of limits into 7#TA, *ITA . : .In case of cut back arrangement entire amount deposited by borrower is allowed to be withdrawn for business purpose 9 .#ut Bank arrangement is a long term measure for recovery in ! " account. ; .In case of (etail Aoan, account must be classified as ! " , immediately after reschedulement ' rephasement. <. (estructuring'(ephasement' (eschedulement can be done only in )tandard category accounts. =. If restructuring'rephasement'reschedulement is done in ! " account, account will become standard provided there is satisfactory performance of recovery for a period of 16 months from the date when first installment 'interest has become due as per revise repayment schedule. 52 Baroda Academy Inventing Methods for Igniting Minds
>. To get benefit of special treatment and to keep the account in same category, restructuring of dues must be done before commencement of production. 12. (ephasement'reschedulement etc can be considered in case of ! " accounts where activity has become non?viable. F !o "ns 1 6 *alse True 0 True : 9 ; *alse *alse True < = *alse True > 12 *alse *alse
53
SME DE)T RESTR&CT&RING ' ic( )ites #oncept of (estructuring #auses of )ickness? Internal causes- +Bternal causes Determining Tiability of )ick 8nits DE)T RESTR&CT&RING ENTERPRISES MECFANISM %OR MICRO SMA"" AND MEDI&M
Bank has come out with a policy on Debt (estructuring $echanism for $icro )mall and $edium +nterprises on 6:.16.6216. Broad parameters for restructuring are as under/ 23 Ob?ective The obEective of this olicy is to ensure timely and transparent Debt (estructuring $echanism 3 D($ 5 for restructuring the debts of viable $)$+s facing problems, outside the purview of BI*(, D(T, #D( and other legal proceedings. In particular, the framework will aim at preserving viable $)$+s that are affected by certain internal and eBternal factors and minimize the losses to the creditors 3the Bank5 and other stakeholders through an orderly and coordinated debt restructuring mechanism or rehabilitation package. 53 Sco,e 8 A,,*icabi*it+ The $icro, )mall - $edium +nterprises Development 3$)$+D5 "ct, 622; which has come into effect from 6nd %ctober, 622; classifies enterprises into three categories viz., $icro, )mall and $edium based on investment levels ,are covered. This policy intends to cover basically Tiable or otentially Tiable $)$+ units 3both manufacturing and non?manufacturing 5 that are facing problems which can be overcome with timely remedial 'corrective action. These problems may be due to cost'time overrun before commercial production, mismatch in cash flows resulting in temporary li&uidity crunch, eBternal factors etc. The guidelines enumerated below may generally be made applicable to accounts which are showing signs of slippage or have slipped to ! " category but have not become PunviableQ. In such accounts, timely decision on restructuring would be helpful. These accounts are more likely to be )tandard and )ub )tandard accounts but instances of even doubtful accounts having potential viability cannot be ruled out. (estructuring may or not involve additional funding. In such accounts, we may be re&uired to permit P,olding on operationsQ in the account till decision is taken on the restructuring proposal. M *or eligible $)$+s under #onsortium'$ultiple Banking "rrangement the Bank with the maBimum outstanding may work out the restructuring package along with the Bank having the second largest share. Baroda Academy Minds 54 Inventing Methods for Igniting
M In case of multiple banking'syndicate'consortium accounts where restructuring can be considered under #orporate Debt (estructuring )cheme 3#D()5, we may make effective use of #D( mechanism. In such cases restructuring may be considered on the basis of rehabilitation scheme worked out and approved by #D( +mpowered Group.M )uit filed cases are eligible if a minimum of <9O of the lenders 3by value5 in case of multiple banking' syndicate'consortium accounts consent for such restructuring. M Borrowers who have been identified as willful defaulters in terms of (BI directives 3"nneBure I5 may generally not be considered for restructuring where the default is due to diversion of funds. (estructuring may be however considered when the funds diverted have been brought back and'or there is a change in management and'or where the diversion is intra #ompany. ,owever, restructuring need not be withheld where even inter? #ompany diversion had taken place. ,owever, in such instances, the restructuring would be subEect to such diversion being brought back within a reasonable time and the same will be decided on a case to case basis. It shall also be our endeavour to address this issue by stipulation of additional margin'contribution, security etc. and wherever possible - feasible and placing suitable covenants to ensure non?recurrence in future keeping in mind safety of bankJs funds. Tiability and the ability to service after restructuring shall be the important criteria for determining eligible cases. 73 De.inition o. Sic( Micro 8 S1a** Enter,rises and Medi 1 Enter,rises3 Medi 1 Sector Enter,rises/ "s per eBtant (BI guidelines, a $edium )ector +nterprise may be classified as sick if/ i5 any of the borrower accounts of the unit remains sub?standard for more than ; months i.e., principal or interest, in respect of any of its borrowal accounts has remained overdue for a period eBceeding one year. The re&uirement of overdue period eBceeding one year will remain unchanged even if the present period for classification of an account as sub? standard, is reduced in due course/ or ii5 there is erosion in the net worth of the borrower due to accumulated cash losses to the eBtent of 92 per cent of its net worth during the previous accounting year/ and iii5 the unit has been in commercial production for at least 6 years " $icro and )mall +nterprise 3 $)+5 unit may be classified as sick when/ a5 any of the borrowal account of the enterprise remains ! " for three months or more or b5 there is erosion in the net worth due to accumulated losses to the eBtent of 92 per cent of its net worth during the previous accounting year. The decision on viability of the unit should be taken at the earliest but not later than 0 months of unit becoming sick under any circumstances. 55 Baroda Academy Inventing Methods for Igniting Minds
:. E*igibi*it+ criteria The following entities would be eligible for Debt (estructuring $echanism 3D($5/ 3i5 "ll non?corporate $)$+s irrespective of the level of dues to the Bank. 3ii5 "ll #orporate $)$+s enEoying banking facilities solely from our Bank irrespective of the level of dues to the bank. 3iii5 "ll corporate $)$+s, which have funded and non?funded outstanding up to (s. 12 #rore under multiple ' consortium banking arrangement with our Bank and other Banks. 3iv5 "ccounts classified as )ub?)tandard or Doubtful would also be eligible but accounts classified as P Aoss "ssetsQ will not be eligible for D($. 3v5 #ases where %perating "gency has been appointed, restructuring may be considered on the basis of the (ehabilitation )cheme worked out by the %perating "gency. 3vi5 "ccounts where recovery suits have been filed or action under )"(*"+)I "ct has been initiated will generally not be considered eligible for restructuring under D($ for $)$+s. ,owever, in eBceptional cases General $anager of the Hone ' #orporate %ffice may permit restructuring in such cases. 3vii5 In respect of units referred to #D( mechanism, restructuring may be considered on the basis of scheme worked out and approved by #D( +mpowered Group. 3viii5 "ccounts involving willful defaults, fraud and malfeasance will not be eligible for restructuring under these guidelines. 3iB5 7here funds diverted earlier have been brought back into thebusiness and'or there is change of management and'or where the diversion is intra company, restructuring may be undertaken on a case to case basis. ,owever, restructuring'rehabilitation need not be withheld where intra company or even inter?company diversions have taken place, provided the amount diverted is brought back within a reasonable time. )uch restructuring would be decided on a case to case basis, at the sole discretion of the bank. But additional margin' contribution, security etc. wherever possible feasible and suitable covenants may be considered as per BankJs discretion to ensure both safety of BankJs funds and non?recurrence in future. :3 0iabi*it+ Criteria .or S1a** and Micro Enter,rises Tiability and the ability to service the debt after restructuring shall be the important criteria for determining eligible cases. otentially Tiable )ick $)$+ 8nit. a. " unit may be regarded as potentially viable if it would be in a position to continue to service its repayment obligations as agreed upon including those forming part of the package, after implementing a relief package spread over a period not eBceeding 12 years if it is engaged in infrastructure activities and @ <? years in case of other 8nits from the commencement of the package from Banks' *inancial Institutions' Government 3#entral')tate5 and other concerned agencies, as may be necessary, without the help of the concessions after the aforesaid period.
56
b. The repayment period for restructured 3past5 debts including moratorium period if any should not eBceed 19 years in case of infrastructure "dvances and 12 years in case of other "dvances from the date of implementation of the package. c. *inancial arameters applicable for D($ are given in d. Based on the norms specified above, it will be for the banks'financial institutions to decide whether a sick $)$+ unit is potentially viable or not. i5 *or $edium )ector +nterprises/ The decision on viability of a unit should be decided &uickly but not later than ?2:? months and made known to the unit and others concerned at the earliest. ii5 *or $icro - )mall +nterprises 3$)+s5 The decision on viability of the unit should be taken at the earliest but not later than 0 months of becoming sick under any circumstances and made known to the unit and others concerned at the earliest. e. (estructuring'(ehabilitation scheme for $)$+ sector to be implemented within three months from date of receipt of full fledged applications alongwith copies of "udited Balance sheets for the last ?0? years and all the necessary relevant papers re&uired to prepare the scheme. f. articulars D($ for )$+s $inimum "verage D)#( 1.69 $aBimum period within which the unit should become Tiable < years $aBimum repayment period of all term loans ' *ITA '7#TA 12 years $inimum romotersJ #ontribution 19O of the long term re&uirement of funds plus the monetary value of the sacrifices made by the lenders,out of this at least 92O to be braught in up front and balance in a period of 16 months. g. " unit should be declared unviable only if the viability status is evidenced by a viability study. ,owever, it may not be feasible to conduct viability study in very small units and will only increase paper work. "s such for micro 3manufacturing5 enterprises, having investment in plant and machinery upto (s.9 lakh and micro 3service5 enterprises having investment in e&uipment upto (s. 6 lakh, the Branch $anager may take a decision on viability and record the same, alongwith the Eustification. The declaration of the unit as unviable, as evidenced by the viability study, should have the approval of the neBt higher authority' present sanctioning authority for both micro and small units. In case such a unit is declared unviable, an opportunity should be given to the unit to present the case before the neBt higher authority. The A thorit+ .or ,resenting the case to the ne;t higher a thorit+ is as nder/ The "uthority empowered to sanction the loans and advances to the units including additional amount proposed under restructuring package shall have the powers for presenting the case to the neBt ,igher "uthority. ,owever, the "uthority who have 57 Baroda Academy Inventing Methods for Igniting Minds
sanctioned the original proposal or proposal for increase in limits will not sanction the rehabilitation'restructuring proposal.In such cases, restructuring ' rehabilitation proposals will be approved by immediate neBt ,igher "uthority and in case of Honal %ffice Aevel #redit #ommittee 3H%##5 such restructuring ' rehabilitation proposal will be sanctioned by the #orporate %ffice Aevel #redit #ommittee headed by the +Becutive Director or as the case may be at B##, $umbai. The neBt authority should take such decision only after giving an opportunity to the promoters of the unit to present their case. *or sick units declared unviable, with credit facilities of (s. 1crore and above, a Co11ittee a,,roach as detai*ed above are to be ado,ted as the #ommittee approach will improve the &uality of decision as collective wisdom of the members shall be utilized, especially while taking decision on rehabilitation proposals. Decision of the above higher authority should be informed to the promoters in writing. The above process should be completed in a time bound manner not later than @ 20 @ months. The concerned (egional ,ead may, however, take decision in cases of malfeasance or fraud without following the above procedure. <3 Need .or Restr ct ring 4 Rehabi*itation " need for restructuring of an asset could arise due to any one of the following internal ' eBternal problems faced by the unit resulting in incipient sickness and borrowerJs inability to meet his financial commitments to the Bank Internal '+Bternal problems/ M Technical problems in production ' temporary break down of plant M #ommercial compulsions caused by demand and supply position, pricing and market. M $anagerial inade&uacies such as delay in appointing technical'professional staff. M +conomic factors @ eBternal in nature caused by changes in Government policies. M *inancial factors such as cost?over run in proEect implementation resulting in li&uidity crunch, uneBpected payments, delay in release of Bank finance etc. M Delay in commencement of commercial production. Temporary cash flow aberration/ Temporary cash flow aberration may also arise due to any of the following aspects/ a. !on?release of subsidies'grants by GovernmentD b. Inade&uacy of own funds'long term fundsD c. Increase in credit on receivablesD d. Decrease in trade creditD e. )purt in prices of raw materials, other inputsD f. Decrease in selling price of finished goodsD g. Disturbance in production due to strikeD h. ower cuts, maEor repairs, etc.D i. "ccumulation of inventories due to bulk purchases, temporary demand constraints, transport bottlenecksD etc. Due to any of the above problems, the borrowers may not be in a position to service interest or installments or meet their commitments under Aetters of #redit or Guarantees issued. Baroda Academy Minds 58 Inventing Methods for Igniting
63 Identi.ication o. acco nts .or Debt Restr ct ring Mechanis1 =DRM> )ickness should be arrested at the incipient stage itself. "ppropriate measures should be taken by the branches to ensure this. " close watch should be kept on the account operations. Borrowers should be advised about their primary responsibility to inform the Bank of any problems faced by them which could result in the unitJs sickness so as to restore the unit to normal health at the earliest. +arly detection of sickness and prompt remedial action are very crucial. +ffective monitoring of the operations of the unit as well as the borrowal account3s5 with the Bank is essential to identify the units showing symptoms of sickness. Deteriorating &uality of an asset is detectable well in time through a proper system of asset classification. )lippage of a standard account into watch category or substandard asset or any of the early warning signals should immediately be followed up with the borrower'unit. !ecessary corrective'remedial action should be initiated immediately. The action needs to be pre?emptive for an early and effective restoration of health to a unit turning sick or showing signs of incipient sickness. A3 Restr ct ring 4 Rehabi*itation Methods (estructuring may involve/ M (e?phasement of recovery schedule in term loan accounts for both interest and installment3s5. M 7aiver'concessions in interest charged with or without recompense. M *unding the un?serviced interest'irregular portion in the working capital facilities 'term loan facilities 37#TA'*ITA5. M (eduction in margin for funded and non?funded limits. M (ealignment of limits from pre?sale to post?sale and vice versa or from funded to non? funded limits. M (eassessment of the credit facilities including the working capital. )uch a restructuring may be/ M *or a short or medium term M 7ith or without additional term or working capital funding normally with additional financing in genuine cases for Balancing +&uipment, $odernisation, #ritical #apital +Bpenditure 3#" +S5 essential to make business 8nit viable 'operationalise etc. 7orking #apital may be re&uired over short'medium'long term basis within the restructuring'rehabilitation frame work. B32 Resched *ing/ It is changing the attern of debt service obligation from e&uated monthly installment to ballooning schedule or descending schedule without considering any enhancement in repayment period and &uantum of outstanding/ i5 (etaining the eBisting repayment period. ii5 !ot eBceeding the eBisting outstanding eBposure. iii5 7ithout changing the nature and &uantum of eBisting credit facilities. Baroda Academy Minds 59 Inventing Methods for Igniting
iv5 7ithout sanctioning any fresh credit facility or additional limit beyond the eBisting outstanding eBposure. B35 Re,hase1ent/ (ephasement is rescheduling with enhancing the repayment period only.
B37 Restr ct ring/ In (estructuring following may be considered/ a. (ephasement and ' or (escheduling. b. #hanging eBisting outstanding eBposure, and ' or c. #hanging the nature and &uantum of eBisting credit facilities d. )anctioning any fresh credit facility or additional limit whether within the eBisting outstanding eBposure or beyond. B39 Re,eated Re-str ct ring/ The account is eBpected to revert to normal health during the stipulated time?frame when the (estructuring is done for the first time.,owever, further restructuring may be necessitated in some cases of genuine difficulties beyond the comprehension of the borrower like change in Govt. policies, shift in supply'demand, etc.,owever, the special dispensation for asset classification would be available only when the restructuring is done for the first time. B3: Fo*ding on O,erations %or Medi 1 Sector Enter,rises/ 7hile identifying and implementing the restructuring'rehabilitation package, Pholding operationQ may be considered for a period of 2; months. This will allow small?scale units to draw funds from the cash credit account at least to the eBtent of their deposit of sale proceeds during the period of such Pholding operationQ *ess pre?agreed cutbacks to reduce overdues. M ,olding on %perations essentially implies/ ? #ontinuous operations in the account, like opening fresh A#s to the eBtent of reduction in devolvement, even if devolvement is not fully cleared. ? (oll over of A# opened by the Bank. ? "llowing operations in the cash credit account despite interest'forced debits not being cleared. ? *all in drawing power etc. M )uch ,olding on %perations may generally be permitted with a cut back of say about 12? 19O towards reduction in overdues.
60
,olding on %perations can also be permitted even without cut back arrangement on case to case basis and merits of the case. %or Micro and S1a** &nits/ ". Fandho*ding stage/ 23 Timely and ade&uate assistance to $)+s and rehabilitation effort should begin on a proactive basis when early signs of sickness are detected. This stage would be termed as Hhandho*ding stage! as de.ined be*o-3 This will ensure intervention by banks immediately after detecting early symptoms of sickness so that sickness can be arrested at an early stage. "n account may be treated to have reached the Ihandholding stageJD if an+ of the following events are triggered/ a. There is delay in commencement of commercial production by more than siB months for reasons beyond the control of the promoters. b. The #ompany incurs losses for two years or cash loss for one year, beyond the accepted timeframeD c. The capacity utilization is less than 92O of the proEectedlevel in terms of &uantity or the sales are less than 92O of the proEected level in terms of value during a year. 53 The bank branches should take timely remedial action which includes an en&uiry into the operations of the unit and proper scrutiny of accounts, providing guidance ' counselling services, timely financial assistance as per established need and also helping the unit in sorting out difficulties which are non @financial in nature or re&uiring assistance from other agencies. In order to ensure timeliness for banks for taking remedial action ' measures in Ihandholding stageJ, the handho*ding s ,,ort to s ch nits sho *d be nderta(en -ithin a 1a;i1 1 ,eriod o. t-o 1onths o. identi.ication o. s ch nits . 2@3 Techno Econo1ic 0iabi*it+ St d+ 3i5 To ascertain the viability of a sick unit, detailed technical,economical, financial and managerial appraisal should be carried out to find out whether sufficient profit will be generated within the period of rehabilitation and whether the unit will be able to achieve positive I!etworthJ. 3ii5 In "ccounts where aggregate eBposure 3eBisting'proposed5eBceeds (s. %ne #rore, T+T study to be carried out by outside empanelled "gency with our Bank'$ember Banks or our BankJs roEect *inance Department, B##, $umbai. In respect of "ccounts where such eBposure eBceeds (s. *ive #rores such T+T report to be vetted by our BankJs ' $ember BankJs roEect *inance Division. In respect of "ccounts with eBposure upto (s. %ne #rore, In ,ouse report submitted by the Borrower can be accepted subEect to our usual scrutiny and if necessary the same may be vetted by our roEect *inance Division. 3iii5 The study so conducted should cover various aspects relating to technical, financial, 61 Baroda Academy Inventing Methods for Igniting Minds
commercial and managerial appraisal. 223 E*igibi*it+ criteria .or restr ct ring o. advances 223232 Bank may restructure the accounts classified under GstandardG,Gsub?standardG and GdoubtfulG categories. 223235 Bank can not reschedule ' restructure ' renegotiate borrowal accounts with retrospective effect. 7hile a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The process of re?classification of an asset should not stop merely because restructuring proposal is under consideration. In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of regulatory concern. 223237 (estructuring of debt can take place only with the formal consent' application of the debtor. ,owever, the process of restructuring can be initiated by the bank in deserving cases subEect to customer agreeing to the terms and conditions. 223239 !o account will be taken up for restructuring by the bank unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the bank based on the acceptable viability benchmarks as mentioned above. The accounts not considered viable should not be restructured and bank should accelerate the recovery measures in respect of such accounts. "ny restructuring done without looking into cash flows of the borrower and assessing the viability of the proEects ' activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite regulatory concerns'action. 223 5 Asset c*assi.ication nor1s (estructuring of advances could take place in the following stages / 3a5 before commencement of commercial production'operationD 3b5 after commencement of commercial production'operation but before the asset has been classified as Isub?standardJD 3c5 after commencement of commercial production'operation and the asset has been classified as Isub?standardJ or IdoubtfulJ. 223532 The accounts classified as Istandard assetsJ should be immediately reclassified as Isub?standard assetsJ upon restructuring 3subEect to provisions contained at ara !o 11.0 5. 223535 The non?performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per eBtant asset classification norms with reference to the pre?restructuring repayment schedule. Baroda Academy Minds 62 Inventing Methods for Igniting
223537 "ll restructured accounts which have been classified as nonperforming assets upon restructuring, would be eligible for up?gradation to the IstandardJ category after observation of Isatisfactory performanceJduring one year period from the date of first payment of interest or installments in terms of the restructuring package 3Ispecified periodJ5. )atisfactory performance during the specified period means that i5 in case of cash credit accounts, the account should not be out of order for more than >2 days during the specified period and there should not be any over dues at the end of the specified period. ii5 in case of term loans no payments should remain overdue for more than >2 days during the specified period and there should be no over dues at the end of the specified period. 223539 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured accountwould be governed as per the applicable prudential norms with reference to the pre?restructuring payment schedule. 22353: "ny additional finance may be treated as Istandard assetJ, during the specified period. ,owever, in the case of accounts where the pre restructuring facilities were classified as Isub?standardJ and IdoubtfulJ ,interest income on the additional finance should be recognized only on cash basis. If the restructured asset does not &ualify for upgradation at the end of the above specified period, the additional finance shall be placed in the same asset classification category as the restructured debt. 22353< In case a restructured asset, which is a standard asset on restructuring, is subEected to restructuring on a subse&uent occasion, it should be classified as substandard. If the restructured asset is a substandard or a doubtful asset and is subEected to restructuring, on a subse&uent occasion, its asset classification will be reckoned from the date when it became ! " on the first occasion. ,owever, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subEect to satisfactory performance. 2237 S,ecia* Reg *ator+ Treat1ent .or Asset C*assi.ication The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated in ara 11.6 above , will be available to the borrowers engaged in important business activities, subEect to compliance with certain conditions as enumerated in ara 11.0.1 below. )uch treatment is not eBtended to the following categories of advances/ i5 #onsumer and personal advancesD ii5 "dvances classified as #apital market eBposuresD iii5 "dvances classified as commercial real estate eBposures The asset classification of these three categories accounts as well as that of other accounts which do not comply with the conditions enumerated in para 11.0.1 will be governed by the prudential norms in this regard described in ara 16 herein below. Baroda Academy Minds 63 Inventing Methods for Igniting
223732 E*e1ents o. S,ecia* reg *ator+ .ra1e-or( The special regulatory treatment has the following two components/ i5 Incentive for &uick implementation of restructuring package. ii5 (etention of the asset classification of the restructured account in the pre?restructuring asset classification category. 22373232 Incentive .or E ic( i1,*e1entation o. the restr ct ring ,ac(age "s stated in para 11.1.6, during the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. ,owever, as an incentive for &uick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which eBisted when the reference was made to the #D( #ell in respect of cases covered under the #D( $echanism or when the restructuring application was received by the bank in non?#D( cases. i5 7ithin 162 days from the date of approval under the #D( mechanism. ii5 7ithin >2 days from the date of receipt of application by the bank in cases other than those restructured under the #D( $echanism. 22373235 Asset c*assi.ication bene.its )ubEect to the compliance with the undernoted conditions in addition to the adherence to the prudential framework laid down in para 11.6 i5 In modification to para 11.6.1, an eBisting Istandard assetJ will not be downgraded to the sub?standard category upon restructuring. ii5 in modification to para 11.6.6, during the specified period, the asset classification of the sub?standard ' doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period. ,owever, these benefits will be available subEect to compliance with the following conditions/ i5 The dues to the bank are Ifully securedJ by tangible security. The condition of being fully secured by tangible security will not be applicable in the following cases/ a5 $)+ borrowers, where the outstanding is upto (s. 69 lac. b5 Infrastructure proEects, provided the cash flows generated from these proEects are ade&uate for repayment of the advance, the financing bank3s5 have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows. c5 Dues of $icro *inance Institutions 3$*Is5 restructured up to $arch 01, 6211. ii5 The unit becomes viable in 12 years, if it is engaged in infrastructure activities, and in < years in the case of other units. iii5 romotersJ sacrifice and additional funds brought by them should be a minimum of 19O of banksJ sacrifice. iv5 ,owever, based on the representations received from Banks and Indian BanksJ "ssociation that corporate under stress find it difficult to bring in the promoters share of 64 Baroda Academy Inventing Methods for Igniting Minds
sacrifice and additional funds upfront on some occasions, it was decided by (BI that / a5 The promoterJs sacrifice and additional funds re&uired to be brought in by the promoters should generally be brought in upfront. ,owever, if banks are convinced that the promoters face genuine difficulty in bringing their share of the sacrifice immediately and need some eBtension of time to fulfill their commitments, the promoters could be allowed to bring in 92O of their sacrifice, i.e., 92O of 19O, upfront and the balance within a period of one year. b5 ,owever, in case the promoters fail to bring in their balance share of sacrifice within the eBtended time limit of one year, the asset classification benefits derived by banks will cease to accrue and the banks will have to revert to classifying such accounts as per the asset classification norms specified under ara !o. 11.6 of this policy document. c5 romoterJs contribution need not necessarily be brought in cash and can be brought in the form of de?rating of e&uity, conversion of unsecured loan brought by the promoter into e&uity and interest free loans. d5 ersonal guarantee is offered by the promoter eBcept when the unit is affected by eBternal factors pertaining to the economy and industry. e5 The restructuring under consideration is not a Irepeated restructuringJ as defined in ara >.: of this policy document. 2239 Inco1e recognition nor1s Interest income in respect of restructured accounts classified as Gstandard assetsG will be recognized on accrual basis and that in respect of the accounts classified as Gnon? performing assetsG will be recognized on cash basis. 223: Provisioning nor1s 223:32 !ormal provisions Bank will hold provision against the restructured advances as per the eBisting I("# norms. 223:35 rovision for diminution in the fair value of restructured advances 3i5 (eduction in the rate of interest and 'or reschedulement or rephasement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. )uch diminution in value is an economic loss for the bank and will have impact on the bankJs market value of e&uity. It is, therefore, necessary for the bank to measure such diminution in the fair value of the advance and make provisions for it by debit to rofit - Aoss "ccount. )uch provision should be held in addition to the provisions as per eBisting provisioning norms as indicated in para =.:.1 above, and in an account distinct from that for normal provisions. *or this purpose, PThe erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. 65 Baroda Academy Inventing Methods for Igniting Minds
Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the eBisting rate charged on the advance before restructuring and the principal, discounted at a rate e&ual to the bankJs B A( or base rate 3whichever is applicable to the borrower5 as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuringU. Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate e&ual to the bankJs B A( or base rate 3whichever is applicable to the borrower5 as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuringU. 3ii5 In the case of working capital facilities, the diminution in the fair value of the cash credit 'overdraft component may be computed as indicated in para 3i5 above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components3 7orking #apital Term Aoan and *unded Interest Term Aoan5 would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components. 3iii5 In the event any security instrument is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1/- till maturity of the security. This will ensure that the effect of charging the economic sacrifice to the rofit - Aoss account is not negated. 3iv5 The diminution in the fair value may be re?computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in B A( or base rate 3whichever is applicable to the borrower5, term premium and the credit category of the borrower. #onse&uently, bank will have to provide for the shortfall in provision or reverse the amount of eBcess provision held in the distinct account. 3v5 Due to lack of eBpertise it would be difficult to ensure computation of diminution in the fair value of advances by the branches. The bank has the option of notionally computing the amount of diminution in the fair value and providing there for, at .ive ,ercent of the total eBposure, in respect of all restructured accounts where the total dues to bank are less than r ,ees one crore till the financial year ending $arch 6210. The bank has decided to opt for the simplified system for making provision in small accounts 3less than (s.1 crore i.e. making provision of 9O of total eBposure in restructured accounts. The position would be reviewed thereafter5. 253 Pr dentia* Nor1s .or Restr ct red Non-Man .act ring &nits3 8nits other than manufacturing can also be restructured'rescheduled subEect to their satisfying the basic test of viability. 66 Baroda Academy Inventing Methods for Igniting Minds
I1,ortant Note Reserve )an( o. India directives 4 g ide*ines iss ed .ro1 ti1e to ti1e -i** be a,,*icab*e and o,erative and -i** have overriding stat s over an+ other instr ctions . 10. Re*ie.s 4 Concessions to be e;tended and Sacri.ice !orms for grant of (eliefs'#oncessions are furnished below and are common for $)$+s under (estructuring as well as (ehabilitation. *or the sake of clarity we state here that the term (estructuring refers to the borrowal facilities 3*und Based as well as !on?*und Based5 of the unit with us'other *inancial Institutions whereas the term (ehabilitation refers to the progress of the unit on its way to recovery through restructuring of its liabilities'repayment obligations. (ehabilitation should result in the unit becoming viable again so as to meet such liabilities'repayment obligations. The viability and the rehabilitation of a unit would depend primarily on the unitJs ability to continue to service its repayment obligations including the past restructured debts. It is, therefore, essential to ensure that ordinarily there is no write?off or scaling down of debt such as by reduction in rate of interest with retrospective effect eBcept to the eBtent indicated in the guidelines. Interest concessions granted, if any, may be subEect to annual review depending on the performance of the units. The reliefs and concessions specified are not to be given in a routine manner and have to be decided based on the commercial Eudgement and merits of each case. (eliefs and concessions may be eBtended beyond the parameters in deserving cases. %nly in eBceptional cases, concessions'reliefs beyond the parameters would be considered. In fact, the viability study itself should contain a sensitivity analysis in respect of the risks involved that in turn will enable firming up of the correction action matriB. 293 De*egation o. Po-ers .or sanctioning ,ro,osa*s a,,roving concessions nder DRM .or MSMEs and
The "uthority empowered to sanction the loans and advances to the units including additional amount proposed under restructuring package shall have the powers to sanction the restructuring ' rehabilitation package. ,owever,the "uthority who have sanctioned the original proposal or proposal for increase in limits will not sanction the rehabilitation'restructuring proposal. In such cases, restructuring ' rehabilitation proposals will be approved by immediate neBt ,igher "uthority and in case of Honal %ffice Aevel #redit #ommittee 3H%##5 such restructuring ' rehabilitation proposal will be sanctioned by the #orporate %ffice Aevel #redit #ommittee headed by the +Becutive Director or as the case may be at B##, $umbai.(eliefs and concessions proposed under the D($ for $)$+s will be approved by immediate neBt ,igher "uthority in whose power proposal falls. In case of proposal within the powers of Honal %ffice Aevel #redit #ommittee 3H%##5 such reliefs and concessions will be approved by the +Becutive Director. i> In case of default @ 6O penal interest would be charged over and above prevailing normal rate, which would be applied on the amount of default for the period of default in the event of the unit achieving the proEections but defaulting in payment of principal ' interest. ii> "ccording to (BI guidelines small and medium enterprises engaged in service sector are also eligible for relief and concessions for rehabilitation ' restructuring. 67 Baroda Academy Inventing Methods for Igniting Minds
iii> (elief and concessions in services charges permissible under eBtant guidelines may also be permitted to accounts under restructuring ' rehabilitation package. iv> The bank shall have the right to recompense i.e., recovery of the sacrifice made by it after the unit becomes profitable and all the term loans outstanding at the time of restructuring and sanctioned as a part of restructuring package have been repaid. v> It should be ensured that relief and concessions are not granted to the maBimum permissible eBtent in all the cases as a matter of routine. 2:3 Right o. Reco1,ense !ormally, every (ehabilitation'(estructuring package involves some waivers and concessions eBtended by the lenders to deserving borrowers during their difficult times in order to keep them afloat. 7hen the borrower stops incurring losses and starts earning profit, the lenders have right to recoup the sacrifice. Technically, 122O of such waivers' concessions result in sacrifice of past dues or future dues can be recovered by the lenders at the time of enforcing the right of recompense. But, in practice the entire amount is not demanded from the borrower for the reason that the amounts involved would be high which, if paid in full, would again cause stress on the asset which has Eust come out of past difficulties. Therefore only certain elements of sacrifice are considered for eBercising (ight of (ecompense. It may be noted that the Bank will not entertain proposals with a re&uest to waive the stipulation of right of (ecompense. ,owever in eBceptional cases, reference may be made to B## with views'recommendations of the Branch'(egional'Honal ,eads. The authority to waive this condition rests only with the +Becutive Director'#hairman and $anaging Director. 2<3 Methodo*og+ to be .o**o-ed .or SCENARIO A $FERE $E ARE TFE SO"E "ENDER 1. The borrower will make re&uest for restructuring under D($ for $)$+s to the branch along with roforma ackage 3 , the application form for making re&uest for restructuring under D($ for $)$+s @ format of which is placed at anneBure I5 and its enclosures' documents. Three sets of documents shall be provided by the borrower. The re&uest should be entered in the roposal (eceipt (egister and acknowledgement given to the borrower. 6. The branch shall eBamine the eligibility of the reference for restructuring under D($ for $)$+s. The branch shall send one set each to its controlling office - the sanctioning authority, where necessary, along with its views' recommendations. 0. Techno?economic Tiability needs to be established before proceeding with the restructuring. "ll cases shall be forwarded to the controlling office for assessment of viability and further action. :. If the unit is found viable, the branch should prepare the *inal (estructuring ackage based on the T+T study report and submit the same to the appropriate authority of the Bank. 68 Baroda Academy Inventing Methods for Igniting Minds
SCENARIO ) =i> $E ARE TFE "ARGEST "ENDER 1. The borrower will make re&uest for restructuring under D($ for $)$+s to the branch along with roposal apers 3 5 and its enclosures' documents. The re&uest should be entered in the roposal (eceipt (egister and acknowledgement given to the borrower. 6. The branch shall eBamine the eligibility of the reference for restructuring under D($ for $)$+s. 0. The branch shall send a copy each of the to other lenders, informing the date of Eoint meeting of the lenders which shall not be later than 19 days from the date of the receipt of the re&uest. :. %ur stand on the restructuring proposal should be finalized before the Loint meeting. The views of other lenders may be obtained in the Loint meeting. 9. The lenders shall discuss the admissibility of the reference, the reasonableness of the relief and concessions sought, the system to be adopted for establishing viability and maEor issues to be addressed in the same, the terms and conditions to be stipulated Win case the account is restructured ;. Techno?+conomic Tiability needs to be established before proceeding with the restructuring. 7hether the T+T study is to be done by the largest lender along with the second largest lender in?house or through an outside agency may be decided in the Eoint meeting itself. <. The branch along with the second largest lender should prepare the *inal (estructuring ackage based on the T+T study report and circulate the same to other lenders. Before circulating the *inal ackage, the branch should obtain the approval of the stand from the sanctioning authority. The other lenders should obtain the approval of their competent authority and implement the restructuring package. =. ackage would be implemented simultaneously by all the lenders after it is sanctioned by their respective competent authorities. >. <9O Aenders by value should agree for restructuring scheme approved. =ii> $E ARE TFE SECOND "ARGEST "ENDER 1. The branch shall eBamine the eligibility of the reference for restructuring under D($ for $)$+s. 6. %ur stand on the restructuring proposal should be crystallized before the Loint meeting. %ur views may be conveyed in the Loint $eeting. 9. Techno?+conomic Tiability needs to be established before proceeding with the restructuring. 0. The *inal ackage circulated by the largest lender should be put up to the competent authority, after the Eoint meeting, for sanction of the restructuring package. =iii> $E ARE NEITFER TFE "ARGEST NOR TFE SECOND "ARGEST "ENDER Baroda Academy Minds 69 Inventing Methods for Igniting
1. The branch shall eBamine the eligibility of the reference for restructuring under D($ for $)$+s. The branch shall, immediately thereafter, send one copy each to its (egional %ffice - the sanctioning authority, where necessary. 6. %ur stand on the restructuring proposal should be crystallized before the Loint meeting. %ur views may be conveyed in the Loint meeting. 0. The *inal ackage circulated by the largest lender should be put up to the competent authority for sanction of the restructuring package and implemented within the prescribed time frame. 263 Date o. Co11ence1ent o. Co11ercia* O,erations =DCCO> Guidelines on D##% as per $aster #ircular !o. DB%D !o. B /B#/>'61.2:.2:='6216?10 dated 26.2<.6216 are as under/ Pro?ect "oans .or In.rastr ct re Sector 3i5 " loan for an infrastructure proEect will be classified as ! " during any time before commencement of commercial operations as per record of recovery 3>2 days overdue5, unless it is restructured and becomes eligible for classification as Istandard assetJ in terms of paras 3iii5 to 3v5 below. 3ii5 " loan for an infrastructure proEect will be classified as ! " if it fails to commence commercial operations within two years from the original D##%, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as Istandard assetJ in terms of paras 3iii5 to 3v5 below. 3iii5 If a proEect loan classified as Istandard assetJ is restructured any time during the period upto two years from the original date of commencement of commercial operations 3D##%5, in accordance with the provisions of art B of the above referred (BI $aster #ircular, it can be retained as a standard asset if the fresh D##% is fiBed within the following limits, and further provided the account continues to be serviced as per the restructured terms. 3a5 Infrastructure roEects involving court cases 8pto another 6 years 3beyond the eBisting eBtended period of 6 years i.e. total eBtension of : years5, in case the reason for eBtension of date of commencement of production is arbitration proceedings or a court case. 3b5 Infrastructure roEects delayed for other reasons beyond the control of promoters/ 8pto another 1 year 3beyond the eBisting eBtended period of 6 years i.e., total eBtension of 0 years5, in other than court cases. 3iv5 It is re?iterated that the dispensation in para 3iii5 above is subEect to adherence to the provisions regarding restructuring of accounts as contained in the (BI $aster #ircular DB%D !o.B /B#/>'61.2:.2:='6216?10 dated 26.2<.6216 which would inter alia re&uire that the application for restructuring should be received before the eBpiry of period of two years from the original D##% and when the account is still standard as per record of recovery. The other conditions applicable would be/ 3a5 In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years from the original D##%, considering the high risk involved in such restructured accounts. 70 Baroda Academy Inventing Methods for Igniting Minds
3b5 Banks should maintain provisions on such accounts as long as these are classified as standard assets as under/ 8ntil two years from the original D##% 2.:2O During the third and the fourth years after the original D##% 6.<9O 3v5 *or the purpose of these guidelines, mere eBtension of D##% will also be treated as restructuring even if all other terms and conditions remain the same. Pro?ect "oans .or Non G In.rastr ct re Sector/ 3i5 " loan for a non?infrastructure proEect will be classified as ! " during any time before commencement of commercial operations as per record of recovery 3>2 days overdue5, unless it is restructured and becomes eligible for classification as Istandard assetJ in terms of paras 3iii5 to 3v5 below. 3ii5 " loan for a non?infrastructure proEect will be classified as ! " if it fails to commence commercial operations within siB months from the original D##%, even if it is regular as per record of recovery,unless it is restructured and becomes eligible for classification as Istandard assetJ in terms of paras 3iii5 to 3v5 below. 3iii5 In case of non?infrastructure proEects, if the delay in commencement of commercial operations eBtends beyond the period of siB months from the date of completion as determined at the time of financial closure, banks can prescribe a fresh D##%, and retain the PstandardQ classification by undertaking restructuring of accounts in accordance with the provisions contained in the (BI $aster #ircular DB%D !o. B /B#/>'61.2:.2:='6216?10 dated 26.2<.6216 provided the fresh D##% does not eBtend beyond a period of twelve months from the original D##%. This would among others also imply that the restructuring application is received before the eBpiry of siB months from the original D##%, and when the account is still PstandardQ as per the record of recovery. The other conditions applicable would be/ a. In cases where there is moratorium for payment of interest,banks should not book income on accrual basis beyond siB months from the original D##%, considering the high risk involved in such restructured accounts. b. Banks should maintain provisions on such accounts as long as these are classified as standard assets as under/ 8ntil the first siB months from the original D##% 2.:2O During the neBt siB months 6.<9O 3iv5 *or this purpose, mere eBtension of D##% will also be treated as restructuring even if all other terms and conditions remain the same. Other iss es/ 3i5 "ll other aspects of restructuring of proEect loans before commencement of commercial operations would be governed by the provisions of art B of $aster #ircular !o. DB%D 71 Baroda Academy Inventing Methods for Igniting Minds
!o.B /B#/>'61.2:.2:='6216?10 dated 26.2<.6216 on rudential !orms on Income (ecognition, "sset #lassification and rovisioning ertaining to "dvances. (estructuring of proEect loans after commencement of commercial operations will also be governed by these instructions. 3ii5 "ny change in the repayment schedule of a proEect loan caused due to an increase in the proEect outlay on account of increase in scope and size of the proEect, would not be treated as restructuring if/ 3a5 The increase in scope and size of the proEect takes place before commencement of commercial operations of the eBisting proEect. 3b5 The rise in cost eBcluding any cost?overrun in respect of the original proEect is 69O or more of the original outlay. 3c5 The bank re?assesses the viability of the proEect before approving the enhancement of scope and fiBing a fresh D##%. 3d5 %n re?rating, 3if already rated5 the new rating is not below the previous rating by more than one notch. 3iii5 These &uidelines would apply to those cases where the modification to terms of eBisting loans, as indicated above, are approved by banks from the date of this circular. 2A3 Standard ter1s and conditions The need for restructuring would arise in stressed assets. The reasons for stress may be internal to the #ompany like diversion of funds, non?induction of promoters contribution, poor vision and mismanagement or eBternal to the #ompany' management like sudden downturn in the market, technology changes, policy changes etc. "n indicative list of standard terms and conditions that may be imposed by the lenders is given at Anne; re 0. of the policy.The branches may be guided by the reasons for the stress in the account while stipulating the conditions. The list given at the anneBure is only indicative and the branch may impose conditions as may be necessary to safeguard bankJs interest. 2B3 Disc*os re Bank is re&uired to disclose in its published "nnual Balance )heet, under U!otes on "ccountsU, information relating to number and amount of advances restructured under D($ for $)$+s and the amount of diminution in the fair value of the restructured advances. Bank is re&uired to disclose the total amount outstanding in all the accounts'facilities of borrowers whose accounts have been restructured along with the restructured part or facility. This means even if only one of the facilities'accounts of a borrower has been restructured, the bank should also disclose the entire outstanding amount pertaining to all the facilities' accounts of that particular borrower. Anne; res to the Po*ic+ "nneBure I / 7illful Defaulters "nneBure?II / +arly 7arning )ignals "nneBure?III / (eliefs - #oncession which can be eBtended 72 Baroda Academy Inventing Methods for Igniting Minds
by the Bank to potentially viable )ick $$)$+ units "nneBure?IT / *inancial arameters applicable for D($ "nneBure?T / )tandard Terms - #onditions "nneBure?TI / Guidelines on (ight of (ecompense
TEST #O&R &NDERSTANDING )T"T+ *%AA%7I!G )T"T+$+!T T(8+ %( *"A)+ 1. In case of reschedulement of loan account , total repayment period is eBtended. 6 .In case of rephasement of loan account, the repayment period is enhanced. 0. (estructuring of Aoan account is a combination of rephasement and reschedulement along with additional eBposure, acceptance of sacrifice , segregation of limits into 7#TA, *ITA . : .In case of cut back arrangement entire amount deposited by borrower is allowed to be withdrawn for business purpose Baroda Academy Minds 73 Inventing Methods for Igniting
9 .#ut Bank arrangement is a long term measure for recovery in ! " account. ; .In case of (etail Aoan, account must be classified as ! " , immediately after reschedulement ' rephasement. <. (estructuring'(ephasement' (eschedulement can be done only in )tandard category accounts. =. If restructuring'rephasement'reschedulement is done in ! " account, account will become standard provided there is satisfactory performance of recovery for a period of 16 months from the date when first installment 'interest has become due as per revise repayment schedule. >. To get benefit of special treatment and to keep the account in same category, restructuring of dues must be done before commencement of production. 12. (ephasement'reschedulement etc can be considered in case of ! " accounts where activity has become non?viable.
ANS$ER/ F !o "ns 1 6 *alse True 0 True : 9 ; *alse *alse True < = *alse True > 12 *alse *alse
CORPORATE DE)T RESTR&CT&RING =CDR> ' ic( )ites Definition 7hich types of borrowers can go for #D(X 7hat types of account can be referred to #D( X 7hat is the structure of #D( system 7ho can make a reference to #D( ,ow does the system operate legal basis for the #D( )ystem #ategory I and #ategory II (estructuring Tiability arameters )tandstill #lauseX general concessions 74 Inventing Methods for Igniting
"sset #lassification during and after #D(
#orporate Debt (estructuring 3#D( 5, is a mechanism for restructuring the debts of a corporate borrower, which is facing difficulties in servicing its debts due to certain internal, eBternal factors, but which is otherwise viable. The aim of this mechanism is to preserve viable corporate which are affected by certain internal and eBternal factors and thereby minimize losses to the creditors and other stake holders through an orderly and coordinated restructuring programme. This mechanism which is in vogue in other countries like 8.4., Thailand, 4orea, etc. helps the borrower and the lenders to come together and restructure the debts in time and help the corporate to remain viable. In other words we can define/ #orporate Debt (estructuring is a mechanism which provides for timely and transparent action for restructuring the debts of viable corporates which are affected by internal and eBternal factors for the benefits of all concerned. The (eserve Bank of India first issued the guidelines on #D( in "ugust 6221. It issued revised guidelines in *ebruary 622: which has been further revised in !ovember 6229. The important features of the revised guidelines are as under/ $hich t+,es o. borro-ers can go .or CDRI #D( can be taken up only in case of corporate borrowers. The borrower should have been assisted under consortium arrangement, multiple banking arrangement or syndication arrangement. i.e. when more than one Bank'*.I are involved. The outstanding of fund based and non fund based eBposure should not be less than (s. 12 crore. The borrowing company should not be a willful defaulter to any of the banks. This mechanism is available for both industrial and any other type of activity. $hich t+,es o. acco nt can be re.erred to CDR I In order to refer the account to #D(, it is not necessary that it should have been classified Baroda Academy Minds 75 Inventing Methods for Igniting
under !on?performing asset. The account can belong to )tandard category, )ubstandard or Doubtful category. In certain cases suit filed accounts can also be referred provided, the initiative to resolve the case under the #D( system is taken by at least <9O of the creditors 3by Talue5 and ;2O of creditors3 by number5. BI*( cases are not eligible for restructuring under the #D( system. ,owever, large value BI*( cases may be eligible for restructuring under the #D( system if specifically recommended by the #D( #ore Group. The #ore Group shall recommend eBceptional BI*( cases on a case?to? case basis for consideration under the #D( system. It should be ensured that the lending institutions complete all the formalities in seeking the approval from BI*( before implementing the package. $hat is the str ct re o. CDR s+ste1 I The #D( consists of a three tier structure namely 3i5 #D( )tanding *orum and its #ore Group, 3ii5 #D( +mpowered Group and 3iii5 #D( #ell. Standing %or 1 The )tanding *orum consists of the #hairman and $anaging Director of all banks'financial institutions who have Eoined the #D( system and #hairman of Indian Banks "ssociation. This is a self?empowered body, which lays down the policies and guidelines to be followed up by the #D( system. It also monitors the progress of #D( from time to time. (BI is not a member of the forum and core group. It only provides the broad guidelines. The )tanding *orum is re&uired to elect its #hairman for a period of one year. It should meet at least once in every siB months. Core Gro , o. the Standing %or 1 It is a small group of eight members, which is carved out of the )tanding *orum. It consists of #$Ds'#+%s of IDBI, )BI, I#I#I Bank, Bank of Baroda, Bank of India, unEab !ational Bank, Indian Banks "ssociation and Deputy #hairman of IB" to represent foreign banks in India. The #ore Group oversees the functioning of the #D( empowered Group and the #D( #ell. It lays down the policies and guidelines to be followed by them. It provides for the rogramme +valuation Techni&ues #hart for processing of cases referred to #D( and decides the modalities for enforcement of the time frame. This group has to decide all policy issues without reference to (BI. E1,o-ered Gro , This consists of three standing members namely +D level (epresentative of IDBI, I#I#I, )BI and also the +D level representative of the Banks'*Is who have eBposure to the company concerned. The latter should have the authority from their respective Boards to decide cases referred to the #D(. This group takes the decision for corporate restructuring of individual companies. It decides on the acceptable viability bench mark levels on parameters like D)#(, (%#+ 3(eturn on #apital +mployed5, I(( 3Internal (ate of (eturn5, Break +ven oints, etc. 76 Baroda Academy Inventing Methods for Igniting Minds
CDR Ce** The #D( #ell is presently functioning in the head office of IDBI Atd. W!ote / The #D( )tanding *orum, the #D( +mpowered Group are also housed in this office.Y. It will be staffed by members of staff deputed from banks and *Is. The administrative and other costs will be shared by all member banks and *Is. The banks and *Is who are in core group will contribute (s. 92 lakh each while others will contribute (s. 9 lakh each per annum for the purpose. "ll references by creditors or borrowers for #orporate Debt (estructuring will be made to the #D( #ell. The #D( #ell will eBamine the acceptability of the proposal and after getting clearance from the +mpowered Group will prepare the (estructuring package. The cost of operating the #D( mechanism including the cost of the #D( #ell will be borne by the banks and *Is. $ho can 1a(e a re.erence to CDR I %ne or more creditors having at least 62O stake in the credit facility can make a reference for #D(. The borrowing company can also make the reference, if it is supported by a Bank'*I having not less than 62O stake in credit facility. Fo- does the s+ste1 o,erateI The Aead Institution'$aEor stake holders work out a preliminary (estructuring plan in consultation with other stake holders and submit the same to #D( #ell. Then the #D( #ell prepares a reliminary (estructuring )cheme 3*lash (eport5 within 02 days and submits the same to the +mpowered Group to take a decision on the admissibility of the case. It also sends copies of flash report to all member banks at least 12 days in advance of the +mpowered Group meeting so that the member banks can effectively participate in the deliberation. %nce the *lash (eport is cleared by the +mpowered Group, the #D( #ell along with the lead institution prepares the detailed restructuring package and submits the same for approval by the +mpowered Group. The #D( #ell should submit the same to the +mpowered Group within a period of ;2 days 3in eBceptional cases >2 days5 from the date of clearance of *lash (eport by the +mpowered Group Then the +mpowered group approves the package with modifications if any. It should take a final decision within a period of >2 days. 3eBtendable upto a maBimum period of 1=2 days from the date of reference to #D( #ell5. %nce the proposal is approved, it is sent to the individual Bank'*Is for their sanction.
$hat is *ega* basis .or the CDR S+ste1 I Baroda Academy Minds 77 Inventing Methods for Igniting
The legal basis for the #D( system is provided by two documents !amely ? Inter #reditor "greement 3I#"5 and Debtor?#reditor "greement. 3D#"5. "ll the participants of the )tanding *orum eBecute the I#". It is a legally binding agreement with necessary enforcement and penal clauses. The agreement remains valid initially for a period of 0 years which can be eBtended for further period of three years. The Debtor?#reditor "greement will be eBecuted by the borrower company and the lender banks. $hat is 1eant b+ Categor+ I and Categor+ II Restr ct ringI Categor+ I restructuring is applicable to standard and sub?standard assets'loans. In case of >2O or more of the outstanding is classified as standard'substandard the balance 12O in the books of other banks will be considered as standard'substandard for the purpose of reference to #D( system under category I. 8nder Categor+ I CDR S+ste1 the creditors have to agree that if <9O of the creditors by value or ;2O of creditors by number agree to a restructuring package the same should be binding on the remaining creditors. This condition must be clearly mentioned in the Inter? #reditor "greement. %nce this condition is satisfied, all the creditors have to agree to the package including additional finance, if any. ,owever, if a #reditor 3outside the minimum <9O and ;2O5 does not wish to commit additional finance, it will have option either 3a5 to arrange for its share from the eBisting or new creditor or 3b5 agree to defer the first yearJs interest due to it after the #D( package becomes effective which will be payable by the borrower company without compounding along with the last instalment of the principal due to the #reditor. The eBisting lenders within minimum <9O and ;2O can eBit provided they arrange with either the eBisting lenders or new lenders to purchase their shares and also agree to the approved restructuring package. *urther, they need not provide additional finance provided they tie up with eBisting lenders or new lenders for their share of the additional finance. Categor+ II CDR S+ste1 is applicable to accounts which are classified as do bt. * assets and if a minimum of <9O of the creditors by value and ;2O of the creditors by number agree for the restructuring. ,ere the creditors are not bound to take up additional financing and the decision to lend or not depends upon each creditor bank' *I separately. In case the eBisting creditor denies for participation in the additional finance the borrower has to make financing arrangements with the eBisting or new creditors. $hat are the i** strative ,ara1etersC -hich are to be ta(en into acco nt b+ the E1,o-ered gro , to decide the viabi*it+ o. the ,ro,osa* a.ter restr ct ringI ROCE/ " minimum (%#+ of 9 year G?sec plus 6O may be considered as ade&uate. 3 !et profit before Interest - TaB' "verage #apital +mployed N1225
78
DSCR/ "verage D)#( of more than 1.69 while with D)#( of not less than1 for more than year is acceptable. 3 "TK Depreciation Kinterest on Aoan'Installment of TAK Interest on Aoan5 IRR / The benchmark gap between the I(( and the cost of funds should be at least 1O. I(( is the rate of discount that makes the discounted value of the net cash flow from a proEect Eust e&ual to the amount which has to be invested to obtain that net cash flow. E;tent o. sacri.ice $hat are the ,ara1eters -hich 1 st be satis.ied to be e*igib*e nder CDRI (estructuring under the #D( is done for the first time. The unit becomes viable in < years and the repayment period of the restructured debt does not eBceed 12 years. romoters sacrifice and additional funds brought by him should be a minimum of 2:J o. the creditors! sacri.ice. ersonal guarantee is offered by the promoter eBcept when the unit is affected by eBternal factors pertaining to the economy and industry. $hat is 1eant b+ Standsti** C*a seI This is a clause in the Debtor?#reditor "greement under which the debtors and creditors agree to a standstill whereby all the parties agree not to take legal action during the standstill period. The standstill provision is applicable as long as reference made to #D( is pending or restructuring scheme is under preparation and not during implementation of the package. %ne of the most important elements of Debtor? #reditor "greement would be P)tand )till #lauseQ binding for >2 days, or 1=2 days by both sides. Both the parties commit themselves not to take recourse to any other legal action during the P)tand )tillQ period. %nce restructuring under the #D( system takes place, the asset classification status should be restored to the position, which eBisted when the reference to the #ell was made and accordingly any additional provisioning made can be reversed. Is it ,ossib*e to go .or a second restr ct ring ,ac(ageI In normal course restructuring under #D( mechanism should be done only once. "ny reworking on the package should be an eBception and should be done only with the approval of the #ore Group. $hat are the genera* concessions given in the ,ac(ageI The #D( mechanism does not provide for any special guidelines for the relief to be eBtended to the company. The +mpowered Group can consider giving the following types of relief or any other relief as it may deem fit. Baroda Academy Minds 79 Inventing Methods for Igniting
3a5#onvert a part of the assistance to e&uity. W!ote / +Bemptions from the #apital market eBposure norm can be obtained from a case to case from (BI.Y 3b57aiver of li&uidated damages and compounding of interest. 3c57aiver of rincipal and interest in deserving cases. $hat is the disc*os re reE ire1entI "s per (BI guidelines, banks are re&uired to disclose the details of the #D( as notes to accounts in their published annual Balance )heet. $hat abo t Asset C*assi.ication d ring and a.ter CDRI During the pendency of the case with the #D( system, the usual classification will continue to apply and there should not be any improvement of the asset classification Eust because the case has been referred to the #D( system. 7here a )tandard asset is restructured the asset has to be classified as substandard asset immediately. In case a !on?performing asset is restructured the asset classification would continue in the same category as prior to restructuring. ,owever, if restructuring package is approved by the +mpowered Group and the same is implemented within ?162?days from the date of the approval, the asset classification is restored to the position which eBisted when reference was made to the #D( #ell. "dditional provision, if any, made during the pendency of the case will be reversed. "ny additional finance, if any, will be treated as Gstandard assetG upto a period of one year after the first interest or instalment whichever is earlier falls due under the approved restructuring package. TEST #O&R &NDERSTANDING )tate whether the following statements are true or false. 1. #D( mechanism is applicable to all types of borrowers. 6. #D( can be considered in accounts where total eBposure () 12 crores and above which is financed either in consortium or through multiple banking facility. 0. #D( can be considered in case of suit filed accounts, subEect to certain conditions. :. 9. In case of #D( I account must be in standard category. In #D( +mpowered Group, #hairman and $anaging Directors of Banks are members. 80 Inventing Methods for Igniting
;. 8nder #D(, even loss accounts are also covered <. #D( is a legal frame work. =. In case of #D( II it is not binding on members to take share in additional eBposure. >. %nce the #D( is approved, it must be implemented within a period of 162 days to get benefit of restoration of assets classification status of the account as on the date of reference for #D(. 12. Borrower can independently make reference for #D(. "nswers F !o "!) 1 6 0 True : 9 ; < = > True 12 *alse
*alse Ture
*alse *alse *alse *alse True
81
SICD &NITS G CA&SES O% SICDNESSC DETECTION AND REFA)I"ITATION ISS&ES =&NDER SICA 2BA: G )I%R CASES> ' ic( )ites Definition of )ick 8nits under )I#" (ehabilitation of )ick 8nits (eference to BI*( +ffect of (eference BankGs osition )tages in BI*( referred accounts BI*( proceedings %perating "gency 7hen our Bank is !%T the %perating "gency 7hen our Bank is the %perating "gency ""I*( "uthority for sanctioning (ehabilitation ackages otential )ick 8nits Rehabi*itation o. sic( nits nder )I%R " #ommittee was appointed in 1>=:, under the #hairmanship of )hri T. Tiwari to look into the causes of sickness and to suggest measures to deal with sickness. This committee which is known as Tiwari #ommittee recommended the following important measures. 23 53 To ,ass a s,ecia* *egis*ation for dealing with the problems of sickness. To set- , a E asi ? dicia* bod+ through the special legislation to deal eBpeditiously and eBclusively with matters relating to rehabilitation of sick industrial units.
To de.ine sic(ness and potential viability in unambiguous terms. )ick Wsick industrial companies 3special provisions5 "ct, 1>=9 was introduced on the recommendations of Tiwari #ommittee, which came into effect from 16 th Lanuary 1>=<. ? It is applicable to Industrial #ompanies engaged in industries specified in )chedule I of the Industries 3Development and (egulation5 "ct, 1>91 with e;ce,tion o. shi,,ing ind stries3 It is not applicable to small scale industries. It defines a )ick Industrial #ompany. It provides for the .or1ation o. )I%R and AAI%R and deals with their powers. 82 Inventing Methods for Igniting
? ?
It compels industrial companies to refer to BI*( when they turn sick or weak. It also deals with the appointment of operating agency and the sanction of rehabilitation package.
Bank undertakes rehabilitation of viable sick industrial units in medium and large sector. In the case of sick units coming under the purview of )ick Industrial #ompanies 3)pecial rovisions5 "ct 1>=9, 3)I#"5, and (ehabilitation will be under the sanctioned scheme of the Board for Industrial and *inancial (econstruction 3BI*(5. Board for Industrial and *inancial (econstruction is a body constituted under )ick Industries #ompanies 3)pecial rovision5 "ct 3)I#"5 1>=9. It is a &uasi Eudicial body with powers to initiate legal steps against erring promoters who fail to abide by the regulations of )I#". It has the powers to summon and record evidence and override some of the provisions of #ompanyGs "ct. De.inition o. Sic( Ind stria* Co1,an+/ Ksec3 7 =O> o. SICAL ? " company will be defined as a )ick Industrial #ompany when it satisfies the following conditions. It is registered for a period not less than five years. It has at the end of any financial year acc 1 *ated *osses e&ual to or eBceeding its entire net worth. Notes/ Net $orth is sum total of the paid?up capital and free reserves. *ree reserves include all reserves created out of rofit and )hare remium "ccount but does not include reserves created out of revaluation of assets, write back of depreciation provision or on account of amalgamation. Definition of weak industrial company ' otentially )ick Industrial #ompany 3)ec. 605 / "n industrial company which has, at the end of any financial year, accumulated loss eE a* to or e;ceeding :@J o. its ,ea( net -orth d ring the i11ediate*+ ,receding .o r .inancia* +ears is known as a 7eak #ompany. )I%R =)oard .or Ind stria* 8 %inancia* Reconstr ction>/ BI*( came into eBistence from 16th Lanuary, 1>=< as per )ection : of )I#" and became operational from 19 th $ay, 1>=<. It has a #hairman and not *ess than t-o and not 1ore than 29 members who are appointed by the #entral Government. ersons &ualified to be ,igh #ourt Ludges or persons having professional eBperience of not less than 19 years can be appointed as member or chairman of the Board. Re.erence to )I%R/ A3 $hen a co1,an+ can 1a(e Re.erence/ "n industrial company, which is registered under #ompanies "ct for not less than 9 years and which has accumulated losses, at the end of any financial year, e&ual to or eBceeding its entire net worth, is a sick industrial company. !et worth means sum total of the paid up Baroda Academy Minds 83 Inventing Methods for Igniting
capital and free reserves. *ree reserves means all reserves credited out of the profits and )hare remium "ccount but do not include reserves credited out of revaluation of assets, write back of depreciation provision and amalgamation. "ll the )ick Industrial companies which are @ a5 engaged in manufacturing'processing activity, employing @92? workers or more, b5 registered for 9 years or more, c5 whose net worth has completely been eroded as at the end of any financial year, are re&uired to make (eference to BI*( within @;2? days from the date of adoption of annual accounts ' audited balance sheet at the "nnual General Body of the concerned company or within ;2 days of the Board of Directors of the #ompany forming an opinion that the company has become sick, whichever is earlier. Fo- Re.erence 1ade The reference is to be made in I*orm "J anneBed to the "ct. In case the sick industrial company is a Govt #ompany, the reference will be made in *orm I""J. %nce a reference is registered, BI*( sends intimation to all concerned parties including Banks, *inancial Institutions and Govt. "gencies. $ho can 1a(e Re.erence " reference can be made by the followings/ a. By the sick industrial company, as described above, b. By #entral Govt, (eserve Bank of India, )tate Govt or a public financial institution or state level institution or a scheduled bank. $hen Re.erence can not be 1ade " reference to the Board does not lie where financial assets have been ac&uired by any securitization company or reconstruction company under )"(*"+)I "ct. $hen Re.erence abates (eference to the Board abates if the secured creditors, representing not less than three fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measure to recover their secured debts under sub section : of section 10 of )"(*"+)I "ct. E..ect o. Re.erence/ %n reference to the BI*( by the company, there will be following effects5 a5 !o legal action'recovery action can be instituted against the borrower company and the guarantors. b5 "ll pending cases against the borrower'guarantors are suspended during the pendency of reference. c5 The limitation is suspended for the period for which the reference is pending with BI*(. ,owever, legal proceedings can be instituted'continued after obtaining the permission of BI*(. )an(Ms Position/ Baroda Academy Minds 84 Inventing Methods for Igniting
It is the responsibility of the company making reference to BI*( to send copies of *orm " along with enclosures to all secured creditors' Banks ' *inancial Institutions and other agencies. If, however, the company does not submit G*orm "G within reasonable time, the same can be called for by the Bank by sending suitable communication to the company.
Stages in )I%R re.erred acco nts/ =A> %IRST STAGE IN )I%R RE%ERRED ACCO&NT/ ADMISSION STAGE "dmission stage means when a reference is made by a company to BI*( under )I#" under section 19 of )I#" and the Board of BI*( is yet to decide about sickness of the #ompany. There are following sub stages/ 3a5 St d+ o. %or1 A and )a*ance Sheets for the detailed analysis in order to verify the facts leading to such sickness, especially @ Z To make critical comparative analysis of all the components of the companyJs audited accounts both of revenue and capital nature at least for the last 9 years. Z Inconsistencies like overstating'booking of eBpenses on maEor inputs' understating income in the later years in a bid to bring the unit under the ambit of )I#". Z #omparative study on each input 3raw materials, powers, labour, etc.5 to sales ratio in order to study abnormal variations. Z "brupt 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. Z #omments of the auditors on the balance sheet and any contradictory stand in *orm ". 3b5 %inancia* irreg *arities in acco nts/ 315 In case the financials of the #ompany submitted in *orm I"J suffers from irregularities, the same may be &uestioned and prayed for )pecial Investigative "udit 3)I"5 u's 1; of )I#". 365 "part from financial irregularities, an analysis of the accounts of the #ompany should be carried out to ascertain whether the sickness is created as a result of wrong and deliberate accounting system followed by the #ompany. =)> SECOND STAGE IN )I%R ACCO&NT/ DRA%T REFA)I"ITATION SCFEME =DRS> The primary purpose of the "ct is to rehabilitate the sick company and with this purpose in mind and after satisfying about the sickness of the #ompany, BI*( appoints %perating agency 3%"5 u's 1<305 of the "ct and directs %" to prepare a )cheme 3D()5, as eBpeditiously as possible and ordinarily within a period of >2 days from the date of such order. "s per the direction of BI*(, %" finalize D() u's 1= of the "ct and circulate to all the lenders and Govt agencies for their comments'consideration. 7hile scrutinizing the D() submitted by %", all the components of the D() are to be analyzed with a view to check if the D() will be successful and the #ompany will have positive net worth within a maBimum period of seven years. 85 Baroda Academy Inventing Methods for Igniting Minds
7hile analyzing the D(), following points, in particular, should be looked into/ i. TE0 St d+ Re,ort/ #ritically eBamine the T+T study (eport including Eustification for Technical feasibility and +conomic Tiability of the unit, #ost of roEect and $eans of *inance, comparative study of proEected financials vis?V?vis actual, etc. ii. )tipulation given in D() - presumptions made are workable which may lead to rehabilitate the #ompany and turn its net worth positive with specific reference to #ost of roEect to rehabilitate the unit i.e. $eans of *inance and its application'uses of *unds. iii. %ther terms - conditions mentioned in D() are acceptable to the Bank like sacrifice to be made in percentile terms by the Bank vis?V?vis other BanksD terms of repayment of the %T) amount, including servicing of future interestD nature and amount of securities charged to the Bank, if %T) offered, fresh eBposure anticipated in the D() from the Bank. These terms - conditions should not be detrimental to the interest of the Bank. iv. The Bank would, in general, prefer %T) based D(). v. It is to be ensured that only IContract a* D es! are advised to BI*(, %perating "gency and other Banks while eBchanging information on the account. If there is any variation by the %"'BI*(, it should be contested in right earnest. vi. The D() must contain Idefault clauseJ means if the #ompany does not fulfill its obligation of repayment of the %T) amount and induction of funds in the business, then the D() may be treated as frustrated'failed and the Bank may take action as per law to recover its dues. ,owever where the Board, after making en&uiry u's 1; of the "ct and after considering of all the relevant facts and circumstances and after giving an opportunity of being heard to all concerned parties, is of the opinion that the sick #ompany is not likely to make its net worth eBceed the accumulated losses within a reasonable time and that it is Eust and e&uitable that the #ompany should be wound up, it may record and forward its opinion to the concerned ,igh #ourt u's 62 of the "ct for winding up of the company. =C > TFIRD STAGE IN )I%R ACCO&NT/ IMP"EMENTATION STAGE %nce the D() is sanctioned by BI*( u's 1=3:5 of the "ct, step by step actions should be taken for the implementation of the )anctioned )cheme and developments are to be reported to $onitoring "gency 3$"5 appointed by BI*( and to the Bench of BI*( regularly and if any deviation is observed, it should also be reported to BI*( for taking remedial actions as per the "ct. =D> A,,rova* o. Stand on re.erence to )I%R/ 7hen a reference is made to BI*( and the Bank is to convey its stand on *orm I"J or I""Q, as the case may be, the (egion'Hone should prepare a proposal incorporating therein profile of the account, background of the sick unit, details of credit facilities sanctioned and outstanding, serious irregularities observed in the conduct of the account in the past, adverse observations of the #ompanyJs auditors and BankJs concurrent')tock auditors and our comments on *orm I"J or I""J and reasons of sickness alongwith recommendations, should be submitted to #orporate #entre alongwith *orm I" or I""J and audited financials of the #o well before neBt date of hearing at BI*('""I*( for its approval. "fter obtaining approval Baroda Academy Minds 86 Inventing Methods for Igniting
from the competent authority, the (egion'Branch should accordingly convey BankJs stand to BI*(, in writing through BI*( #ell !ew Delhi. Ine*igib*e Cases/ =a> " company is not eligible for reference to BI*( if it falls under any of the category/ Z ))I unit Z "ncillary industrial undertaking Z $inimum number of workers re&uired in a sick industrial undertaking during the preceding financial year is 92 in case of the unit is run on power and 122 in case the unit is not run on power. Z The #o has been registered under the #ompanies "ct for less than 9 years =b> )hipping companies, Industrial units registered as ))I8s and service units as ,otels etc. are not eligible for reference. )I%R ,roceedings/ The first hearing should normally be attended by an official who is thoroughly conversant with the account to present the BankJs stand and also should be well prepared to reply to any &uestion which may be asked by BI*( to have proper information on all important issues vis?V?vis BankJs stand with the officials at BI*( #ell !ew Delhi. If BI*( has doubts about the genuineness of sickness of the company, it may dismiss the reference ab?initio or take other steps like )pecial Investigative audit, further en&uiry etc. to ascertain the genuineness of sickness and thereafter initiate action as per the provisions of )I#". "s the branch'(egion is in the know of the background and present status of the #ompany, the Branch'(egion is re&uired to keep the #orporate #entre and BI*( #ell !ew Delhi abreast with the development in the account and to ensure the same before each date of hearing. O,erating Agenc+/ 7hen BI*( decides about the sickness of the company and appoints %perating "gency, which is normally a Bank or *inancial Institution, two situations may arise 3a5 our Bank may be %perating "gency 3b5 any other Bank, *inancial Institution as %perating "gency. $hen o r )an( is NOT the O,erating Agenc+3 a5 %ur Bank should furnish complete details of our dues including uncharged interest upto the cut off date.3b5 Inter Institution meetings convened by %" should be attended along with BankGs stand on the specific issues duly approved by appropriate authority.3c5 8pon receipt of Dra.t Rehabi*itation Sche1e =DRS>C it should be scrutinized to verify that it is as per the stand taken by the Bank earlier, if inconsistencies are observed, obEection may be filed for their rectification within the time prescribed. "ny amendments subse&uent to the date are not accepted. 87 Baroda Academy Inventing Methods for Igniting Minds
$hen o r )an( is the O,erating Agenc+/ a5 7henever our Bank is appointed as %perating "gency, the Bank is entitled for fees together with actual eBpenses to carry out the function'duties of operating "gency 3%"5 and to claim such fees and eBpenses during the course of proceedings before the BI*(. b5 7henever our Bank is appointed as %perating "gency, we should act impartially with the unit as the focal point for rehabilitation, irrespective of the promoters, guarantors and ' or securities offered to the Bank and our relationship with the borrower like filing of suit, etc. c5 i5 7hile appointing %perating "gency to look into the rehabilitation of the sick company, BI*( re&uires to take any of the steps mentioned in )ection 1= of )I#" for eBploring the possibility of rehabilitation of unit. These steps include @ M *inancial (econstruction of sick Industrial #ompany. M #hange in and ' or take over of the $anagement. M $erger ' amalgamation of the company. M )ale or lease of part or whole of the Industrial #ompany. M (ationalisation of work force. M "ny other measure. 7ith the permission ' approval of BI*(, normally, the scheme should be completed within >2 days. Ii5 "s soon as the company submits the Draft (ehabilitation )cheme, the %" should scrutinize the same to ensure that the scheme submitted is as per the directions ' guidelines of BI*(. "long with valuation of assets of the company, techno economic viability study should be carried out by internal eBpertise or reputed eBternal agency and thereafter call for inter?institutional meet, including Govt. agencies, to tie up the reliefs and concessions re&uired by the company. %nce the D() is tied up, the scheme should be submitted to BI*( for approval. iii5 During the above period of finalization of D(), %" should submit periodically the developments to BI*( regarding compliance of the direction by all the concerned. iv5 The D() may include ? 6. " regular (ehabilitation scheme 0. %ne time settlement of dues :. (ehabilitation cum one time settlement of dues with any of the 9. "bove measures. v5 %nce the scheme is sanctioned, BI*( may appoint %" or any other Bank or *inancial Institutions as $onitoring "gency to monitor the implementation of the scheme and advise BI*( periodically about the performance of the unit and other developments regularly. If there are no proposals received for rehabilitation of the unit, BI*( may after issuing notice, send the file to ,igh #ourt for winding up, alongwith its opinion. " sick Industrial company comes out of the purview of BI*( ? 88 Baroda Academy Inventing Methods for Igniting Minds
7hen the net worth of the company becoming positive. 7hen BI*( confirm opinion that the company shall be wound up. 7here our Bank is appointed as %perating "gency, we should keep in mind following points/ a5 "ll the guidelines provided by the Board are studied carefully. b5 To maintain follow up with the company for timely submission of D(). c5To study the D() submitted by the company and reliefs and concessions sought therein by the company and to verify that the D() submitted by the company is in total compliance with the guidelines provided by the Board. d5To conduct Eoint meeting of all stake holders, including government organisations to discuss the reliefs and concessions sought by the company in the D() so as to take the views of all concerned about such reliefs and concessins sought by the company and accordingly proposals are incorporated in D(). e5 To get the D() modified as per the suggessions made by the stake holdes and acceptable to the company. f5To prepare minutes of the Eoint meeting and submit the same to Board alongwith fully tied?up D(), if any emerges or to submit our BankGs views' recommendations about the D() to Board for consideration and further direction. g5 "ct of any non?co?operation from the company should be brought to the notices of the Board for further direction to the company to any other appropriate action against the company. i5To ensure timely action is initiated and compliance of Boards direction is completed within the stipuDated deadlines. E5!o correspondence is made directly with the Board and all correspondence and submissions are made to respective (egional %ffices. AAI%R If any of the parties is aggrieved by any of the order of BI*(, such affected party may prefer an appeal within :9 days from the date of order to "ppellate "uthority for Industrial *inancial (econstruction 3""I*(5 Co1,etent a thorit+ to ta(e a decision on Re.erence The #ompetent "uthority at the #orporate #entre will take a decision whether to support the #ompanyJs reference to BI*( or oppose the same. The #ompetent "uthority is as under/ i. #hairman and $anaging Director/ %utstanding 3*und K !onfund based5 above (s. ;2.22 #rores. ii. +Becutive Director? outstanding 3*und K !on?fund based5 "bove (s. 02.22 #rores upto (s. ;2.22 #rores iii. General $anager 3(espective *unctional ,ead @ )$+, 7holesale Banking, (ural and "gril, (etial 5/ outstanding 3*und K !on?fund based5 beyond the powers of Honal $anager upto (s. 02.22 #rores in case of standard and sub standard account Baroda Academy Minds 89 Inventing Methods for Igniting
General $anager 3 #redit $onitoring - (ehabiitation of sick units BI*'#D(5 beyond the powers of Honal $anager upto (s 02 crores in case of other accounts. iv. Honal $anager/ outstanding 3*und K !on?fund based5 upto respective delegated powers for sanction. Other Matters/ In all the BI*( sanctioned schemes, the Bank should not only keep track of the implementation of the schemes but also monitor the performance ' progress in the working of the units. Besides, undertaking an annual review of the scheme at BankGs level, the Bank is re&uired to submit progress ' review reports to BI*( where they are the operating agency. In the cases where BI*( has passed winding up orders, Bank should make arrangements for filing of suit or take up with the concerned ,igh #ourt for eBpediting the process of li&uidation of the non?viable sick company. Through establishing a proper rapport with BI*(, Bank should take maBimum advantage of the other powers of BI*( such as ordering sale of assets, change of management or merger of the sick unit with the healthy unit, initiating misfeasance proceedings against the promoters or blacklisting the promoters. In certain cases, rehabilitation scheme envisaging %ne Time )ettlement 3%T)5 of Bank dues formulated by operating agency for approval of BI*(, may involve sacrifices by the Bank by way of write?off of interest either in full or in part or write off of principal amount in part. ,aving regard to various facts and circumstances of the case and based on the scheme formulated by the operating agency, Bank should accept such %T) subEect to the same being approved by the competent authority empowered to approve such proposals. In cases of urgency, where decisions have to be conveyed to BI*( ' ""I*( or any such authorities about acceptance of rehabilitation scheme envisaging sacrifices beyond the powers of #hairman - $anaging Director and +Becutive Director but if they are otherwise satisfied about the commercial soundness of the proposal, the #hairman - $anaging Director and +Becutive Director are authorized to accord in principle approval of the proposed scheme. A thorit+ .or sanctioning Rehabi*itation Pac(ages In respect of sick units, BI*( or non?BI*( 3including ))I sick units5 authority to sanction rehabilitation packages is delegated as under. i5 "ll )enior Branch $anagers 3including )enior $anager? #redit' (ecovery in (%s5, #hief $anagers 3Branches5 and Deputy (egional $anagers can sanction rehabilitation packages if there is no sacrifice in the account 3strictly in terms of BI*( sanctioned scheme in the cases of BI*( accounts5 upto their discretionary lending powers. ,owever, #hief $anagers 3Branches5 and Deputy (egional $anagers can consider reduction in rate of interest with prospective effect 3strictly in terms of BI*( sanctioned scheme in cases of BI*( accounts5.
90
ii5 "ll (egional $anagers and above can sanction rehabilitation packages if there is sacrifice in the account such as refund of penal interest charged, reduction in rate of interest with retrospective effect upto their discretionary lending powers subEect to their power of sacrifice for compromise settlements 3strictly in terms of BI*( sanctioned scheme in the case of BI*( accounts5. iii5 If the borrower is not agreeable for U(ight of (ecompenseU 3eBcept where BI*( has denied right of recompense5, Honal $anagers can sanction such rehabilitation packages upto their discretionary lending powers, subEect to their power of &uantum of sacrifice for compromise settlements, after obtaining sanction for waiver of right of recompense from #orporate #entre, $umbai. #hairman and $anaging Director' +Becutive Director will take a decision on waiver of right of recompense. ,owever, for accounts below (s.92 lacs 3outstanding5, Honal $anagers need not obtain sanction from #orporate #entre, $umbai for waiver of right of recompense. iv5 )anctioning of rehabilitation proposals shall be subEected to )( !oting by the neBt higher authority. In the case of )enior Branch $anagers and )enior $anager? #redit' (ecovery in (egional %ffice, Deputy (egional $anager shall be the )( !oting authority. In respect of #hief $anagers 3Branches5 and Deputy (egional $anagers, (egional $anager not below the rank of "ssistant General $anager shall be the )( !oting authority. Potentia* Sic( &nits 3i5 7hile )I#" =9 vide )ection 60 defines a U otential )ick Industrial #ompanyU, there are no accepted definitions of U otential )ick 8nitsU in respect of artnership, )ole roprietorship and other firms including ))I 8nits. 3ii5 ,owever, based on the above definition and from the eBperience, one can draw an inference that any unit, irrespective of its constitution, can be considered a U otentially )ick 8nitU if it starts incurring cash losses repeatedly and it is likely to make cash losses, in the coming years also. 3iii5 In such cases, branches should take all effective steps as per eBtant guidelines to arrest the sickness and to rehabilitate the account for recovering our dues. 3iv5 It should be well understood that no unit should be classified as G)ick or otentially )ickG if/ 3a5 the unit has wilfully defaulted in repayment of the bankGs dues even though it has been making ade&uate profit and net worth is positive. 3b5 the unit has incurred cash loss, but has no financial imbalance. 3c5 only a particular unit ' division of the company has incurred cash losses, while the overall performance of the company shows profit. TEST O% &NDERSTANDING Baroda Academy Minds 91 Inventing Methods for Igniting
)tate whether following statements are true or false. 1. To classify a 8nit as )ick Industrial company, it must be registered at least for a period of five years 6. In case of 7eak Industrial company the accumulated losses are e&ual to or more than 92O of its peak net worth for immediately preceding four years. 0. " )ick Industrial #ompany independently cannot make reference to BI*( :. If <9O of the secured creditors or more have taken decision to proceed under )"(*"+)I "ct, reference can not be made to BI*( 9. +ven after making reference to BI*( by the company, bank take legal action for recovery of dues. ;. D() under BI*( may recommend for one time settlement. <. "ny party who is aggrieved by the order of BI*( can file appeal a. in ""I*( within 02 days. =. " wilful defaulter can also take benefit of provisions of )I#" 1>=9. >. " company will come out of of BI*( when its net worth will become positive. 12. 8nit can be classified as otential sick unit, if it is incurring cash losses and likely to incur cash losses in future.
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92
SECTION II - NPA MANAGEMENT

NPA MANAGEMENT- Need o. the ho r In present scenario ! "s are at the core of financial problem of the banks. #oncrete efforts have to be made to improve recovery performance. $easures re&uired to be undertaken are mainly twofold. Banks should make efforts first to avoid fresh addition on ! "s by their effective appraisal and then through monitoring and secondly to recover the amount from accounts which have already turned bad. The main reasons of ! " are willful defaults, ineffective supervision of loan accounts and lack of technical and managerial eBpertise on the part of borrowers. ! "s put detrimental impact on the profitability, capital ade&uacy ratio and credibility of banks. ! " is a double?edged weapon. %n the one side bank cannot recognize interest on ! "s accounts and on the other, it is a drain of the bankJs profit by way of provisioning. ,igher ! " ratio shakes the confidence of investors, depositors, lenders etc. It also causes poor recycling of funds, which in turn will have deleterious effect on the deployment of credit. The non?recovery of loans effects not only further availability of credit but also financial soundness of the credit of organisation. There are a number of factors responsible for weak performance and conse&uently account turning into ! "s. ! "s occur due to the factors attributed to the borrowers, lenders and also due to eBternal environment. Borrowers may divert their funds for eBpansion, modernization, diversification etc. Banks are re&uired to have ade&uate preventive measures in fiBing pre?sanctioning appraisal responsibility and an effective post?disbursement supervision. Banks should continuously monitor loans to identify accounts that have potential to become non? performing. +ffective use of recovery tools can help in recovery of ! " like @ icking up early warning signals and providing remedial measures in time can prevent the account from turning into ! " (egular contact with borrower'guarantor has its own impact in ! " recovery +ffective use of legal measures and )"(*"+)I ,Aok "dalats and ublic $oney (ecovery "ct of the respective )tates. (eminders especially in rural areas Threats of the impact of #IBIA Timely (ephasement' (eschedulement can help in prevention !egotiation skills can help in better ! " recovery In "griculture sector, organising P#haupalQ meetings for financial literacy and educating the people for timely repayment, facilitating them for regular repayment of loans, peer pressure and meeting the borrowers in presence of their family members ? are some of the proactive steps which may help in getting regular repayment of loans and reducing the legal recourse. Time and again it is needed that all the staff members should support in recovery of ! ". There is no standard formula of recovery but if we dedicatedly try to recover the dues and use the different tricks as per demand of situation we have sufficient tools and eBperience for recovery even in hard core accounts.
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G&IDING PRINCIP"ES O% DOMESTIC RECO0ER# PO"IC# 5@25 ' ic( )ites %bEective of (ecovery olicy 6216 Guiding rinciples of (ecovery olicy
Recover+ Po*ic+/ The (ecovery olicy is a non?statutory policy document issued by Bank on a Toluntary basis. resent is the modified 'revised version and shall be called (ecovery olicy 6216 Ob?ective/ The basic obEective of the (ecovery olicy is to maBimize recovery of dues under the credit portfolio of the Bank through effective credit monitoring for prevention of slippages and to maBimize recovery in !on erforming "ssets 3! "s5 and prudentially written off accounts. G iding Princi,*es o. Recover+ Po*ic+/ Day?to?day monitoring is the first step towards ensuring good recovery and in eBtending timely assistance for any temporary mismatch of the cash flow of the customers in running their day?to?day business. 1. Greater focus is laid on preventing an account from becoming ! " rather than applying remedial measures at the post?! " stage 6. The basic approach for recovery is practical and non?preEudiced. 0. %air treatment and persuasion are the basic principles of recovery mechanism. Aegal action is considered only as the last resort3 :. Recovery action in each case would depend upon the characteristics of the case specific and prevailing circumstancesD general consistency in approach is eBpected to be maintained while dealing with the defaulting borrowers. 9. More considerate treatment would be given to the borrower customers who continue to make payments even after being classified as ! ". ;. Since timely rescheduling'restructuring helps in preventing further deterioration of the account, rescheduling ' restructuring ' rehabilitation of accounts as per (BI guidelines will be resorted to wherever warranted, on merits. 94 Inventing Methods for Igniting
<. In respect of restructuring proposals, the package is generally finalized in consultation with other lenders. #ases eligible for coverage under the #orporate Debt (estructuring 3#D(5 )ystem are intended to be referred to the #D( #ell. =. In the ! " cases where the borrower unit ' company may be facing long term problems with structural deficiencies and may not be able to operate on sustained profitable lines, including non?viable sick ' closed units, #ompromise' %ne Time )ettlement 3%T)5 option is eBplored as an eBit route >. In case of units in operation, but not found to be in a position to generate ade&uate surplus to service the debt on a long term basis even after eBamining the possibility of restructuring, #ompromise'%T) option would be considered on merits. 12. )ank may consider, assignment' sale of financial assets to "(#s ' Banks ' *Is ' !B*#s as an alternate option of (esolution and reduction in ! " ' 7% portfolio in cases where protracted litigation are going on and' or otherwise chances of recovery are poor, proving difficult and time consuming. 11. Enforcing provisions of declaring I7illful DefaultersJ in accordance with (BI guidelines for helping in maintaining credit discipline and creating a recovery climate. 16. $hile adopting (ecovery measures Bank shall follow I#%D+ *%( #%AA+#TI%! %* D8+) "!D (+ %))+))I%! %* )+#8(ITRJ, as approved by Board of Directors. "ppointment of (ecovery' +nforcement "gents shall be in accordance with guidelines issued by (eserve Bank of India from time to time. 10. )ank desires to be proactive and be guided by (BI guidelines in complying with the (ecovery measures for the asset &uality. Ins,ection o. Sec rities in NPA and P$O Acco nts/ "ll ! " and 7% account should be inspected and copy of reports should be sent to respective (egional $anagers as under/ (s %ne crore and above Aess than one crore / ,alf yearly in Lune and Dec / Rearly in Lanuary
In case access is not allowed to the Inspecting %fficers, discrete en&uiries must be made as regards status of securities and possession thereof, borrowersJ present activities'address etc and suitable observations be given in the report . )uch observation be also &uoted while noting status of 7% accounts. In case any adverse observations branch should also get land records'(egistrar of companiesJ records searched to ensure that no outside interest has been created thereon. A,,ro,riation o. Recoveries in NPA acco nts3
95
In respect of eBisting ! "s where suit is not filed, recoveries effected in the account 3 Including recovery under ubic $oney (ecovery "ct 5 from time to time shall be appropriated in the following manner. i5 ii5 iii5 Towards reduction in Book Dues. Towards recovery of eBpenses. Towards unapplied interest.
(ecovery in suit filed'decreed accounts shall be appropriated first towards legal charges'eBpenses awarded by the court, there after interest due and finally principal amount. Record o. &na,,*ied Interest 4charges Branch shall maintain a record of unapplied interest and other charges at contracted rate and update the same at periodical intervals. Ins rance ChargesC Assets 0a* ation chargesC Stoc( A dit ChargesC Sec rit+ Charges etc3 In respect of ! " accounts, which are not operated, the above mentioned charges shall not be debited to the accounts. The eBpenses incurred shall be debited to the )an(!s Pro.it and "oss acco nt and record of the same shall be maintained. Additiona* % nding in gen ine cases3 Borrower having genuine problems due to temporary mismatch in funds flow or sudden re&uirements of additional funds may be entertained as follows/ "ll senior branch manager 3 including )r $anager 3 #r'(ecovery 5 in ('%s 5 and above are authorised to sanction )pecial Temporary Aimits 3 )TA 5 with proper Eustifications, within their eBisting discretionary lending powers i.e. up to the remaining portion in DA . The limit'present outstanding in the account plus the )TA shall determine the level of sanctioning authority. It shall be satisfied that the temporary mismatch is not because of diversion of short term funds outside business or for long term uses. Dis,osa* o. Assets in NPA4P$O Acco nts $any times, borrowers approach the bank to allow them to sell the assets charged to the bank and deposit the proceeds in the borrowal accounts with the Bank. "nother Bank or *inancial Institution may also approach for sale of assets commonly charged to them and us. There may be instances where a third party may approach the bank to buy the assets charged by the borrower to the Bank. In such cases #hief $anager 3 including Dy. (egional $anagers )cale IT and above 5 and above can authorize sale of such assets in accounts, as per norms. Before authorising sale of current assets, a fair value of such assets should be ascertained. In respect of fiBed assets, valuation of such assets should be conducted by 96 Baroda Academy Inventing Methods for Igniting Minds
bankJs 3 or other bankJs'*IJs Taluer 5 approved valuer. In respect of movable machinery, fair market value should be ascertained or valuation should be done before authorising sale of assets.3 valuation of the lending *I may be considered for approval if done by a Government'7ealth taB approved valuer 5. The sanctioning authorities should ensure that the amount to be deposited in the borrowal accounts conse&uent upon such authorisation of sale of assets should generally not be lower'less than the !et resent Talue 3 !" 5 of the realisation value of assets being allowed to be disposed off 3 fair market value and not the distress value 5 net of the cost of realisation in accordance with (BI guidelines. Monitoring o. NPA4P$O4T$O )orro-a* Acco nts/ Bank has evolved a system of continuous monitoring of large ! "' 7% borrowal accounts on monthly basis. The purpose of regular monitoring is / 1. To eBamine whether account can be upgraded by rechedulement'restructuring'rehabilitation. 6. To attempt to make appropriate provision because of deterioration in value of security conse&uent upon ageing process. 0. To prevent the assets from becoming loss assets. :. To eBplore the possibility for an acceptable compromise settlement. 9. To ascertain current status of D(T'BI*( proceedings. The report should give details of efforts made to recover the dues and developments in the account. The periodicity for submission of $onitoring (eports is as under/ *or ! " - 7% accounts with %'s (eport to be submitted balance 3*BK!*B5Aimit or %'s by'(eviewed by whichever is higher "ccounts (s 12 #rs and above Through Honal $anager by #$D'+D "ccounts (s 9 #rs and upto (s 12 crs Through (egional $anagr by Honal $anager "ccounts (s 1 crore and above and Through (egional $anager below (s 9 crore by Dy Honal $anager "ccounts (s 12 Aacs - above and Through Dy (egional below (s 1 crore $anager by (egional $anager "ccounts (s 9 Aacs - above and below By Dy (egional $anager (s 12 Aacs "ccount below (s 9 Aacs By Branch $anagers eriodicity Bi monthly Bi monthly Fuarterly Fuarterly $onthly'(egular monitoring. $onthly'(egular $onitoring.
Stat s Revie- o. NPA Acco nts )tatus notes of all ! " accounts giving details of action already initiated and proposed to be initiated should be submitted to their (egional '(eporting authority at half yearly Baroda Academy Minds 97 Inventing Methods for Igniting
intervals who shall note the status of the account and advise steps to be taken for eBpediting recovery in ! " accounts. Revie- o. P$O4T$O Acco nts "ll 7% accounts should be reviewed on half yearly basis as on 01 st December and 02th Lune every year by way of status note as follows/ 7% accounts (s 12 crores and above by #orporate %ffice 7% accounts (s 9 crores and above by Honal ,ead 7% accounts (s 1 crores and above by (egional ,ead 7% accounts upto (s 1'? crore by Branch ,ead %ina*4P re $rite O../ NO %INA" $RITE O%% -i** be considered at branch *eve* headed b+ Chie. Manager or be*o*inal write off may be considered by the Bank only when it becomes clear that there is absolutely no chance of further recovery in the account/ +ither by way of (ealization of "ssets charged %( By way of proceedings against uncharged assets standing in the name of borrower's and Guarantor's %( By way of proceeding for personal liability of borrower and guarantor's "!D *urther continuing of the account in the books for follow up'recovery will only add cost to Bank and wastage of resources and thorough check up has been made regarding non availability of assets and means of the borrower'guarantors 3 or legal heirs 5 have been ascertained. 7here frauds are reported in advances accounts and complaints are lodged with #BI' olice "uthoities and criminal investigations'proceedings are initiated by such authorities, !% *I!"A 7(IT+ %** 7IAA B+ #%!)ID+(+D +S#+ T with authority of $#B, pending action by outside investigation agencies. In other cases delegated powers to consider final write offi are as under/ !ame of "uthority Branch ,ead 3 )cale I to IT5 Branch ,ead and Dy (egional $anager 3 )cale T5 (egional ,ead 3 scale T-TI5'DG$ ,ead branch Baroda Academy Minds *or accounts o's in GA !IA (s ; lacs (s 16.92 Aacs 98 *or 7% accounts !IA (s 16.92 lacs (s 62 Aacs Inventing Methods for Igniting
Honal ,ead and above
8pto delegated powers of )acrifice
8pto delegated powers of )acrifice
TEST #O&R &NDERSTANDING 1. In case of ! " accounts of (s %ne crore and above, inspection of securities is to be done a5 half yearly b5 Rearly c5 !o need to do inspection d5 ,alf yearly in Lune and December e5 Fuarterly 6. In case of ! " account, if there is recovery in the account, it should appropriated in following se&uence. 15 Book Dues 65 +Bpenses 05 8napplied Interest a5 6?0?1 b5 0?6?1 c5 1?6?0 d5 In any order e5 %nly towards book dues. 0. (egular monitoring of ! " accounts upto (s 9 lac is to be done by a5 b5 c5 d5 e5 (egional $anager Dy (egional $anager Branch ,ead "ny body #redit %fficer of the Branch
:. In case of ! " ' 7% accounts of (s 9 crore and above branch to submit monitoring report to (egional %ffice on ZZZZZZZZZZZbasis. a5 b5 c5 d5 e5 $onthly Bi?monthly Fuarterly ,alf yearly Rearly
9. "ll 7% accounts are to be reviewd once in ZZZZZ months. a5 16 monhs b5 20 months c5 2; months d5 !o !eed to review e5 !o specific guidlines Baroda Academy Minds
99
State .o**o-ing state1ents are TR&E or %A"SE 1.$ain obEective of (ecovery olicy 6216 is to take legal action in respect of all ! " account for recovery of dues. 6. +venthough the account has become ! " and is not operative, it will be in order for branch to debit banks charges, valuation charges etc to that account. 0. In case of ! " account, no additional funding can be sanctioned at branch level. : .In case of ! " account, if borrower is willing to sell the assets and pay the due bank can consider his re&uest , subEect to certain condition. 9. In case of ! " account branch to submit status notes to (egional %ffice , once in siB months, to appraise the developments in the account and present status of account. F !o "ns F !o "ns 1 d 1 *alse 6 c 6 *alse 0 c 0 *alse : b : True 9 c 9 True
100
CA&SES AND COSE'&ENCES O% NON-PER%ORMING ASSETS ' ic( )ites #auses of !on? erforming "ssets? Internal - +Bternal #onse&uences of !on? erforming "ssets #onse&uences on Fuality of Aending #onse&uences on rofitability #onse&uences on capital "de&uacy #onse&uences on other factors
Introd ction/ By the late 1>=2s, the state of the Indian financial sector was precarious. *ailing profitability, dubious loan portfolio, lack of credit discipline, politicized appointment of chief eBecutives, loss making rural branches, deteriorating customer service was the principal maladies. By the 1>>2, many of the nationalized banks had to run through their capital. Banks were saddled with an alarming level of bad loans. The massive funds blocked in such sticky loans could not be recycled due to non?recovery of dues in Advances. This led to the erosion of banksJ profitability as they re&uire higher provisions. The reasons for growing ! "s, as revealed by the (eserve Bank of India study group , are as follows/ 1. Diversion of funds, mostly for eBpansion' diversification' modernization, taking up new proEects or helping' promoting associate concernsD Time' cost overrun during the proEect implementation stage, *actors internal to business like product' marketing etc failure, inefficient management, )trained labour relations and inappropriate technology' technical problems and product obsolescenceD #hanges in the macro environment like recession, infrastructural bottle necks etcD #hanges in Government policies3 eBport?import duties5D !on payment in other countriesD %ther systemic deficiencies like delay in release of sanctioned limits by banks. It is also revealed that the internal factors outweighed the eBternal factors in accounts turning bad. CA&SES O% ASSETS )ECOMIMNG NON-PER%ORMING/ The various causes that make an asset !on? erforming can be broadly classified into +Bternal #auses and Internal #auses. 3i5 The +Bternal #auses are those which are attributable to reason, which are beyond the control of the borrower or the management. 3ii5 The Internal #auses are those which are within the control of the borrower Baroda Academy Minds 101 Inventing Methods for Igniting
or management and attributable to them. E;terna* Ca ses The following could be termed as +Bternal #auses for an account becoming an ! "/ 3i5 "dverse Government olicy guidelines affecting the production'marketing )ales of the product. 3ii5 !atural calamity leading to destruction of assets. 3iii5 #losure of factory due to strikes, court orders. 3iv5 (ecession in the Industry. 3v5 "dverse change in the proEected demand due to factors like environmental regulations, change of fashion, change in consumer needs etc. 3vi5 Inputs' power shortage 3vii5 rice escalation Interna* Ca ses The Internal #auses for an account becoming ! " could be any or many of the following/ =i> Manage1ent/ 3a5 7illful default. 3b5 Dishonesty of partners, directors, proprietor etc. 3c5 Dispute among partners, directors etc. 3d5 Aack of proper organizational set up and control. 3e5 Aack of farsightedness' hesitation for modernization 3ii5 Mar(eting/ Inade&uate product base. Aack of distribution channels. Irregular delivery. Inappropriate pricing. 8nhealthy competition =iii> %inancia*/ ;. *aulty costing and pricing. <. Aack of resources. =. Diversion of funds for unproductive eBpenditure. >. #ostly outside borrowings. 12. Increased cost of production. 11. 8nder financing =iv> Prod ction/ 1. 6. Inappropriate technology. Aack of production planning and control. 102 Inventing Methods for Igniting
0. :. 9. ;. <. =.
*re&uent machine breakdowns. oor labour productivity. Inferior &uality of finished goods. *aulty inventory planning. oor &uality control. Improper site' location
CONSE'&ENCES O% NON-PER%ORMING ASSETS 7henever an asset becomes !on? erforming its conse&uences on the bank can be manifold and they can be broadly classified into : categories/ 3i5 #onse&uences on Fuality of Aending. 3ii5 #onse&uences on rofitability. 3iii5 #onse&uences on #apital "de&uacy. 3iv5 #onse&uences on other factors. =i> ConseE ences o. NPA on ' a*it+ o. "ending The most important conse&uence of an asset becoming ! " is the effect on the &uality of the advances portfolio. The health of the "dvances portfolio is measured in terms of its capacity to generate income. Ideally all advances, properly appraised and sanctioned, should remain performing till recovery of all the dues. ,owever, due to various factors described above, accounts become non?performing. Thus, the health and &uality of the lending portfolio is measured by the level of non?performing assets. The higher level of ! " would render lending portfolio less healthy. ,igher percentage of ! " to total "dvances reflects poorly on the &uality of appraisal, follow?up and recovery. Thus, the level of ! " provides a &uantitative picture of the &ualitative aspects of #redit "dministration #redit $anagement. =ii> ConseE ences o. NPA on Pro.itabi*it+ 3i5 The direct outcome of an account becoming ! " is two?fold/ 3a5 Aoss of income by way of interest etc. 3b5 rovisioning re&uirement. 3ii5 "s per eBtant guidelines, when an account becomes ! ", income by way of interest etc. cannot be recognized on accrual basis. In other words, %n an account turning to ! " category , banks should reverse the interest already charged and not collected by debiting rofit and Aoss account, and stop further application of interest . Therefore, an immediate outcome of an account becoming ! " is the loss of income to the Bank by way of interest etc. 3iii5 *urther, as per norms for provisioning prescribed by (BI, bank will have to provide for certain percentage of outstanding amount against the loss that may arise, due to the classification of an account as ! ". )uch provisioning re&uirement, as per the regulatory norms may vary from 19O to 122O of balance outstanding, depending upon the 103 Inventing Methods for Igniting Baroda Academy Minds
classification of an asset as sub?standard, doubtful or loss and also on the realizable value of securities available. )uch provisions have to be made from the Gross rofit made in a year which includes interest income from other standard assets. 3iv5 To illustrate the point, assume that an account with outstanding balance of (s. 12,22,222'? is treated as ! ". "ssuming that the average rate of interest on the a'c is 16O, the loss of income by way of interest in a year would be about (s. 1,62,222'? 3"pproB.5. If the account is classified as substandard a further provision of (s. 1.92'? lac . 19O will have to be made from the Gross rofit. Therefore, the net rofit would be reduced by (s. 1,62,222'?K 1,92,222'? [ 6,<2,222'? on account of the a'c being treated as ! ". =iii> ConseE ences o. NPA on Ca,ita* AdeE ac+ 3i5"s per (BIJs guidelines, all commercial banks are re&uired to maintain a minimum #("( of > percent on an ongoing basis, which will be 11.9O under Basel III on an ongoing basis 3ii5 The unimpaired capital - reserves can be strengthened either by issue of fresh capital or by retaining profits. 7hile the issue of fresh capital will depend upon statutory guidelines, market conditions, performance of the bank etc. the addition to reserves is directly related to the profitability of the bank. The profitability in turn is dependent on the income earning capacity, which is dominated by interest income from "dvances. 3iii5 If the !on? erforming "ssets are more, the income generating capacity gets reduced and conse&uently the profitability is affected thus affecting the capital ade&uacy of the bank. 3iv5 The effect of not achieving the capital ade&uacy norm is that risk weighted assets like advances cannot be increased without a corresponding increase of at least > O in unimpaired capital and reserves. =iv> ConseE ences o. NPA on other .actors Besides the three maEor conse&uences of ! ", there are some other ramifications of increase in ! ". )ome of them are given below/ 3i5 International banks insist on all banks having e&ual prudential norms for doing business with them. Therefore, banks having large ! " would find it difficult to have banking relations with them, like opening of A#s, negotiation of documents under A#s, opening lines of credit etc. 3ii5 (BI has modified the guidelines on issue of licenses for opening of new branches, whereby only those banks whose ! " levels are below the desired level will be allowed to open new branches. 3iii5 ,igh level of ! " prevents the banks from obtaining a good credit rating which in turn, would impair its ability to issue shares on high premium 3iv5 In present competitive environment, market analysts, press media, business channels, critically comment upon the performance of #orporate and specifically Banks and *inancial 104 Inventing Methods for Igniting Baroda Academy Minds
Institutions. ,ealth of "ssets, level of net and gross ! "s and conse&uently the profitability of Bank is always under scanner of $arket. This has direct bearing on the stock price of share having bearing on the capacity of the Bank to raise fresh capital as well as the confidence of all stake holders viz. Investor 3(etail5 *IIs, #orporate and Banks consultants. The huge level of ! " also affects the (eturn on "ssets, !et worth, "utonomy, Business eBpansion, image of the Bank etc. (BI has taken action on the following areas of concern to contain the increasing ! "s among the Banks/ 1. 6. 0. :. 9. ;. (estriction on eBpansion of (isk weighted assets #apital restoration plan "pproval for opening new branches !ew lines of business aying off costly deposits Drive to reduce ! "
To conclude, Bank credit is the catalyst to economic growth of the country. "ny bottleneck in the smooth flow of credit like ! " will have serious repercussions in the economy. TEST O% &NDERSTANDING )tate following statements True or *alse. 1. The increasing ! " has only an impact on profitability of Bank. Diversion of funds is an eBternal cause of ! ". *re&uent strike in the factory is an eBternal cause of ! "
:. Increasing ! " will have an adverse impact on business eBpansion. 9. Increasing ! " may affect incentive schemes for staff. Bifurcate the following causes of ! " into different categories. !o. 1 0 9 < #ause "dverse Government olicy Inade&uate product base rice escalation Inappropriate technology !o. 6 : ; = 105 #ause oor &uality of product Increased cost of production 8nproductive eBpenditure !atural calamity Inventing Methods for Igniting
>
8nhealthy competition.
12
Irregular delivery
"!)7+() F " 1 *"A)+ 6 *"A)+ Fuestion !o. : ,;, 0 ,>, 12 0 T(8+ : T(8+ 9 T(8+ Fuestion !o 6, <, 1 ,9, = ,
Type of cause *inancial cause $arketing cause
Type of #ause roduction +Bternal cause
106
INCOME RECOGNITIONC ASSET C"ASSI%ICATION 8 AD0ANCES PORT%O"IO 8CAPITA" ADE'&AC# NORMS Quick Bites 23@ Concept of N&'s Various &rudential Norms /ncome (ecognition norms 'sset Classification Norms &ro!isioning Norms Introd ction
PRO0ISIONING
NORMS
IN
In December 1>>1, the #ommittee on the *inancial )ystem, under the chairmanship of )hri $. !arasimham W!arasimham #ommitteeY recommended for the introduction of the prudential norms on income recognition, asset classification and provisioning in advance portfolio of banks in line with the international practices. The (BI introduced these norms in banks in a phased manner starting from the year 1>>0. The prudential norms on Income recognition re&uire banks to classify advance accounts as !on?performing "ssets W! "Y if interest or installment remains unpaid for a certain period and not to recognize income on such accounts on accrual basis. The prudential norms on Asset C*assi.ication re&uire banks to classify all advance accounts into four categories namely )tandard, )ub?standard, Doubtful and Aoss assets depending on the period for which they have remained !on? erforming "ssets and their recovery prospects. The prudential norms on Provisioning re&uire banks to make provision on different types of assets. The basic purpose of these norms is to move towards greater consistency and transparency in published accounts. 7ith a view to moving towards international best practices and ensure greater transparency, the (eserve Bank of India has decided to adopt the P >2 days overdueQ norm for identification of ! "s, from the year ending 01 st $arch,622:. ,owever, %ur Bank adopted to switch over to ?>2? days norms from the &uarter ending 01st December, 6220 it self. 7ith the introduction of these norms the (BI withdrew the health code norms and made it optional on the part of banks to use the same. 53@ De.inition o. Non-,er.or1ing Assets KNPAL
#onceptually, an asset becomes non?performing, when it ceases to generate income .or the )an(. The (BI has given the following guidelines for classification of advance accounts to ! "s. 532 "oan Acco nts = T"4D"> Baroda Academy Minds 107 Inventing Methods for Igniting
" Aoan account Wterm loan'DAY is to be classified as ! " when interest and'or installment of principal remain overdue for a period of more than >2 days. *or eBample, a loan account will not be classified as ! " on 01st $arch 6210, if the interest and installment on principal have been fully serviced up to 01st December, 6216. " loan account where the interest has been serviced but the installment has remained unpaid will also be classified as ! ". 53@5 Cash Credit or Overdra.t Acco nt
" cash credit or overdraft account is to be classified as ! " when it remains o t o. order as on date of Balance )heet for reasons as given below/ If the outstanding balance remains continuously in eBcess of the sanctioned limit ' drawing power for >2 days, %( where the outstanding balance in the principal operating account is less than the sanctioned limit'drawing power, but there are no credits for >2 days as on the date of Balance )heet, %( #redits are not enough to cover the interest debited during the same periodD E;a1,*e "s on 01.20.6210, if we find that the outstanding balance in a cash credit account has remained continuously in eBcess of the sanctioned limit ' drawing power during the $arch 6210 &uarter, it should be classified as ! ". If as on 01st $arch 6210, we find that in a cash credit account the outstanding balance in the account is less than the D ' sanctioned limit and there has been no credit to the account during $arch 6210 &uarter, the account has to be classified as ! ". *urther if as on 01st $arch 6210, we find that in a cash credit account the outstanding balance in the account is less than the D ' sanctioned limit and the total of all credits made during $arch 6210 &uarter is less than the interest debited in this &uarter, the account has to be classified as ! ". 53@7 )i** , rchased 4 )i** Disco nted acco nt
" bill purchased ' bill discounted account will be classified as ! " if the bill remains overdue for a period of more than >2 days from the due date. 53@9 Agric *t ra* advances
" crop loan account for short duration crop will be classified as ! " if the instalment of principal or interest thereon remains overdue for two crop seasons subEect to maBimum 16 months. Wi.e. remains unpaid for two crop seasons beyond due date.Y Baroda Academy Minds 108 Inventing Methods for Igniting
" crop loan account for long duration crops will be classified as ! " if the instalment of principal or interest thereon remains overdue for one crop season, subEect to maBimum 16 months . WAong duration crops means crops with crop season longer than one year.Y (BI has directed that the repayment schedule of the rural housing advances to agriculturists under Indira "was RoEana and Golden Lubilee (ural ,ousing *inance )cheme should be linked to crop cycles. In case of term loans given to non?agriculturists the account becomes ! " on the basis of >2 days delin&uency norms as applicable to non?agriculture finance. )an(s sho *dC c*assi.+ an acco nt as NPA on*+ i. the interest d e and charged d ring an+ E arter is not serviced . **+ -ithin B@ da+s .ro1 the end o. the E arter3 53@: In respect of derivative transactions, the overdue receivables representing positive mark?to?market value of a derivative contract, if these remain unpaid for a period of >2 days from the specified due date for payment. 73@ NPA d e to te1,orar+ de.iciencies in Acco nts In case of cash credit accounts, where the stock statement has not been obtained for a continuous period of more than three months and the outstanding in the account is based on drawing power calculated from stock statements which is older than -7- months would be deemed as irregular. " working capital borrowal account will become ! " if such irregular drawings are permitted in the account for a continuous period of ?>2? days even though the unit may be working or the borrowerJs financial position is satisfactory. "n account where the regular' ad hoc credit limits have not been reviewed' renewed within 2A@ days from the due date' date of ad hoc sanction will be treated as ! ". 93@ Other ,oints on NPA c*assi.ication
Consorti 1 advances/ In case of consortium advances, the account will be classified as ! " by a member bank depending on the record of recovery in its own books irrespective of the recovery status with the lead bank or any other member bank. NPA c*assi.ication borro-er -ise and not .aci*it+ -ise / In case any one of the facilities sanctioned to a borrower is classified as ! ", all other credit facilities availed by him and also the investments made by the bank in all securities issued by him will also be classified as ! ". E;e1,ted Categories/ "dvance against bankGs term deposits, !)#s, IT s, 4T s, and Aife olicies will not be classified as ! " if the outstanding balance is fully covered by Baroda Academy Minds 109 Inventing Methods for Igniting
such securities. These advances also come under the eBempted category for the purpose of income recognition and asset classification. Advance g aranteed b+ Govt. / The credit facilities guaranteed by Govt. Wboth central or stateY will be treated as ! " as per the above mentioned >2 days delin&uency norms. W,owever the treatment is different for the purpose of asset classification.Y Post-shi,1ent S ,,*ierMs Credit i. #redit eBtended by the banks covering eBport of goods to countries for which the +#G#Js cover is available, +SI$ Bank has introduced a guarantee?cum?refinance programme whereby, in the event of default, +SI$ Bank will pay the guaranteed amount to the bank within a period of 02 days from the day the bank invokes the guarantee after the eBporter has filed claim with +#G#. "ccordingly, to the e;tent ,a+1ent has been received from the +SI$ Bank, the advance may not be treated as a nonperforming asset for asset classification and provisioning purposes
ii.
E;,ort Pro?ect %inance i. ii. In respect of eBport proEect finance, 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, 8! embargo In such cases, where the lending bank is able to establish through documentary evidence that the importer has cleared the dues in full by depositing the amount in the bank abroad before it turned into ! " in the books of the bank, but the importerGs country is not allowing the funds to be remitted due to political or other reasons, 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.
Pro?ect "oan? G roEect AoanG would mean any term loan which has been eBtended for the purpose of setting up of an economic venture. Banks must fiB a Date of #ommencement of #ommercial %perations 3D##%5 for all proEect loans at the time of sanction of the loan ' financial closure 3in the case of multiple banking or consortium arrangements5. *or this purpose, all proEect loans have been divided into the following two categories/ 3a5 roEect Aoans for infrastructure sector 3b5 roEect Aoans for non?infrastructure sector " loan for a proEect will be classified as ! "/ i. "s per record of recovery 3i.e. >2 days overdue5 ii. %n account of non?achievement of commercial operations, *or In.rastr ct re Sector/ if it fails to commence commercial operations within two years from the original D##%,
110
*or Non In.rastr ct re Sector/ 8p to siB months from the original Date of #ommencement of #ommercial %perations 3 D##%5, even if it is regular as per record of recovery. Restr ct ring o. Pro?ect "oan/ If a proEect loan classified as Gstandard assetG is restructured any time during the period up to two years 3 Infra structure5 - )iB months 3 !on Infra structure 5 from the original date of commencement of commercial operations 3D##%5, within the following limits, and further provided the account continues to be serviced as per the restructured terms. 3a5 Infrastructure Projects involving court cases 8p to another 6 years 3beyond the eBisting eBtended period of 6 years i.e total eBtension of : years5, in case the reason for eBtension of date of commencement of production is arbitration proceedings or a court case. 3b5 Infrastructure roEects delayed for other reasons beyond the control of promoters 8p to another 1 year 3beyond the eBisting eBtended period of 6 years i.e. total eBtension of 0 years5, in other than court cases. E;ce,tion/ "ny change in the repayment schedule of a proEect loan caused due to an increase in the proEect outlay on account of increase in scope and size of the proEect, -o *d not be treated as restr ct ring i./ 3a5 The increase in scope and size of the proEect takes place before #ommencement of commercial operations of the eBisting proEect. 3b5 The rise in cost eBcluding any cost?overrun in respect of the original roEect is 69O or more of the original outlay. 3c5 The bank re?assesses the viability of the proEect before approving the enhancement of scope and fiBing a fresh D##%. 3d5 %n re?rating, 3if already rated5 the new rating is not below the previous rating by more than one notch. 5.0 INCOME RECOGNITION / income recognition has to be obEective and based on the record of recovery Banks should not charge and take to income account interest on any ! ".
111
Interest on advances against term deposits, !)#s, IT s, 4T s and Aife policies may be taken to income account on the due date, provided ade&uate margin is available in the accounts Reversa* o. inco1e/ In case o. NPA Acco nt the entire interest accrued and credited to income account in the past periods should be reversed if the same is not realised. This -i** a,,*+ to Govern1ent g aranteed acco nts a*so3 In respect of ! "s, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected 6.0 ASSET C"ASSI%ICATION / a3 Standard b3 NPA Standard Assets)tandard assets are those, which are regular in payment of interest and Installments due as per sanction. Non,er.or1ing assets/ Banks are re&uired to classify non,er.or1ing assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues/ i. S bstandard Assets ii. Do bt. * Assets iii. "oss Assets <3@2 S bstandard Assets 7ith effect from 01 $arch 6229, a substandard asset would be one, which has remained ! " for a period less than or e&ual to 16 months. In such cases, the current net worth of the borrower' guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that Eeopardize the li&uidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. <3@5 Do bt. * Assets 7ith effect from 01 $arch 6229, a Doubtful asset is one which has remained in sub standard category for period of ?16? months. !ormally , once an account becomes ! ", it is classified as substandard asset and it remains in this classification for 16 months and unless upgraded to standard asset, it is then classified as doubtful asset. In case of accounts where there is a significant erosion in the value of security i.e. if the realizable value of the security is less than 92O of the value of security Baroda Academy Minds 112 Inventing Methods for Igniting
assessed in the last year by the bank ' (BI inspectors or where the borrower has provided fraudulent security, the account can be straight a-a+ c*assi.ied as do bt. *3 <3@7 "oss Assets " loss asset is one where loss has been identified by the bank or internal auditor or eBternal auditor or by (BI inspector but the amount has not been written off wholly. It is an asset which is considered uncollectible and is of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 7here the realizable value of the security is less than 12 O of the outstanding of the borrowal account, the eBistence of the security should be ignored and the account should straight a-a+ be c*assi.ied as *oss asset <3@9 "oans -ith 1oratori 1 .or ,a+1ent o. interest/ . 7here moratorium is available for payment of interest, payment of interest becomes GdueG only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence do not become ! ", with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected. In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first &uarter onwards. )uch loans'advances should be classified as ! " only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates.
<3@: &, gradation o. *oan acco nts c*assi.ied as NPAs If arrears of interest and principal 3 Total overdue5 are paid by the borrower in the case of loan accounts classified as ! "s, the account should no longer be treated as nonperforming and may be classified as IstandardJ accounts 7.0 Provisioning Nor1s
The primary responsibility for making ade&uate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the (BI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making ade&uate and necessary provisions in terms of prudential guidelines. In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security Baroda Academy Minds 113 Inventing Methods for Igniting
charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below/ a. "oss Assets/ Aoss assets should be written off. If loss assets are permitted to remain in the books for any reason, 2@@ ,ercent of the o tstanding should be provided for. b. Do bt. * Assets/ In case of doubtful assets, bank has to provide 69O or :2O or 122O of the secured portion depending upon the period for which the asset has been classified as doubtful ,* s 2@@J o. the sec rit+ short.a** . If the asset has remained in doubtful category for a period of not more than one year the provision re&uirement is 69O of the secured portion, for more than one year and up to three years it is :2O and for more than 0 years it is 122O. eriod for which the advance has remained in IdoubtfulJ category &, to one +ear One to three +ears More than three +ears rovision re&uirement 3O5 69 :2 2@@
The security shortfall will be calculated as per the following formula. Sec rit+ Short.a** N O tstanding A1o nt - Rea*iOab*e va* e o. the sec rit+ - A1o nt o. c*ai1 i. receivab*e .ro1 ECGC or CGTSI. ,ere the realisable value of security means the current market value of both the prime security and collateral security. The g arantee i. avai*ab*e .ro1 ECGC or CGTSI has to be ca*c *ated on the a1o nt -hich is arrived a.ter ded cting the rea*iOab*e va* e o. sec rit+ .ro1 the *oan o tstanding3 In case of ! " account with balance above (s. 9 crores, bank has to get the stock audit done every year by eBternal agencies appointed as per the guidelines approved by the Board of Directors. The collaterals such as immovable properties should be got valued once in three years by valuers appointed as per the Guidelines approved by the Board of Directors. c3 S b-standard Assets
114
In case of substandard assets, a general provision of 2:J has to be made on the total outstanding of the substandard asset without any allowance for +#G# cover available and also securities available. In case of unsecured eBposure, which has been identified as substandard, an additional provision of 12O is to be done i.e. 5:J of the outstanding balance is to be provided for. 8nsecured eBposure is defined as an eBposure where the realisable value of the security, as assessed by the bank'approved valuers'(eserve BankJs inspecting officers, is not more than 12 percent, ab-initio, of the outstanding eBposure HSec rit+! 1ean tangib*e sec rit+ ,ro,er*+ charged to the ban( and -i** not inc* de intangible securities like guarantees 3including state government guarantees5, comfort letters etc. The rights, licenses, authorisations, etc., charged to the banks as collateral in respect of proEects 3including infrastructure proEects5 financed by them, should not be reckoned as tangible security. ,ence such advances shall be reckoned as unsecured. Fo-ever, banks may treat annuities under build?operate?transfer =)OT> model in respect of road ' highway proEects and toll collection rights, where there are provisions to compensate the proEect sponsor if a certain level of traffic is not achieved, as tangible securities subEect to the condition that banksG right to receive annuities and toll collection rights is legally enforceable and irrevocable Fo-ever P nsec red e;,os resQ in respect of Infrastructure Aoan accounts classified as sub?standard, in case of which certain safeguards such as escrow accounts are available will attract an additional provision of 9O only. i.e a total of 62O as against the eBisting 69O. d. Standard Assets
Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis. 3a5 3b5 3c5 3d5 Direct advances to agricultural and )$+ sectors 3$icro - )mall5 at 2.69 O "dvances to #ommercial (eal +state @at 1.22O "ll other loans and advances not included in 3a5 and 3b5 above at 2.:2O ,ousing Aoans at Teaser rates ? 6O
e3 Restr ct red Advances / (estructured accounts classified as standard advances will attract provision of 6.<9 per cent in the first two years from the date of restructuring. In cases of moratorium on payment of interest'principal after restructuring, such advances will attract a provision of 6.<9 per cent for the period covering moratorium and two years thereafterD and Baroda Academy Minds 115 Inventing Methods for Igniting
(estructured accounts classified as non?performing advances, when upgraded to standard category will attract a provision of 6.<9 per cent in the first year from the date of up gradation In.rastr ct re ,ro?ects/ Partic *ars If the revised D##% is within two years from the original D##% prescribed at the time of financial closure If the D##% is eBtended beyond two years and upto four years or three years from the original D##%, as the case may be, depending upon the reasons for such delay Provisioning ReE ire1ent 2.:2O 6.<9 O @ *rom the date of such restructuring till the revised D##% or 26 years from the date of restructuring, 7hichever is later.
116
Non In.rastr ct re ,ro?ects/ Partic *ars If the revised D##% is within siB from the original D##% prescribed at the time of financial closure If the D##% is eBtended beyond siB months and upto one year from the original D##% prescribed at the time of financial closure Provisioning ReE ire1ent 2.:2O 6.<9 O @ *rom the date of such restructuring for 26 years.
.3 Additiona* Provisions .or NPAs at higher than ,rescribed rates The regulatory norms for provisioning represent the minimum re&uirement. " bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under eBisting regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. )uch additional provisions are not to be considered as floating provisions. The additional provisions for ! "s, like the minimum regulatory provision on ! "s, may be netted off from gross ! "s to arrive at the net ! "s g3 Ta(eo t .inance The lending institution should make provisions against a Gtakeout financeG turning into ! " pending its takeover by the taking?over institution. "s and when the asset is taken?over by the taking?over institution, the corresponding provisions could be reversed. h3 Reserve .or E;change Rate %* ct ations Acco nt =RER%A> 7hen eBchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign currency denominated loans 3where actual disbursement was made in Indian (upee5 which becomes overdue, goes up correspondingly, with its attendant implications of provisioning re&uirements. )uch assets should not normally be revalued. In case such assets need to be revalued as per re&uirement of accounting practices or for any other re&uirement, the following procedure may be adopted/ The loss on revaluation of assets has to be booked in the bankGs "ccount. rofit - Aoss
Besides the provisioning re&uirement as per "sset #lassification, banks should treat the full amount of the (evaluation Gain relating to the corresponding assets, if any, on account of *oreign +Bchange *luctuation as provision against the particular assets i3 Provisioning .or co ntr+ ris(
117
Banks shall make provisions, with effect from the year ending 01 $arch 6220, on the net funded country eBposures on a graded scale ranging from @35: to 2@@ percent according to the risk categories ?3 Provisions .or Di1in tion o. %air 0a* e rovisions for diminution of fair value of restructured advances, both in respect of )tandard "ssets as well as ! "s, made on account of reduction in rate of interest and ' or reschedulement of principal amount are permitted to be netted from the relative asset. (3 Provisioning nor1s .or "iE idit+ .aci*it+ ,rovided .or Sec ritisation transactions The amount of li&uidity facility drawn and outstanding for more than >2 days, in respect of securitisation transactions undertaken in terms of our guidelines on securitisation dated *ebruary 1, 622;, should be fully provided for *3 Provisioning reE ire1ents .or derivative e;,os res #redit eBposures computed as per the current 1ar(ed to 1ar(et value of the contract, arising on account of the interest rate - foreign eBchange derivative transactions, credit default swaps and gold, shall also attract provisioning re&uirement as applicable to the loan assets in the GstandardG category, of the concerned counterparties 13 Provisioning Coverage Ratio i. rovisioning #overage (atio 3 #(5 is essentially the ratio of provisioning to gross non?performing assets and indicates the eBtent of funds a bank has kept aside to cover loan losses. ii. *rom a macro?prudential perspective, banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn. This will enhance the soundness of individual banks, as also the stability of the financial sector. It was, therefore, decided that banks should augment their provisioning cushions consisting of specific provisions against ! "s as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than <2 per cent. The PCR o. the ban( sho *d be disc*osed in the Notes to Acco nts to the )a*ance Sheet3 n3 $rite-o.. at Fead O..ice "eve* Banks may write?off advances at ,ead %ffice level, even though the relative advances are still outstanding in the branch books. ,owever, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 122 percent provision will have to be made therefore S&MMAR# O% PRO0ISIONS =IN JAGES> Baroda Academy Minds 118 Inventing Methods for Igniting
)tandard @General accounts Direct "griculture - )$+3$icre - )mall5 #ommercial (eal +state Treser rate loan @ for 1st Rear (estructured Aoan )ub?)tandard ? )ecured )ub?)tandard ? 8nsecured Doubtful? 8p to %ne Rear Doubtful? %ne Rear to 0 years Doubtful? more than three Rears *or 8nsecured portion of Doubtful Aoss "ssets TEST O% &NDERSTANDING
2.:2O 2.69O 1.22O 6.22O 6.<9O 19O 69O 69O :2O 122O 122O 122O
1. If any irregularity persists beyond ZZZZZ days we call it as a special mention account. a5 ;2 Days b5 02 days c5 >2 days d5 162 days
6. $aBimum period the account can remain in sub standard category is ZZZ months. a50; b56: c5:= d516
0. Aoss accounts are those accounts where there is no security or value of security is less than ZZZZZZ of outstanding balance. a59O b519O c512O d562O
:. "n agricultural account will become ! " if a5 Instalment or interest is overdue for more than >2 days . b5 Instalment or interest is overdue for more than one crop season in case of long duration crop maBimum 16 months c5 Instalment or interest is overdue for more than two crop seasons in case of short duration crop maBimum 16 months d5 Both b-c 9. rovision on the secured portion in an account in doubtful category for more 119 Inventing Methods for Igniting
than 16 months but less than 0; months is / a562O ;. b5 :2O c592O d5122O
rovision on the unsecured portion in an account in doubtful category for more than 0; months is / a562O b502O c592J d5122O
<. The concept of ! ", introduced by (BI in phased manner started from the year a51>>9 b51>>; c56221 d51>>0 =. Introduction of prudential norms in advances accounts were recommended by a5!arang #ommittee b5$itra #ommittee c5 !arasimhan #ommittee d5 4annan committee >. #oncept of out of order to classify ! " is applicable for a5 Bills purchased account d5 #ash #redit "ccount b5Bills discounted "'c c5Bank Guarantee
12. Bills purchased 'discounted account will be classified as ! " if they, a5(emain overdue for a period of more than 162 days. d5(emain overdue for a period of more than 02 days. c5(emain overdue for a period of more than >2 days. d5(emain overdue for a period of more than 1=2 days. 11. (epayment schedule of rural housing advances to agriculturists should be Ainked to a5 #rop cycle. b5 Term loans for other housing advances accounts. c5 ,alf yearly basis. d5 !one of above 16. "n account will be treated as ! " if the limits have not been reviewed for a5 for more than >2 days b5 for more than 162 days c5 for more than 1=2 days d5 !on of the above.
" cash credit account will be treated as irregular if stock statement has not been obtained for more than 120 Inventing Methods for Igniting Baroda Academy Minds
10.
a5Three months 1:
b5>2 days
c5 1=2 days
d5 Three monthsK >2 days
" cash credit account will be treated as ! " if stock statement has not been %btained for more than a5 Three months b5>2 days c51=2 days d5Three months K>2 days
19.
)pecial $ention account is a category which would fall between the following a5)ubstandard and Doubtful category. b5 )tandard and sub?standard category. c5 Doubtful and Aoss category. d5 Aoss account and written off account.
1;. Gross ! " means a5 %utstanding in the borrowal account including the uncharged interest. b5 %utstanding in the borrowal account plus rovision held in respect of ! "s, unrecognized income kept in interest suspense account and claim received ,but not appropriated . c5 %utstanding in the borrowal account including the provision made for that account. d5 %utstanding in the borrowal account eBcluding the provision made for that account. 1<. !et ! " is the amount of Gross ! " less a5 Interest debited to borrowerJs account. b5 Interest suspense c5 rovision held in respect of ! "s d5 rovision held in respect of ! "s, unrecognized income kept in interest suspense account and claim received ,but not appropriated. 1>. 7hich among the following results in an account becoming ! "X 3a5 7here rincipal and ' or interest in TA has become due and not paid by the borrower for ?<9? days =b5 where the #ash credit account has been out of order for more than >2 days. 3c5 7here the bill purchased' discounted has become overdue and continues for =< days. 3d5 7here amount remains unpaid for less than two crop seasons for short duration and less than one crop season for long duration crop in case of all agriculture accounts. 3e5 "ll of these. 121 Inventing Methods for Igniting Baroda Academy Minds
62. "n account will be classified as substandard if it remains ! " for a period not eBceedingZZZZ months 3a5 61. 1= 3b5 16 3c5 6: 3d5 ; 3e5 !%!+
"n account which remains in ! " category for a period of more than ZZZZ months will be classified as doubtful asset. 3a5 1= 3b5 16 3c5 6: 3d5 ; 3e5 !%!+
66.
"n account guaranteed by Govt. will become ! " if the interest or instalment due remains overdue for a period of ZZZZ .
3a5 >2 days 3b5 1=2 days 3c5 it does not become ! " =d5 >2 days in case of )tate Govt. guaranteed advances only 3e5 !%!+ 60. The account will be classified as ! " in case of the following lapse 3a5 )tock statement not received for three months on the date of the balance 3b5 sheet - the same irregular feature is continued for another?0? months 3c5 account not renewed even after 1=2 days of the due date of (eview 3d5 account is backed by security which is fully?fraudulent and thus carries no value 3e5 all of these 6:. In accounts where there is an erosion of the value of security and the realizable value of the security is less than 12O of the outstanding the account will be classified as 3a5 )ubstandard asset 3b5 Doubtful asset 3c5 Aoss asset 3d5 !o such guideline as ! " classification depends on recovery record alone3e5!oneof these 69. "dvances accounts backed fully by the following securities will not be treated as ! " 3a5 3d5 6;. Gold ornaments 3b5 Govt. securities 3c5 !)#s and 4T s )hares of )8s 3e5 "ll of these
"n "gricultural advance for long duration crop will be treated as ! " if the interest or instalment remains overdue for 3a5 3d5 Two crop seasons 3b5 %ne crop season 3c5 Two years 1= months 3e5 none of these
In case of accounts guaranteed by Govt. of India the non?performing account will be treated as standard till the 122 Inventing Methods for Igniting Baroda Academy Minds
6<.
3a5 Guarantee is invoked 3b5 The Govt of India repudiates its liability against the guarantee 3c5 Becomes a loss asset due to complete erosion of security 3d5"ccount is not more than 16 years old 3e5 none of these 6=. In case of standard asset the general provision to be made against the total outstanding of direct agricultural loans and direct loans to )$+ sector is ZZZZZZ O. 3a5 6>. 1 3b5 2.69 3c5 2.:2 3d5 nil 3e5 !one of these
In case of doubtful asset which has remained doubtful for more than three years the provision to be made against the secured portion is ZZZZZZO of the secured amount 3a5 62 3b5 02 3c5 92 3d5 122 3e5 !one of these
02.
In case of unsecured eBposures in substandard category the provision to be made is ZZZZZZO of the total eBposure 3a5 12 3b5 69 3c5 16.9 3d5 122 3e5 !one of these
01.
"s per the (BI guidelines the banks are re&uired to make floating provision minimum to the eBtent of ZZZZZZO of their risk weighted assets. 3a5 1 3b5 1.9 3c5 6.9 3d5 !othing is prescribed by (BI as this provision is voluntary 3e5 !one of these
06.
7here an advance account is guaranteed by the +#G# or #GT)I and it has been classified as doubtful, the banks are re&uired to do the following 3a5 !ot to provide any thing 3b5 not to provide on the amount receivable from the guaranteeing organization 3c5 have to provide like any other account 3d5 provide only for the unsecured amount 3e5 !one of these
00.
"s per prudential norm, the !on?performing assets are classified into ZZZZZ categories 3a5 : =b5 0 3c5 9 3d5 6 3e5 !one of these
0:.
Banks are re&uired to make provision for country risk where the net funded eBposure to a country is ZZZZZZO or more of its total assets 3a5 9 3b5 6 3c5 1 3d5 6.9 3e5 !%!+
If an account is more than ?0? years in doubtful category as on 01.20.622< 123 Inventing Methods for Igniting Baroda Academy Minds
09.
with a balance of (s amount provision would be/
12 lacs and security value of (s ; lacs. The
3a5 9 lac 3b5 ; lac 3c5 <.9 lac =d5 12 lac. 0;. In ! " "'c the interest will be reversed @ 3a5 entire interest charged during current financial year will be reversed. interest charged during current Fuarter will be reversed 3c5 entire interest charged in the past periods, should be reversed if the same is not realised 3d5 entire interest charged in the last &uarter, should be reversed if the same is not realised 0<. "sset classification of accounts under consortium should be based on? 3a5 on the record of recovery of the individual member banks 3b5 on the record of recovery of the #onsortium Aeader 3c5 on the record of recovery of the any member banks 3d5 !one 0=. Banks may restructure the accounts classified under? 3a5 "ny advance account 3b5 %nly )tandard "ccount 3c5 %nly ! " "ccount 3d5 %nly )tandard - )ub standard account 3e5 %nly )tandard , )ub )tandard - Doubtful account 3f5 !one of These 3b5 entire
"!)7+() ' A ' A ' A ' A 2 b 27 a 5: c 76 a 5 d 29 d 5< b 7A e 7 c 2: c 56 b 9 d 2< b 5A b : b 26 b 5B d < d 2A d 7@ b 6 d 2B b 72 d A c 5@ b 75 b B d 52 b 77 b 2@ c 55 d 79 c 22 a 57 d 7: d 25 c 59 c 7< c
124
RECO0ER# TFRO&GF NON-"EGA" MEAS&RES Quick Bites (eco!ery 'gents Compromise Settlement #rite3off. &rudential #rite off &urc ase and Sale of N&'s (eco!ery 'gents +an<Ds Special sc emes for reco!ery E S'NK'*& Recover+ Meas res (ecovery measures may be classified into two categories/ !on legal measures and Aegal measures. " detailed write up on !on?Aegal measures is as underD NON-"EGA" MEAS&RES 23@ A,,oint1ent o. Pro.essiona* Agencies .or Recover+ (ecently, IB" has worked out certain guidelines for banks on matters concerning the appointment of outside professional agencies whose services can be utilized to ascertain the whereabouts of the borrower and enforcement of securities. There is some hesitancy on the part of public sector banks in engaging them for recovery purposes due to unpleasant eBperiences in certain cases. But in the post?T() scenario, it is suggested to seek such outsourcing. This should be done after eBamining the credentials of the agencies. It is also essential to keep a constant vigil on their practices. A,,oint1ent o. En.orce1ent4 Recover+ Agents/ 7ith a view to facilitate smooth action, authorities in the (egion and Hone are authorized to appoint enforcement agencies for taking physical possession of assets, guarding of the secured assets, sale and post sale actions under )"(*"+)I "ct. Po-ers to a,,oint En.orce1ent Agents based on the amount involved are as under/ "mount of ! "s' 7% inclusive of suit filed - decreed a'cs i5 8pto (s122 lacs ii5 \122 lacs to 622 lacs iii5 "bove (s622 lacs upto (s.922 lacs iT5 %ver (s.922 lacs upto (s.1222 lacs Baroda Academy Minds "uthority to appoint +nforcement "gent #hief $anager "G$ Dy.General $anager General $anager'Honal ,ead )cale TII 125 Inventing Methods for Igniting
T5 %ver (s.1222 lacs to any amount
+D'#$D
Note/ No a thorit+ e;ce,t -ith the ,er1ission o. ED4 CMD sha** a,,oint Recover+ Agents in S b Standard Acco nts . ,owever, zonal heads may authorise appointment of recovery agents wherever necessary in case of accounts with outstanding upto (s. 122 lacs after eBpiry of siB months from date account turning to be ! " a5 The name and addresses of all the (ecovery "gents on the BankGs approved panel of the bank will be placed on the bankGs website for information all concerned. b5 %nly recovery agent from approved panel will be engaged by the bank. c5 In case bank engages services of such recovery agent'enforcement agent'seizure agents for any recovery case, the identity of the agent will be disclosed to the borrower. Pa+1ent o. %ees/ It may be appreciated that (ecovery "gents may be re&uired to initiate various steps depending upon stage of specific ! " account and also where such actions are initiated in part only. Therefore fees can be negotiated' fiBed looking to stages involved, however subEect to the maBimum as contained in Recover+ Po*ic+ 5@25 =Page <7> 7here the +nforcement "gent'(ecovery "gents has made efforts for locating and realization'recovery from the uncharged assets 3with re&uired details' proof5 of the borrower' guarantor an additional fee not eBceeding (s.19,222 %( 1.9O of the value realized of such property, whichever is less, to meet his out of pocket eBpenses, over and above the prescribed recovery charges may be paid to the +nforcement'(ecovery "gent. ,owever payable on actual recovery and shall not be applicable in case higher fee is negotiated under clause 10. In case any ! " account is regularized' upgraded and comes out of ! " through recovery effected after taking action by the said agency and services of enforcement agency are no longer re&uired, fee in such case will be 6O of ! " N a1o nt recovered or (s.92, 222'? which ever is lower . This will cover ! " accounts as outstanding as ! " within one year from the date of ! ", not covered above. In case the de.a *ting borro-er a,,roaches the )an( .or OTS or adEustment of account after assignment the case to +nforcement')upporting "gent, fee shall be as under/ M Before taking physical possession of secured assets?69O of above fee schedule subEect to maBimum (s.92222'?. M "fter taking physical possession of secured assets but before sale of )ecured assets? 92O of above fee schedule subEect to maBimum (s.1 lac (ecovery charges upto maBimum of 12O 3 to be negotiated with (ecovery "gents 5 of the actual #ash (ecovery 3 subEect to ceiling on maBimum amount as per table given above 5 126 Inventing Methods for Igniting Baroda Academy Minds
can be paid to (ecovery "gents in cases where Bank does not have any security whatsoever 3 Ist charge or II nd charge or eBtension of charge etc 5 in any account outstanding as ! " for more than one year and classified as doubtful or loss or 7%. ,owever, no other charges, fees, reimbursements, of $isc eBpenses etc will be paid at any stage before or after cash recovery is made. Incentive to staff will not be payable in such cases. *urther the accounts where the securities were available but since disposed off through (ecovery "gent making them eligible for charges will not be eligible for higher charges though rest dues will then be unsecured. In case o. OTS, fee payable to +nforcement'supporting "gents shall be negotiated for recovery from the borrower in additions to %T) amount. Rei1b rse1ent of reasonable and actual out of pocket eBpenses for security, insurance, statutory'legal compliances only 3after taking the possession of securities charged to bank5 may be paid after being satisfied about the need for such eBpenses and the reasonableness of the amount taking into consideration local conditions etc. TDS and service ta; on fee paid to the agency will be deducted as per rules applicable. No se,arate 1isc3 e;,enses of any kind eBcept as mentioned above will be paid to the +nforcement'supporting agencies by the bank. In recent*+ s*i,,ed acco nts, branches are re&uired to issue notice under )"(*"+)I "ct immediately after account becoming ! " in order to pressurize the borrower for upgrading the account. )ometimes, the accounts are upgraded but when repayment of overdues is not forthcoming, branches are re&uired to take possession of secured assets after completion of ;2 days of notice period. The support of enforcement ' recovery agency is re&uired in obtaining permission from District $agistrate ' olice and also in taking physical possession of assets. In such cases the charges payable to recovery agency will be as under/ *ee for obtaining D$Js order and arranging police assistance for taking physical possession shall be actual eBpenses or (s. 9222'? per case which ever is lower. Proced re .or a,,oint1ent o. Recover+ Agents4 En.orce1ent agents3 In appointment of both (ecovery "gency and (ecovery "gent an 8ndertaking to be obtained' agreement with recovery agents i.e. i. adoption of lawful means, ii. not to accept cashD
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iii. he or his employees shall be solely responsible for any step taken beyond authority' law and shall indemnify bank against all losses'claims for all such acts . iv. will appoint agents' employees only in accordance with guidelines of (BI as applicable, v. will follow code as laid down in $odel policy on code for collection dues and repossession of security, circulated vide circular !o. B##'B('121'1=9 dated 0 rd Luly 622> Monitoring o. Recover+ Agents/ The Branches are advised to review the performance of (ecovery "gent every month. In this regard, branches are advised as under/ 1. The specific time limit should be given to (ecovery "gentsfor making recovery in the account. Generally the total limit should not eBceed ; months as the period re&uired for taking recovery action under )"(*"+)I from issuing notice to confirmation of sale is around ; months maBimum. 6. During this period if it is found that the service of the (ecovery agent is not satisfactory, he should be given notice and inform (egional' Honal office so that they can take a view to terminate the (ecovery "gent and appoint another (ecovery "gent. 0. The Honal office should inform the termination of such (ecovery "gents to all concerned so that he will not be appointed as (ecovery "gent in future for any other account. :. Before assigning any new' additional account to any (ecovery "gent, his performance in the account should be kept in view to avoid bunching of large no. of accounts to one recovery agent as well as to avoid assigning accounts to non performing recovery agents. 9. "s per eBisting guidelines the annual review of all empanelled (ecovery"gents should be undertaken by the (egional office under reporting system to Honal %ffice' B##. 53@@ Co1,ro1ise Sett*e1ent In general, it is eBperienced that filing of suits and recovery of dues of banks through the process of courts is a cumbersome, eBpensive and time consuming, and task without any fruitful results in many cases. %ne of the main reasons attributed for non?recovery of dues through the process of law'court is lack of proper follow?up and timely and proper action. ,ence, it would be worthwhile to think of other ways to tackle the situation. The tradition of amicable settlement through panchayat and arbitration, leads to think as to why bank loan disputes cannot be settled without having recourse to the court. A co1,ro1ise is an agree1ent reached by mutual consent, a negotiated settlement with or without sacrifice component on the concerned parties to the dispute. #ompromise settlement is a non-*ega* re1ed+ for reduction of ! "s of the Bank.
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A&TFORIT# TO RECA""/ +Bcept for officials ' Branch $anagers upto the level of $iddle $anagement Grade')cale III, owers for (ecalling an advance and filing suit are co? eBtensive with discretionary lending powers, subEect to reporting to neBt higher authority. i.e. %fficers, $anagers, etc., upto the level of $iddle $anagement Grade')cale III are not empowered for (ecalling and filing of suits for recovery of bankJs dues in respect of advance accounts. Therefore, all proposals for (ecalling' filing of a suit in respect of branches headed by L$?1, $$?II, and )$?III %fficers, should be forwarded to respective (egional authorities for permission. !ormally, bank would like to recover the entire dues with unapplied interest at contractual rates and costs in full, without any sacrifice. ,owever, there may be instances' cases where the bank may consider waiver of part interest and'or legal charges and agree to settle the account by receiving a little lesser amount. In such a situation, the bank may enter into a compromise agreement with the borrower to accept a specified amount instead of the actual dues in full and final settlement. The difference between the total dues - total offer amount is GsacrificeG 3by way of write off and'or waiver5 to be borne by the bank. 53@2 $hen to Co1,ro1ise !ormally compromise proposals can be considered in following situations/ 7hen the borrower is willing to settle the dues in full in a lump sum and the sacrifice of the bank is minimum. 7hen the bank feels that the time taken and cost involved in recovering the dues through the legal will be more than the likely recovery to be effected. 7hen a unit has become unviable to continue operations and borrowersG verifiable means'resources as well as securities are not ade&uate. 7hen there is no security or realization of the same is difficult or unit is closed and there are no assets for eBecution of decree and the borrower' guarantor is willing to settle the dues out of court. 53@5 $hen not to Co1,ro1ise Branches should not, in general, enter into a compromise for lower amount in respect of following cases/ 7hen there are ade&uate realizable securities available covering our dues and properly charged to us.
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ii. 7hen the account is covered by guarantee cover of DI#G#' +#G# and ade&uate securities are available to cover the BankJs dues and'or net worth of the borrower's and guarantor's is ade&uate. 53@7 $hen to entertain co1,ro1ise ,ro,osa*s #ompromise proposals can be negotiated in all ! " - 7% accounts, 3a5 before filing the suit 3b5 after filing the suit 3c5 after obtaining the decree ' (# but before eBecution of the decree ' (#. 3d5 even after the account is written?off prudentially. In other words, compromise proposals can be entertained any time till the borrower settles the dues in full. )pecial %ne Time )ettlement )cheme of (BI announced from time to time like (BI %T) )cheme for )$+, scheme for small borrowers, scheme for small and marginal farmers, are outside the purview of this policy. )eparate guidelines are being issued from time to time for such schemes. 53@9 )asic Princi,*es governing co1,ro1ise sett*e1ents 1. +nsure recovery of dues to the maBimum eBtent possible at minimum eBpense and within shortest possible time frame. 6. The opportunity cost analysis be made i.e. the advantage available to the Bank from prompt recycling of funds should be weighed in comparison to the likely recovery by following legal or other protracted course of action. 0. 7here security is available the realizable value thereof. :. " proper distinction will have to be made between P7illful defaultersQ and Idefaulters due to circumstances beyond their controlJ. 7hile in the case of former, a tough stand may be taken, in latter case a sympathetic view is to be taken. 9. Due weightage to be given to present activities of the borrower 'guarantor, their worth present means etc. ;. !orms as applicable for assessment of staff accountability be strictly adhered to invariably formed a part of the proposal 3 In case of NPA>. - be
<. There shall be a committee approach for vetting and recommending compromise proposals to ensure fair and proper assessment of proposals. 53@: G iding %actors i5 7hile negotiating a compromise settlements following factors have to be kept in mind/? a5 Tota* Contract a* D es/ This is the sum total of balances outstanding in the various accounts of the borrower and are due for recovery from him. It will include %'s balance 130 Inventing Methods for Igniting Baroda Academy Minds
plus amount of Interest' charges reversed plus unapplied interest at contractual rate of interest from date of cessation of interest to date of compromise proposal plus amount of Aegal +Bpenses and security eBpenses etc. already incurred and debited to 'A a'c, if any. b5 !et Book Dues/ Balance outstanding in the various accounts of the borrower less unrealized interest ' uncollectable charges, which are subEect to reversal c5 $argin money and recoveries held separately/ The net book dues as above will be reduced to the eBtent of $argin money 3eBcluding margin against non crystallised non? funded facilities5 etc. kept in current a'c, Time Deposit a'c or any G'A a'c and the recoveries kept separately in any account or the retainable portion of claims received from DI#G#, +#G# etc. eBcept sums accepted by bank under I!o AienJ. d5 Sec rities detai*/ Details of securities are to be taken into account. *or immovableJs such as "rea of land, nature of land 3"gricultural Aand, Industrial Aand, commercial, residential etc5 carpet ' built up area, location and the related information be taken into consideration. "part from the above, it should also be indicated if the property is leasehold 3in such a case balance period of lease5, freehold. e5 Rea*iOab*e va* e o. sec rit+/ The nature and realizable value of securities is an important factor to be considered while arriving at a compromise. The valuation of securities should have been done by our approved valuer and should not be more than 21 Rear old at the time of considering of compromise. If the securities are ade&uate and easily realizable, the sacrifice in the compromise should be minimum. *or property'assets having value of Rs %ive crores and above, valuation should be obtained from t-o approved valuers independently, Taluer should invariably be registered under 7ealth TaB "ct for type of properties to be valued Therefore following factors are to be considered for assessing realizable value of securities/? M *air $arket Talue given by I"pproved TaluerJ should be taken for the purpose Iand not the distress valueJ. M $arketability of the securities with a special reference to immovable properties is a function of legal tangles affecting security like/ various laws meant for protection of agriculturists' )#s' tribal people govern security in the form of agricultural land wherein marketability would be a factor of constraint. Z getting permission from #ollector. Z "vailability of purchasers from tribal communities. Z (estrictions on sale to non?agriculturists etc. f5 Net Present 0a* e =NP05/ )ettlement amount should not generally be low' less than the !et resent Talue 3! T5 of the realizable value of available securities 3*air $arket Talue and not the Distress Talue5 net of the cost of realization.
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g5 Reasons .or .ai* re o. b siness / (easons for the failure of business or the unit are also important to be kept in mind. )ometimes, a change in Government guidelines and policies may be the cause of the failure of the unit. )ometimes, it can be due to mismanagement and willful act by the borrower. h5 Present stat s o. the nit/ If the unit is running and prospects are good and branch ' region has not lost trust in borrowersG conduct and dealingsD it would be worthwhile to consider possibility to rehabilitate the unit. If, however, the unit is closed and prospects are bleak, it would be better to compromise and recover the dues to the maBimum. i5 Means o. borro-ers4g arantors/ resent means of the borrowers, guarantors etc. will also have a bearing on the compromise settlement. E5 A1o nt o. co1,ro1ise and 1ode o. ,a+1ent / The amount of compromise and the period for receiving the payment will also influence the terms of compromise. Bank would like to receive the maBimum amount within the shortest possible time. "s regards the amount of compromise, the most important guiding principle should be the minimum sacrifice as far as possible. *urther book dues, as far as possible should be recovered in full, so that there is no adverse impact on rofit - Aoss "'c. k5 Period o. Recover+/ "s a matter of principle, compromise settlement shall be negotiated for direct bullet payment i.e. normally within 02 days of advising the sanction. Based on the circumstances, time can be allowed up to >2 days payable in 6?0 installments 3with a down payment of at least 19O5. In eBceptional cases where the cash flow does not permit or assets will take time to be sold and realized, eBtended period say up to 16 months can be permitted. In such cases, a down payment of at least 12?69O shall be stipulated with preferably monthly installments. In the case of large compromise proposals with compromise amount say above (s.1 #rore, time beyond 16 months may be permitted with down payment of at least 19O and remaining amount in monthly'&uarterly' half yearly installments carrying suitable interest. l5 Recover+ o. Interest on Co1,ro1ise/ 7herever compromise settlement is eBtended over a period of time or in installments, it is necessary to negotiate' recover the suitable rate of interest not only to cover cost of funds but also prompting the borrower not to delay the repayments. Interest negotiation may be at minimum of )ase Rate ,* s 9J or at a rate not *o-er than 2@J si1,*e . )ame may be stipulated to be recovered simultaneously, with each installment. m5 I1,act on Pro.it 8 "oss Acco nt/ In accounts which are already written?off or full provision has been made because of nil or negligible security, any recovery affected through compromise would increase the income by credit of such recovery to 'A "'c or release of provision. 53@< Others/ The .o**o-ing ,oints 1a+ a*so be (e,t in 1ind/ #ompromise negotiation sho *d not hover aro nd boo( d es. Baroda Academy Minds 132 Inventing Methods for Igniting
Interest at contracted rate shall be calculated and the total contractual dues 3including eBpenses incurred on filing the suit in the cases of suit filed accounts5 shall be advised to the borrower. !egotiation shall start from such total dues owned by the borrower. Depending on the security available, borrowerJs'guarantorJs "ssets'resources etc. concessions can be considered on the rate of interest and' or compounding of interest. $inimum interest that is acceptable to the bank is 12O p.a., simple, from the date of cessation of interest till the date of repayment. " lower rate of interest may be accepted as a matter of eBception in deserving cases
"i1itation/ In the case of non?suit filed accounts, it shall be ensured that the documents are (e,t a*ive b+ obtaining "AD from borrowers'guarantors. In the case of suit filed accounts where compromise is sanctioned, consent terms signed by the bank and the borrower'guarantor shall be filed with #ourt' D(T subEect to default clause and consent decree shall be obtained. Consent decree shall contain the default clause to the effect that in case of failure in full or in part to repay BankJs dues in accordance with the terms, the contractual dues shall be recoverable along with interest at contracted rate, costs and eBpenses. !et worth of the borrower'guarantor as of a recent date shall be incorporated by making suitable en&uiries. In case it is not available the net worth as avai*ab*e on ban( record should be incorporated with date. Date of valuation and details of the property of the borrower shall be invariably mentioned and Eustification for the value shall be given. In case there is wide downward variation in the value of the property while sanctioning the advance and while negotiating compromise, the cogent reasons to be eBplained in the proposal invariably. Sta.. acco ntabi*it+/ )taff accountability certificate' (eport must be enclosed to the proposal as per the prescribed format. In case any staff lapse is observed, Honal %ffice shall mention the same or enclose a copy of the (eport along with the action proposed'taken by them. *actors stated above are only illustrative and not eBhaustive. It is important that an overall view is taken, considering all the aspects. Branch to ensure that information in conteBt with )taff accountability has been submitted to respective (egional authority in time 53@6 De*egation o. Po-ers/ Board of Directors ' $anagement #ommittee of Board have powers to sanction any compromise proposal irrespective of &uantum of sacrifice, nature of compromise settlement and' or nature of the account in which a compromise is considered. Baroda Academy Minds 133 Inventing Methods for Igniting
7ith a view to facilitate recovery through compromise, following discretionary powers are delegated to grant sacrifice, till further modification' amended in terms of $#B'Board directions or (BI guidelines. )anction of #ompromise proposal are linked with )acrifice amount not with Aoan amount in other words a Branch manager in rank of L$G') I can sanction a compromise proposal within his power of sacrifice irrespective of Aoan sanctioning authority 3(s in lacs5 "uthority owers for sacrifice 3waiver plus write off5 #hairman - $anaging Director 162.22 +Becutive Director >2.22 General $anager at corporate 92.22 %ffice General $anager heading Hone :9.22 Dy. General $anager' 09.22 Dy. Honal ,ead 3)cale TI5 DR General $anager as (egional ,ead ' Branch ,ead 02.22 "sstt. General $anager 69.22 #hief $anager 62.22 "s (egional $anager'D($'#hief $anager as recovery 19.22 in charge at (egional %ffice 3%ther than D($5 Branch ,ead. 16.92 )r. Branch $anager ' ;.22 )r. $anager "t (%s 3(ecy.5 Branch $anager )cale II 1.22 Branch $anager )cale I 2.92 53@A E;tension o. ti1e 7here ever the party is facing genuine difficulties in payment as per terms of compromise sanction, the eBtension of time may be allowed by sanctioning authority on the re&uest of the party. ,owever the Honal ,ead 3 in the rank of General $anager 5is authorized to eBtend time for the period of ; months and Honal ,ead'(egional ,ead 3 In the rank of Dy General $anager 5 is authorized to eBtend time for the period of 0 months in case o. sanction b+ Manage1ent Co11ittee )oard4 Chair1an 8 Managing Director E;ec tive Director4 Genera* Manager =Recover+> , provided interest for eBtended period is recovered . Base (ate lus :O from the party, and all other terms and conditions remain same. 53@B Deviation In case of sanctioned compromise proposals, normally for any deviation in the compromise terms, it should be referred to the sanctioning authority. ,owever, modifications in the terms of sanction of compromise proposals earlier sanctioned by $anagement #ommittee 3Board5 may be approved by #hairman - $anaging Director and in his absence by +Becutive Director Baroda Academy Minds 134 Inventing Methods for Igniting
16. for change in mode of repayment and'or 10. total (epayment period and'or 1:. other modification' deviation (%TID+D revised additional sacrifice is not more than 62O of sacrifice as per original sanction. )uch modifications are to be reported to $anagement #ommittee 3Board5. In other cases, the modifications shall be approved by the same authority who has sanctioned the proposal earlier and' or who is now vested with powers of such compromise. 532@ Deciding "eve* o. A thorit+/ *or the purpose of deciding the level of authority for sanction of compromise, notional interest shall be calculated at Q2@J ,3a3 si1,*e or Q contract a* rate -hichever is *ess Co1,ro1ise in Decreed cases -here Rate o. Interest a-arded b+ Co rt is *ess than 2@J ,3a3 In case of decreed accounts, where rate of interest awarded as per decree is less than 12O and bank has not preferred an appeal at higher court or an appeal, if made, is decided against bank, the calculation of sacrifice should be made on the basis o. ter1s o. decree. ,owever, the sacrifice will be calculated based on decretal dues for the purpose of deciding the level of authority for sanction of compromise proposal. There is no group'associate concern concept for compromise proposals, unless security charged to the bank is common. #ompromise proposal shall be based on total sacrifice involved in all such accounts where security is common. 532@ Co1,ro1ise in Sta.. "oan4 Sta.. Re*ated Acco nts4 Sta.. G aranteed A4c/
In )taff related ' )taff guaranteed accounts, no compromise by way of sacrifice ' waiver may be sanctioned by any authority below the level of Honal ,ead as under/ In respect of staff related accounts the Honal $anager shall ensure the genuineness of the difficulty in recovering the contractual dues from the staff member or the borrower as the case may be. The compromise settlements in respect of sta.. re*ated acco nts may be considered b+ the Rona* Manager within his delegated powers of sacrifice. ,owever, before considering such proposals prior vigilance clearance should be obtained. The compromise settlements in respect of sta.. acco nts and sta.. g aranteed acco nts may be considered by the Honal $anager within his delegated powers of sacrifice provided such staff member has ceased to be in the service of the Bank for more than @6? years. Baroda Academy Minds 135 Inventing Methods for Igniting
In other cases of )taff Aoan accounts' )taff guaranteed accounts where the staff is ceased to be in the service of the Bank for less than @ 6? years, proposals are to be submitted to Baroda #orporate #entre, $umbai for sanctioning by +Becutive Director and above as per delegated powers. 5322 Co1,ro1ise in %ra d Re,orted Cases Branches, (egional %ffices shall not enter into any compromise settlement in accounts where frauds are committed. "ny compromise proposal in respect of such an account 3other than cases registered or under investigation with #BI 5 shall be considered by an authority not below the Honal ,ead in the rank of General $anager and Baroda #orporate #entre viz.General $anager 3 (ecovery 5, +Becutive Director, #hairman and $anaging Director or $anagement #ommittee of Board upto their respective powers for sacrifice in compromise settlement. 5325 Sett*e1ent Advisor+ Co11ittee A,,roach/ #ommittee approach shall be adopted for compromise settlement. "t #orporate #entre, $umbai, )ettlement "dvisory #ommittee 3)"#5 will consist of seven General $anagers to eBamine and recommend the compromise proposals falling under the owers of +Becutive Director, #hairman - $anaging Director or $.#. 3Board5.The minimum &uorum prescribed is three G$Js including compulsorily the presence of the G$ 3(ecovery5. )uch #ommittees shall function at Honal level, (egional level and Branches. Details regarding #onstitution of )ettlement "dvisory committees at various levels are given on page !o. 66, 60 and 69 of (ecovery olicy 6211 5327 Other 1atters concerning to Co1,ro1ise sett*e1ents/ 1. #ompromise proposals 3including those of #*), #BB - $$%5 falling under the powers of #orporate #entre, $umbai shall be recommended by the Honal )"# and for the purpose of (ecovery and ! " $anagement, Honal "uthority shall be the controlling authority in respect of all branches' offices in the zone. 6. The neBt higher authority of the sanctioning authority shall do )( !oting of compromise sanction. In case of compromises sanctioned by Honal $anager )( will be noted by #orporate General $anager 3(ecovery5. 0. The sanction letter shall contain the terms and conditions as agreed by the borrower and accepted by the bank also specifically mentioning as to compromise for dues outstanding at concerned specific branch. There shall be a de.a *t c*a se to the effect that if the borrower does not pay the compromise amount 3bullet payment'installment5, the bank will treat the sanction as withdrawn and the borrower will be liable to pay the entire gross dues to the bank with contractual rate of interest' eBpenses. Maintenance o. Sanction Register/ "ll branches to maintain a compromise sanction register for recording all compromise sanctions including sanctions by the higher 136 Inventing Methods for Igniting Baroda Academy Minds
authorities. This will facilitate the follow?up at all level for recovery of dues as per compromise sanction. The register is to be maintained w.e.f. 21.2:.622> in the format as given in the circular no. B##/ B(/ 121'1:2 dated 11.29.622>5. Monitoring and %o**o- , .or recover+ in Co1,ro1ise in S it .i*ed cases COMPROMISE/ 7herever genuine difficulties are eBperienced by borrowers' guarantors in repaying outstanding dues in full, compromise negotiations may be initiated for early settlement of accounts. In such cases it should be invariably ensured that compromise terms duly signed by the borrowers' guarantors and the Branch is filed with the D(T and a consent decree with default clause is obtained by Bank. The consent decree is also a decree in favour of the Bank which will enable the Bank to proceed for recovery through D(T in case the compromise terms are not honoured or there is any default in repayment by the borrowers' guarantors as per compromise sanction. The consent decree must be obtained immediately on sanction of compromise without waiting for the payment of due instalments in future, in view of the fact that after default in payment of the compromise amounts, the borrowers are not likely to cooperate in filing consent terms and the matter will again drag in D(Ts. 73 Pr dentia* $rite O..4Technica* $rite O.. 8 $rite O../ rudential 'Technical write off is generally resorted to by the bank in respect of following advances accounts where suits have been filed and staff accountability has been eBamined In respect of any asset, which is not contributing any income to the bank or its continuation in the Balance )heet, is deemed to be undesirable for continuing on asset side 3 1. Aoss asset with 122O cover and Doubtful with 92O cover by way of rovision, Interest )uspense, DI#G#'+#G# claim received, amount held in )uit *iled )undry Deposit account etc. 53 %ther ! " accounts in )ub?)tandard and Doubtful category with less than 92O cover by way of rovision, Interest )uspense, DI#G#'+#G# claim received, amount held in suit filed )undry Deposit account etc. on case to case basis looking to the prospect of realisability in immediate future. " decision on 7% will always be taken by the #orporate #entre under authority of $anagement #ommittee 3Board5. Honal' (egional' Branch $anagers shall not prudentially write off any account without eBpress authority from the #orporate #entre. "uthority may be granted account?wise or for a class of accounts 3%utstanding' )ector' "ge of ! " 137 Inventing Methods for Igniting Baroda Academy Minds
etc.5.The MC) 1a+ a*so a**o- an+ deviation .ro1 the ,o*ic+ on 1erits as 1a+ be dee1ed .it3 Pr dentia* $rite o.. o. the .o**o-ing acco nts -i** be considered on*+ on case to case basis3 1. T%Ds in current account, B%B#"(D T%Ds and adhoc' one time bills purchase'discounting. 6. "ccounts where frauds have been committed. 0. Fuick $ortality accounts 3! " within one year of sanction'disbursement5. :. )taff accounts 3if any5 and staff related' guaranteed accounts. 9. "dvances accounts such as #ash #redit, Demand Aoan, Term Aoan etc. wherein borrower's are also having outstanding T%D in current account, ).B. account, B%B#"(D T%D etc. %or Ne- P$O4 T$O acco nts = -3e3. 23935@2@> 8nder the new system of 7% no accounting entry is to be passed at Branch level. The relative advances accounts will continue to remain as any other ! " account as at present. *or maintaining the records following book keeping and accounting procedure shall be followed/ The accounts identified for rudential 7ritten %ff will be flagged in ")#(%$ system as rudentially 7ritten off account at #orporate %ffice. 7hen an account is identified for the first time and the flagging is done at B## level, a report in respect of such 7% accounts with outstanding balance and provision made there against will be generated. %n the basis of this report, necessary entries shall be passed at #orporate "ccounts Department, B##. )hortfall, if any, to cover the 7% amount by way of rovision, Interest )uspense, DI#G#'+#G# claim received, amount held in )uit *iled )undry Deposit account etc. for any of these accounts being considered for rudential 7rite %ff will be met through debit to the rofit - Aoss account of the Bank. 93@ $rite O.. %ina* -rite o.. 1a+ be considered b+ the ban( on*+ -hen it beco1es c*ear that there is abso* te*+ no chance o. recover+ in the acco nt C No %INA" $RITE O%% -i** be considered at branch *eve* headed b+ Chie. 1anager and be*o16. +ither by way of (ealisation of "ssets charged %( 10. By way of proceeding against uncharged assets standing in the name of Borrower's and Guarantor's %( 1:. By way of proceeding for personal liability of borrower and Guarantor's. "!D 19. *urther continuing of the account in the books for follow up' recovery will only add to cost to Bank and wastage of resources. Baroda Academy Minds 138 Inventing Methods for Igniting
*or *inal 7rite off additionally it should be ensured/ 7hile Eustifying final write off proposal in accordance with provisions mentioned herein above, steps taken and present status as regards to steps initiated for recovery be specifically mentioned inter alia as given below The present means of the borrower's. Guarantor's should be thoroughly probed into and ascertained. "lso that resent activities of borrowers' Guarantors relating to other businesses carried out and sources of income should be ascertained. It should be ascertained whether the Bank will be able to enforce any of these assets' income more particularly in case Borrowers and' or Guarantors are as Iwillful defaulterJ. #omments be also made as regards referring to old records to find unencumbered assets for proceeding for realization of bankJs dues 3 In case outstanding are covered under any of "ssurance #over obtained by Bank' Borrower 3policy assigned in bankJs favour5 and' or cover under DI#G#I'+#G#' #G*T)I' others if any, is admissible, same should be got settled and adEusted in dues, before final write off. )uits should have been filed or proceedings under ublic $oney (ecovery "ct are initiated 3unless specifically eBempted by the (egional $anager and above up to their write off powers5. )taff "ccountability has been eBamined and if re&uired, proper action has been taken against erring official's. The write off proposal alongwith staff accountability certificate and compliance certificate should be submitted to the sanctioning authority. "ll such proposals be screened and recommended by respective P)ettlement "dvisory #ommitteeS "ll such sanctions be recorded giving Isanction sr. no.J and reported to neBt higher authority for )( !oting. Hones are also to submit a consolidated data of all such authorizations 3including sanctions of corporate office5 at &uarterly intervals to General $anager 3(ecovery5. " #ertificate to above effect must be enclosed with such *inal write off roposals. Certi.icate .or %ina* $rite-o.. o. NPA 4 P$O Acco nt Na1e o. Acco nt/ 1. "ll the possible measures ' methods of recovery have been eBplored and eBhausted in the account. 6. "ll the securities charged to the Bank have been sold ' auctioned and share of our Bank is received and appropriated in the account. resently there are no tangible securities available to fallback upon for recovery and there are !IA or very meager chances of further Baroda Academy Minds 139 Inventing Methods for Igniting
recovery through any mode.In case of realization through %'A, Bank has received its due share and no property'proceeds are left with %'A for sale 'distribution. 0. The Borrowers ' Guarantors are either not traceable or of no means as per our discrete en&uiries ' market reports. :. #ontinuance of the account in the books of the Bank and further eBploring for recovery will only add to further cost and wastage of time to the Bank. 9. )taff accountability has been eBamined and dealt appropriately. :3@ P rchase and Sa*e o. Non-Per.or1ing Asset In order to provide another option to banks ' *Is for resolving their !on?performing "ssets, the (eserve Bank of India has permitted them to sell and purchase !on? performing "ssets among themselves. This measure aims at providing a secondary market for the !on?performing assets. "ccordingly the (eserve Bank of India has issued on Luly 10, 6229 certain guidelines 3as given below5 in this regard to be complied by the banks ' *Is. These guidelines are applicable to all commercial banks 3eBcept (egional (ural Banks5, term lending institutions and !B*#s. Banks ' *Is are re&uired to get the necessary permission from their Board for implementation of these guidelines. Reserve )an( o. India!s g ide*ine .or , rchase and sa*e o. NPAs/ Non-,er.or1ing .or at *east t-o +ears/ " bank is permitted to sell an ! " only if it has remained non?performing in its books .or at *east T$O +ears3 Sa*e on cash basis/ The ! " is to be sold only on cash basis and the entire amount should be received upfront by the selling bank. Sa*e on -itho t Reco rse )asis/ " bank has to sale the !on?performing asset only on non?recourse basis i.e. the entire credit risk should be transferred to the purchasing bank. "fter the sale no known liability should devolve on the selling bank. No credit enhance1ent b+ the se**ing ban(/ The bank selling the assets should not assume any type of risk with respect to the asset sold and should not provide any credit enhancement ' li&uidity facilities in any manner. No sa*e on contingent basis/ The sale should not be made at a contingent price with the condition that in case of any shortfall in realization of the price, the selling bank would bear a part of the shortfall. P rchasing ban( to ho*d the NPA .or at *east 2: 1onths/ The bank purchasing an ! " has to hold the same for at *east %I%TEEN MONTFS before it sells the same to other banks. The ! " bought cannot be sold back to the bank from whom it is purchased. Baroda Academy Minds 140 Inventing Methods for Igniting
Asset C*assi.ication as Standard .or Ninet+ da+s/ The asset purchased may be classified by the purchasing bank as standard asset for a ,eriod o. ninet+ da+s .ro1 the date o. , rchase3 "fter this period the bank has to classify the asset depending on the record of recovery. "ny restructuring ' reschedulement by the purchasing bank will result in classification of the asset as an ! ". The asset will attract provision as per the asset classification status. Ris( $eight .or Ca,ita* AdeE ac+/ The ! " purchased will attract 122O risk weight for the purpose of capital ade&uacy. Recover+/ "ny recovery will be first adEusted towards ac&uisition cost and the balance, if any, can be taken towards profit.
141
RECO0ER# TFRO&GF "EGA" MEAS&RES ' ic( )ites *o< 'dalat Ci!il suit. Debt (eco!ery Fribunal @D(Fs) S'(:'CS/ act &ublic 9oney (eco!ery 'ct &urc ase ; sale of N&' (eco!ery agents +an<Ds special sc emes for reco!ery E S'NK'*&
23 "o( Ada*at Aok "dalat is a process of administering Eustice without resorting to filing suit and is established under the Aegal )ervices "uthority "ct 1>=<. 8nder the provisions of the "ct, )tates have constituted Aegal )ervices "uthorities at ,igh #ourt, District and at Taluka level. 8nder the "uthorities of such #ommittees respective #ourts are organizing Aok "dalats within the area of Eurisdiction. Bank shall take maBimum advantage of the medium of Aok "dalats for compromise settlements especially in hardcore cases. It is the fastest and cheapest mode of settlement of disputes and branches can take the benefit of such Aok "dalats regularly being organized by District #ivil #ourts, D(T. 7e may re&uest for a special Aok "dalat where number of cases to be addressed are fairly large. Advantages in ti*iOing the .or 1 o. "o( Ada*ats/15 There is no court fee involved when fresh disputes are referred to it. 65 It can take cognizance of any eBisting suit in the #ourt as well as look into and adEudicate upon fresh disputes. 05 If no settlement is arrived at, the parties can continue with court roceedings. :5 +very award of the Aok "dalats shall be deemed to be a decree passed by #ivil #ourt and is binding on the parties and eBecution proceeding can be filed accordingly. 95 !o appeal lies against the decree passed by Aok "dalats as the matters are settled through negotiation and mutual consent of the parties. ;5 In case where matter is compromised or settled in Aok "dalat or award is made, then the #ourt fee will also be refunded in the manner provided under the #ourt *ee "ct ' Aegislation. G ide*ines .or organiOing "o( Ada*ats 1. The Aok "dalats are constituted under the Aegal )ervices "uthorities "ct, 1>=<. The )tate' District' Taluka Aevel Aegal )ervices #ommittees'authorities constituted under the "ct 3,onJble sitting )r. Ludge of court5 have to be contacted for doing the ground work for organizing Aok "dalats. Baroda Academy Minds 142 Inventing Methods for Igniting
6. #ases of amount involving up to (s. 62.22 lacs can be referred to Aok "dalats as per olicy. 0. The branches should go through their records and identify the borrowersJ accounts coming under the purview of Aok "dalat. " list of such borrowers should be prepared and kept ready. 7hile finalizing such list, the willingness of the borrowers' guarantors, their net worth, actual and as per record, value and nature of the securities available in the account are to be considered. :. Though, pre?litigation disputes can also be taken before Aok "dalats, for selection of cases under the suit filed category, it is advisab*e to give ,riorit+ on se*ection o. o*d casesC -hich are ,ending be.ore the Civi* Co rts .or 1ore than three +ears . lease note that D(Ts also in some centres have been conducting Aok "dalats in respect of cases under their purview. ,ence, the Bank does take benefits of such Aok "dalats. ,owever, prior sanction of the #ompetent "uthority, based on the &uantum of sacrifice shall be obtained before giving consent at D(T Aok "dalat. 9. *or the purpose of organizing Aok "dalats, it will be advisable to identify the area taking into consideration of conglomeration of the branches before approaching the concerned Ludicial "uthorities, so that maBimum number of branches can participate. ;. %n getting approval from concerned Ludicial "uthorities for organizing Aok "dalats, summons be prepared, authorized' signed by the ,onJble #ourt and be served preferably through #ourt representative and as far as possible borrowers should be approached personally. It should be seen that the branch manager' officials of bank ensure that borrowers' guarantors remain present during the proceedings of Aok "dalat and if possible a settlement should be arrived before hand. <. #onsidering the detailed guidelines contained in the recovery policy or as may be updated from time to time on negotiating compromise settlements, it should not be difficult for the region' branch to arrive at amount acceptable from the borrowers. =. owers for sacrifice have been delegated to various functionaries for compromise settlements. ,owever, the region should ensure that only those officials, who have been delegated with ade&uate powers of compromise' sacrifice and other re&uisite authority, should attend the Aok "dalat so that instant and clear cut decisions can be taken as to the eBtent of which Bank is willing to compromise. >. #ompromise be entered and it should be ensured that in the consent terms default clause is incorporated against the borrower and the guarantor stating that in the event of default either in full or part or non?adherence to the terms of the award, +ntire contractual amount as claimed with all interests and costs thereon would become payable forthwith minus the amount already received in pursuance of the award so made. 12. *urther, it is imperative that after the amicable settlement is arrived at with the borrower'sD the branches should ensure to obtain (ecovery #ertificates' Decrees where applicable in such accounts and monitor the accounts very closely to ensure full recovery of compromised amount as per the consent terms filed before the Aok "dalat. 143 Inventing Methods for Igniting Baroda Academy Minds
11. 7here an award has been made by the Aok "dalat in the matter which was transferred from the #ourt, the Bank must appraise the concerned #ourt and apply for and obtain refund of the court fees, wherever applicable. 16. It may please be noted that all such (# or decrees awarded by the #ourt are valid for eBecution like a normal decree obtained by the bank. Sett*e1ent %or1 *a 1. " decree shall be sought from the Aok "dalat for the principal amount and interest claimed in the suit as per terms of compromise with default clause, and after full payment of decree amount, the branch shall issue a Discharge certificate. 6. "s far as possible the branch shall endeavor to recover at least the outstanding amount as on the date of ! "' suit filed whichever is higher. 0. 7hile settling, the compromise amount may be arrived at considering the !et resent (ealizable value of security, worth of the borrowers' guarantors and their repaying capacity etc. ,owever, Bank should endeavor to (ecover a minimum of the following/? N DB "'cs/ $in <9O of the gross outstanding amount as on the date of ! ". N T7% ' 7%' Aoss "'cs/ $in 92O of the gross outstanding amount as on the date of ! ". 93 ,owever, in genuine cases where no security is available or realizable value of security is much less than the outstanding contractual dues, borrowers' guarantors worth is negligible, cost of suit is high, suit is being dragged for long duration without any decision etc., the bank may accept lesser amounts on merit authorized by competent authority having such delegated powers of waiver ' sacrifice. 9. "s far as possible it shall be to endeavor to recover the entire compromise amount in bullet payment within a period of ?>2? days. In suitable cases the period of payment may be considered unto one year or beyond but not eBceeding three years with payment of interest . Base rate plus : O and in no case below 12O simple. ;. The negotiated agreement with the borrower shall contain a default clause in terms of which if the borrower makes a default, in payment, the entire debt will fall due for payment and bank may proceed to eBecute (# ' decree received by Aok "dalat. Sanctioning A thorit+ The competent authority under whose discretionary powers the proposal falls shall take decision on the compromise settlement as per Discretionary powers delegated to different authorities for write off' waiver. DRT G "o( Ada*ats Baroda Academy Minds 144 Inventing Methods for Igniting
D(Ts in some centres have been conducting Aok "dalats in respect of cases coming under their purview. Bank does take benefit of such D(T? Aok "dalats. ,owever, prior sanction of the #ompetent "uthority, based on the &uantum of sacrifice, shall be obtained before giving consent at the D(T Aok "dalat. 5. "ega* Action/ Civi* S it4Debt Recover+ Trib na* =DRT> Before initiating legal action, Bank may adopt any one or more of following strategy/ a5 +fforts to be initiated for compromise settlement. b5 "ppropriate action to be taken under )"(*"+)I "ct, 6226. c5 "scertain the availability and realisability of securities, net worth of borrowers, guarantors and enforceability 'validity of documents. d5 Issuance of legal notices. It is advised to keep documents alive under all circumstances, steps be taken to prepare for filing suit and it is ensured that the suit is filed within limitation period. "ccounts re&uiring legal action shall be referred to (egional %ffice at least ; months in advance before the eBpiry of documents so that the (egional %ffice, Honal $anager'#orporate #entre and "dvocate's will have sufficient time to study the case. It is advisable that while preparing such proposal branch should also put on record the possible strategies ' available avenues to eBecute the decree ' (# to realize the dues. %n receipt of sanction from (egional %ffice, all the relative papers, BeroB copy of documents, etc shall be immediately handed over to the concerned advocate's against proper acknowledgement. %n receipt of the draft of legal notice to be served, the branch shall immediately verify the facts and particulars and return the same to the "dvocate's with corrections, if any, to serve the legal notice. If there is no response to the legal notice's, our "dvocate's shall be suitably instructed to proceed with filing of the suit, etc. rather than to wait for a reminder from him'them. The plaint prepared by the "dvocate shall be thoroughly scrutinised. The plaint shall rely not only on the documents and ledger outstanding but also on the correspondence between the borrower and bank where he'they have agreed to regularize the account, sought time to repay the dues and financial statements 3Balance )heet - -A "ccount5 prepared and made available to the bank. The plaint original application 3%"5 involving (s 92 lacs and above be got vetted by legal Deptt at (%'H%'B##. Proviso/ $aiver o. "ega* Action In case the sanctioning authority is of the view that initiation of legal action will only amount to increasing of the cost without any fruitful results, such sanctioning authority may re&uest for waiver of legal action to the neBt higher authority 3unless such an action is re&uired as a coercive measure, for instance against willful defaulters5 who will be the competent authority for such sanction. *ollowing steps to be taken while preparing for filing suit in civil court or D(T. 145 Inventing Methods for Igniting Baroda Academy Minds
1;. Branch should appropriate the credit balance in any current ' savings account ' and'or *D(s in the name's of the Borrower's or Guarantor's, prior to filing the suit3 (ight of set?off5. 1<. (easonable notice to be given to the borrower before filing suit. 1=. In the case of hypothecated goods, take possession of the assets and sell the same after giving due notice. 1>. In case the AI# policies assigned to Bank, surrender the policies and appropriate the surrender value so received from AI# in the account. 62. The proceeds of securities such as, !)#, $utual *und, shares, debentures etc. should be appropriated' adEusted against the loan account. 61. +nsure that documents ' securities are enforceable against borrowers ' guarantors. 66. roper and meaningful discussions to take place and "dvocate should be briefed accordingly before filing suit. 60. +nsure that the draft laint is prepared by "dvocate within a reasonable time of assignment of the case. 6:. "ll details with facts and figures stated in the draft laint'%" suit be verified and should be sent to the #ompetent "uthority for approval along with the list of documents.3 %" means %riginal "pplication.5 A case invo*ving Rs32@ *acs and above sha** be .i*ed in DRT and be*o- Rs32@ *acs is to be .i*ed in Civi* Co rt3 Proceedings be.ore Civi* Co rt 1. #ase to be filed with the #ivil #ourt within a reasonable time after approval received from appropriate "uthority 6. "dvocate may be instructed to file "pplication for interim sale of hypothecated movable assets, which are subEect to speedy and natural decay, along with filing of laint. 0. laint should contain description of all relevant documents and securities charged to the Bank. :. 7hile filing the )uit, SeroB copies of documents only need be given to the "dvocates %riginal Documents should be retained with the Branch till #ourt re&uires the same. 9 Interim reliefs such as inEunction against sale of properties, attachment before Eudgment, appointment of (eceiver, Decree for admitted dues should be prayed as a rule. Baroda Academy Minds 146 Inventing Methods for Igniting
;. "ccount +Btracts should be produced and certified as per the provisions of Bankers Books +vidence "ct and be anneBed to the laint. <. In case branch is proceeding for destruction of old records, records pertaining to suit filed cases are to be preserved. Proced re a.ter .i*ing the S it -ith the Civi* Co rt4DRT 1. #ivil #ourt gives a )uit number and issue summons to borrowers 'guarantors called defendants. 6. Branches should obtain interim orders for restraining the mortgagor from transferring, alienating or disposal of the mortgage assets in any manner, attachment of uncharged assets of the borrower and guarantors including debtors and appointment of receiver where there is a income from the charged assets or otherwise to the borrower and guarantor. 0. )erving of summons is very important for &uick disposal of the case and the Branch ' "dvocate should take maBimum care to see that the summons are served within a period of one month. :. If summons are served on the defendants, proceedings commence with evidence by way of "ffidavits filed by the Bank and Defendants'%pposite parties. In case of D(T, no cross?eBaminations of witness is allowed without their specific permission. This is followed by arguments ending up in Ludgment and Decree. 9. +vidence by way of affidavits as aforesaid, clarifications ' documents re&uired by #ivil #ourts should be filed in time and no adEournment should be sought on this score. (eply to counter?claims raised by the borrower's should be filed immediately. ;. "ttempt to take adEournment by DefendantsJ should be opposed by the BankJs "dvocate if sought on any ground including that their compromise proposal is pending under consideration before the Bank. Passing o. Decree3 1. Branches must ensure that the statement of eBpenses, such as court fees, advocate fees and other eBpenses be claimed in the decretal amount along with the claims as made in the plaint. 6. 7ithin one month of obtaining the Ludgment Decree the eBecution "pplication has to be filed by the Branch. 0. In addition to or in the alternative the Branches concerned may consider applying to the #ourt for an %rder under %rder 61 (ule :1 of #ivil rocedure #ode, re&uiring the Ludgment Debtor to declare on "ffidavit before the #ourt all the particulars of his attachable assets. Baroda Academy Minds 147 Inventing Methods for Igniting
:. In case of a Decree for realisation of the hypothecated book?debts, the #ourt will appoint a #ommissioner or (eceiver to realise the book?debts by sending notices of demand to the Debtors of the Borrower ' Guarantor who is the Ludgement Debtor and if necessary by filing a )uit and taking legal proceedings against the Debtors for recovery of the amounts which are due by the Debtors and which are hypothecated to the Bank. 9. 7here the Ludgment Debtor i.e. borrower ' Guarantor is entitled to any shares or Debentures in any #ompany or has deposits in any other Bank or #ompany, the Bank should initiate Garnishee roceedings. ;. The Branch should initiate action and proceed with the eBecution of the decree for the entire outstanding, if there is a case of default in payment as stipulated in the decree. <. If any money is deposited by the Ludgement Debtor with the #ourtJs %ffice'court (eceiver, pending disposal of the suit, Branch should follow up with them and ensure early withdrawal'collection of money. =. +ven if an "ppeal is filed by the Ludgement Debtor against the Bank before the "ppellate #ourt challenging the money decree passed by the lower #ourt in BankJs favour, the Bank should nevertheless proceed to apply for eBecution of the decree passed by the lower #ourt, unless the eBecution of decree is stayed by a specific order. >. 7here there are two or more Ludgement Debtors in the decree obtained by the Bank, and in the absence of anything to the contrary provided in the decree, the Bank has an option to eBecute the entire decree either against any one or more or some or against all the Ludgement Debtors. 12. If the decree is sought to be eBecuted after a period eBceeding two years from the date of the decree or if the decree is sought to be eBecuted against the legal representative's of the Ludgement Debtor, then an "pplication will have to be made in the first instance before the eBecuting #ourt for leave of the #ourt to eBecutive the decree. 11. If a decree is passed against a partnership firm the Bank will have to apply for leave of the #ourt under %rder 61 (ule 92 of #. .#. for the purpose of eBecuting such a Decree against a partner who was not made a party to the suit or who was not individually served with the )ummons in the )uit. Recover+ thro gh Mortgage S it/ 7herever the collateral security has been mortgaged to cover the advance and the Bank wants to realise its dues through such security, the mortgage suit is to be filed. Recover+ thro gh S 11ar+ S it/ " summary )uit can be filed as per the provisions laid down in %rder 0< of #ode of #ivil rocedures 3# #5 at specific centres notified by the respective ,igh #ourt. The summary procedure is not available when the laintiff seeks to enforce any securities by way of mortgage, hypothecation or pledge or any other charge on any property. )o far as Bank 148 Inventing Methods for Igniting Baroda Academy Minds
advances are concerned, )ummary )uits can normally be filed, inter alia in the following cases/ 7hen the suit is against a borrower on a mere "greement, wherein no security is to be enforcedD or romissory !ote or a Term Aoan
7hen the suit is against a borrower on a ro?!ote or Term Aoan "greement and ' or guarantor on his Aetter of Guarantee, wherein no security is sought to be enforced against either of themD or 7hen the suit is against a guarantor alone on his Aetter of Guarantee, wherein no security is to be enforced against himD or 7hen, in a Bills urchase or Discount facility, the suit is against the borrower 3who would be the drawer5 and acceptors and guarantors, if any, wherein there is no security to be enforced. 3i5 In the suits tried under %rder 0< of # # the Defendant has to apply for leave to defend such suit and the #ourt may not grant such leave but decree the suit in favour of Bank if the #ourt is satisfied that the Defendant has no substantial defence to raise or that the defence intended to be put up by him is frivolous or veBatious. +ven when he is permitted to defend the suit, the #ourt has powers to direct him to give such security and within such time as the #ourt may fiB. 3ii5 %rder 0< of # # applied to all ,igh #ourts, #ity #ivil #ourts and #ourts of )mall #auses. It also applies to all other courts, subEect to proviso that the ,igh #ourt may, by notification in the %fficial Gazette, restrict the operation of the %rder only to such categories of suits as it deems proper. The summary procedure normally takes shorter time than the usual procedure. Therefore, in cases mentioned hereinabove or where the security is negligible after taking the decision at appropriate level to give up such security the Branch "dvocates may be instructed to consider filing wherever possible, a )ummary )uit under %rder 0< of # #. Recover+ thro gh Mone+ S it/ 7here there are no securities by way of $ortgage and the Bank is to recover the dues on the basis of loan documents or amounts paid to the borrower, the suit will be filed to get a money decree against borrower ' guarantor. Ste,s a.ter obtention o. recover+ certi.icate .ro1 DRT 4 decree .ro1 Civi* Co rt Debt (ecovery Tribunals, in cases before them, issue (ecovery #ertificates to the (ecovery %fficer for recovery of the amount of debt specified in the #ertificates. %n the basis of the said (ecovery #ertificates, the (ecovery %fficer proceeds to recover the amount in any of the following ways/ 3a5 "ttachment and sale of the movable and immovable properties of the borrower ' guarantor. 149 Inventing Methods for Igniting Baroda Academy Minds
3b5 "ppointing a receiver for the management of the movable or immovable properties of the defendant. 3c5 Issue Garnishee %rder against third parties if any amount is due from them to the defendant. 3d5 "rrest of the defendant and his detention in prison. 7hen a (ecovery #ertificate is issued by D(T or Decree has been obtained by the Bank in its favour, prompt steps should be taken for eBecution of such (ecovery #ertificate ' decree for recovery of the BankJs dues. Aack of prompt action and proper follow up at the Branch'(egion and Honal level in the matter of eBecution of (ecovery #ertificate ' decree may Eeopardize and adversely affect the BankJs interest and result in the weakening, deterioration and frittering away of the securities obtained by the Bank. )uch delays will also make it difficult to enforce or realise the securities for recovering the (# ' decretal amount. In many cases, after a (ecovery #ertificate ' decree is obtained, the Branch ' Honal %ffice fails to identify the assets of the borrower ' guarantor which can be attached in eBecution of the decree, with the result that the eBecution proceedings remain pending without the decree getting eBecuted. In the absence of details of attachable assets, BankJs "dvocates for recovery are also helpless, resulting in the entire proceedings being futile, in spite of the Bank having to incur enormous legal costs. Branch should make local en&uiries to ascertain the attachable assets of the Ludgement Debtor. 7here the Branch has on its records copies of Income TaB ' 7ealth TaB "ssessment (eturns, ascertainment of assets will be easier. Branches should closely liaison with the eBecution of the case and the (ecovery %fficer for the purpose of ensuring eBecution of (ecovery #ertificate ' Decree. Arrest o. de.endants 4 ? dge1ent debtors The D(T has the power to pass interim orders by way of inEunction, attachment to direct the defendant to furnish security in pending cases. In case of disobedience of such orders the D(T can order such persons to be detained in #ivil prison for a term not eBceeding 0 months. The Branch should file petition seeking inEunction and attachment orders against defendants and their properties. 7herever such orders are defied by the defendants, the Branch must file petition for arrest of the defendants. In case of (ecovery #ertificate issued by D(T, the (ecovery officer has got the powers under )ection 69 of the D(T "ct inter alia, to recover the amounts under the (# by arrest and detention of the Eudgement debtors in prison. Therefore, in cases wherever our Bank ' Branch concerned is convinced that the borrower ' Eudgment debtors are intentionally avoiding making payments though they have means to pay, in fit cases, the branch may, after obtaining permission from the authority which has authorized filing (ecovery "pplication, file an "pplication before the (ecovery %fficer for arrest and detention of such Eudgment debtors. In eBecution of money decree awarded by the #ivil #ourts, the eBecuting court can send the Eudgement debtor into prison if the #ourt is satisfied that the Eudgement debtor, with the obEect of delaying the eBecution of decree, has after filing of the suit in which decree was passed dishonestly transferred, conceal or remove any part of the property. Branches Baroda Academy Minds 150 Inventing Methods for Igniting
should also take action against such properties in consultation with the advocate of the Bank for realising the BankJs dues. Initiation o. -inding , ,roceedings In case of limited companies where the securities are not available, the bank may also consider to initiate li&uidation proceedings by issuing a demand notice under section :00 of the #ompanies "ct. Inso*venc+ ,roceedings In suitable cases where borrowers ' guarantors, are other than limited companies, have transferred the assets in the names of their family members and others to deprive the Bank of its lawful rights to recover the BankJs dues, branches with the permission of the competent authority may initiate insolvency proceeding against such borrowers 'guarantors. %ur Board of Directors in their meeting held on 20.26.6210 have approved the scheme of HA,,oint1ent o. S,ecia*iOed Agenc+4Person .or assisting in recover+ .ro1 the o..ice o. O3"3 =)CC4)R42@:49: dated @:3@535@27> 73 SAR%AESI ACTC 5@@5 )ecuritization and (econstruction of *inancial "ssets and +nforcement of )ecurity Interest "ct, 6226 is an effective tool in the hands of the bank to enforce the security interest and recover the dues thereby reducing ! "s' 7%s. The "ct deals with three aspects/ 1. +nforcement of )ecurity Interest by secured creditor 3Banks'*IsY. 6. Transfer of non? performing assets to asset (econstruction #ompany, which will then dispose of those assets and realise the proceeds. 0. To provide a legal framework for securitization of assets. En.orce1ent o. Sec rit+ Interest Before enforcing security interest, branches should ensure that the borrowal accounts comply with the following criteria @ 6. The contractual dues in the account should be more than (s.1 lac. 0. The default must have occurred i.e. the account should have become ! " as per (BI 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 !otice. 151 Inventing Methods for Igniting Baroda Academy Minds
9. The security documents in the advance account should be in full force on the date of serving the ;2 days notice. "s an abundant caution, it should be ensured that they will be in force even at the time the action that will follow for enforcement of security i.e. at least up to one year from the date of serving the notice. ;. The security documents should be duly filled in. <. +ither our Bank must be the sole banker to the borrower i.e. 122O lending is done by us or in case of consortium lending consent of secured lenders representing not less than <@J of the amount outstanding in value is obtained. =. In case of multiple Banking, if the security is eBclusively charged, the bank can proceed as though it is the sole banker. >. +ven in B.I.*.(. referred cases and suit filed cases, action can be taken. 12. "n action under )"(*"+)I "ct also facilitates abatement of reference from BI*(. 11. )ince limitation "ct applies to action under )"(*"+)I, care should be taken that the action is within limitation time. Iss e o. Notices )ervice of notice is a pre?re&uisite for enforcement of security interest. ,ence, it should be ensured that proper notices are served on the borrowers' guarantors who created the security interest. owers have been delegated to "uthorized %fficers 3all +Becutives in )enior $anagement Grade')cale?IT and above including branch heads5/ ? i5 to issue' authorise to issue !otices, as per their discretionary lending powers, under )"(*"+)I "ct and take all steps under the "ct. ii5 to take possession, get the same valued and insured and safeguard the secured assets of the borrowers. iii5 to incur various revenue eBpenses including insurance charges, charges for valuation of property, stock audit'valuation, charges of security guards and other eBpenses for safeguarding the property upon take over of secured assets. iv5 to appoint +nforcement "gencies 3(ecovery agents')ecurity agents5 to take physical possession of the assets and safeguard the same till final sell off. v5 to take steps for realisation of secured assets in satisfaction of BankJs dues and for the purpose to lease, assign, sell or transfer the secured assets on taking possession thereof and do all other acts, deeds, matters and things as empowered under the "ct. Baroda Academy Minds 152 Inventing Methods for Igniting
To facilitate smooth implementation of the "ct, certain administrative powers are eBtended to functional authorities. "ll decisions taken under the "ct shall be reported to the neBt higher authority. Decisions taken by the #hief $anagers and Deputy (egional $anagers shall be reported to the (egional $anager concerned. =a> $hen notice can be given "n account is classified as ! " - is not falling in any of the category described below. !otice must contain the contractual dues and details of secured assets. =b> $hen notice can not be given 7hen Bank has lien on any goods, money or security under #ontract "ct or any other Aaw for the time being in force. " pledge of movable asset within the meaning of )ec.1<6 of the Indian #ontract "ct. "ny security interest created in agricultural land. "ny case in which the amount due is less than 62O of the rincipal amount and interest thereon. "ny security interest for securing repayment of any financial asset not eBceeding (s.1'? lac "ny property'ies not liable for attachment 3eBcluding the properties specifically charged with the debt recoverable under this "ct5 or sale under the first proviso of sub section 315 code of the #ivil rocedure, 1>2=. "ny rights of unpaid sellers under sec. :< of the )ale of Goods "ct. "ny conditional sale, hire purchase or lease or any other contract in which no security interest has been created. #reation of any security interest in any air craft as defined in sec. 6 of the "ir craft "ct. #reation of any security interest in any vessel as defined in clause 99 of sec. 0 of the $erchant )hipping "ct. If agriculture land has been utilized for non agricultural activities, action under )"(*"+)I "ct can be taken, even though the status of the land in (evenue (ecover is "griculture Aand. This has been decided by 8ttaranchal ,igher #ourt in a case filed by 8ttaranchl Gramin Bank against ,ari )agar +ducational Trust. Contents o. Notice/ !otice is the basic document and is the subEect matter of scrutiny before the court'D(T .Branches must eBercise utmost care while preparing notice. !otice must contain the contractual dues 3upto date of serving the notice5 !otice must contain the details of the secured assets i.e. movable or immovable securities charged to the Bank. Service o. the Notice Baroda Academy Minds 153 Inventing Methods for Igniting
)ervice of !otice may be made by delivering or transmitting the notice at the place where borrower or his agent actually and voluntarily resides or carries on business or personally works for gains by/ ". (egistered post "D. B. #ourier. #. "ny other means of transmission of documents like faB or electronic mail service. D. By affiBing copy of the demand notice on secured assets. If the borrower is a body corporate, the demand notice shall be served on the registered office or any of the branches of such body corporate. The demand shall be made on all borrowers, if more than one. If notice returned unserved, service shall be effected by publishing the contents of the demand notice in two leading newspapers, one in vernacular language having sufficient circulation in that locality. Re,resentation b+ Mortgagor 4 )orro-er 4 G arantor Sec3 27=7A> 19. If borrower on receipt of notice represents to the Bank or raises any obEection, the Bank shall reply the representation within 2: Days of receipt of such representation ' obEection. 1;. In case the borrower fails to discharge his liability in full within the !otice period, the Bank may take recourse to one or more of the measures given under )ec.10 3:5 of the "ct including possession of mortgaged properties for which "uthorised %fficer shall issue notice demanding possession. Possession o. Movab*e and i11ovab*e Sec red Assets 7hen amount demanded in demand notice is not paid within time, the "uthorised %fficer 3"%5 shall proceed to realize the amount by adopting any of the means provided in sec.10 3:5.including possession of secured assets. It has been eBperienced that branches resort to symbolic possession which may in some cases lead to compromises but in case of need such possession cannot be enforced as the "% cannot handover the possession of the secured asset to the buyer, if any. "s such branches should take physical possession only for facilitating realization of the BankJs dues. "% shall take possession of secured assets in the presence of two witnesses 4nown as anchs. "% shall draw anchnama as given in the circular no. B##'B('>;'6:< dated 2=.<.622:. "% shall make inventory of the secured assets taken into possession in the form as given in the circular no. B##'B('>;'6:< dated 2=.<.622:Y."% can also have video film of the secured assets. "% shall keep the movable and immovable secured assets taken into possession in his custody or a person authorized or appointed by "%. "% must sell the movable secured assets immediately if it is subEect to speedy or natural decay. 154 Inventing Methods for Igniting Baroda Academy Minds
"% shall take steps for preservation and protection of the movable and immovable secured assets till sold' disposed off. "% shall give a public notice in two news papers, one in +nglish language and other in Ternacular language widely circulated in the area where the secured assets are situated ' located immediately within a week of taking possession. S,eci.ic ,roced re -hi*e a,,*+ing be.ore CMM 4 DM .or see(ing assistance .or ,h+sica* ,ossession/ The application by the secured creditor to #hief $etropolitan $agistrate 3 CMM 5 or District $agistrate 3!M 5 to assist in taking possession of secured asset will now have to be accompanied with an affidavit duly affirmed by the authorized officer of the secured creditor 0a* ation o. Sec red assets and .i;ation o. Reserve Price "% shall obtain valuation, of secured assets from an approved valuer and fiB the reserve price in consultation with the secured creditor. Sa*e o. the Movab*e Pro,ert+ "% may sell the movable property taken into possession in one or more lots, by adopting any of the following methods/ By obtaining &uotations from parties dealing in movable properties or otherwise interested in buying such movable property. By inviting tenders from the public. By holding public auction. By private treaty/ In case the auction is not successful the "% may dispose the secured movable assets by private treaty by giving notice to borrower. In case sale by public auction or by inviting tender from the public, a public notice in two leading newspapers and out of them one in vernacular language having sufficient circulation should be given. The public notice must give the following details/ a5 Details about borrower - the secured creditor. b5 Description of movable secured assets to be sold for identification. c5 (eserve price. d5 Time - place of public auction. e5 Depositing of +arnest $oney. f5 )ale must be on Pas is where is and whatever isQ basis. g5 There should be clear 02 days between the notice of sale in the news paper and actual sale. h5 "fter publishing sale notice , one copy of it must be sent to borrower along with letter
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i5 the banks were now empowered to accept any immovable property in realization of a claim from a defaulted borrower, as the banks were not able to find appropriate buyers to buy for these assets. The "ct proposes that if the sale of such asset is postponed due to lack of a bid at the reserve price, the secured creditor 3including banks5 may bid for the asset at a subse&uent sale and make appropriate adEustments of the amount due to the bank. This change enables the banks to secure the asset3s5 in part fulfillment or full and final fulfillment of the defaulted loan. ,owever, the Branches should take prior permission from controlling offices before bidding for the immovable property. Sa*e o. the I11ovab*e Pro,ert+ "% must give notice demanding possession. "% must fiB possession notice on the outer door or at such conspicuous place of the property. anchanama - Inventory of articles be also prepared. ossession notice should be published in two leading newspapers, out of which one in vernacular language having sufficient circulation in that locality.
"fter possession of the immovable property "% shall take steps for preservation rotection of )ecured assets. "% may sell the immovable property taken into possession in one or more lots, by adopting any of the following methods/ ". By obtaining &uotations from parties dealing in immovable properties or otherwise interested in buying such immovable property. B. By inviting tenders from the public. #. By holding public auction. D. By private treaty. In case the auction is not successful the "% may dispose the secured movable assets by private treaty by giving notice to borrower. In case of sale by public auction or by inviting tender from the ublic, a public notice should be given in two leading newspapers and out of them one in vernacular language, having sufficient circulation. The public notice must give the following details/ a5 Details about borrower - the secured creditor. b5 Description of immovable secured assets to be sold for identification. c5 (eserve price. d5Time - place of public auction. e5 Depositing of +arnest $oney. f5 )ale must be on Pas is where is and whatever isQ basis. g5 There should be clear 02 days between the notice of sale and actual sale. h5 "fter publishing sale notice , one copy of it must be sent to borrower alongwith letter as per draft provided in "nneBure !6 of circular !o. B##'B('>;'6:< dated 2=.2<.622: Baroda Academy Minds 156 Inventing Methods for Igniting
In case borrower is not willing to hand over the peaceful possession of assets, facts should be recorded and application be made to District $agistrate to take possession of the assets and hand over the same to the bank for realisation of dues. 7hile making application please note to enclose copies of Demand !otices, "cknowledgement for having served the notices, !otice Demanding ossession, !ote prepared as on the date of taking possession, copies of mortgage deed alongwith supporting papers etc. District $agistrate should take decision within ;2 days. Con.ir1ation o. sa*e/ 3a5 The highest bidder has to pay 69O 3inclusive of earnest money deposited5 of the bid amount in terms of the sale notice immediately i.e. within 6: hours and the balance <9O of the bid amount is payable in 19 days. ,owever, the sale is to be confirmed after eBpiry of 02 days from the date of sale and in no case the sale to be confirmed before eBpiry of 02 days. %nly after confirmation of sale the sale certificate to be issued. 3b5 In case the borrower approaches the Bank before confirmation of sale offering contractual dues ' amount acceptable to the Bank, contractual dues Ii.e. amount claimed in sale notice 5 plus eBpenses plus interest .19O " from the date of proclamation of sale K9O of the purchase money 3 in case after sale which is to be paid to successful bidder 5 and re&uests for cancellation of the sale, Bank shall accept the amount and hand over the possession to mortgagor. This is in view of (ight of $ortgagor to redeem. ,owever for offer by mortgagor more than the sale price but below contractual dues suitable view may be taken eBamining legal aspect. Re,ossession 4 SeiO re o. 0ehic*e/ a. 7henever, the facility ' ies are against the vehicles and the borrower fails to repay the dues and the account turns into ! ", the branch shall give a notice to the borrower advising the dues and the intention of the Bank to seize the vehicle if the overdues are not cleared within the specified period. b. %n failure of the borrower in li&uidating the overdue as above, the vehicle should be seized and parked in a godown with proper insurance. c. The vehicle to be auctioned following procedure given in )ale of $ovable roperty. d. In the meantime, if the borrower deposits total overdue amount alongwith eBpenses incurred by the branch for seizure, security, rent, insurance, etc., %r for the lesser amount with due permission of (egional "uthority, the Branch may release the vehicle to the borrower. +stablishment of #entral (egistry under the provisions of the )ecuritisation and (econstruction of *inancial "ssets - +nforcement of )ecurity Interest "ct 6226 3)"(*"+)I "ct5. 8nder provisions of )ection 62 of )"(*"+)I "ct , Government of India has decided to set up a #entral (egistry for the purpose of registration of transactions of securitisation, asset 157 Inventing Methods for Igniting Baroda Academy Minds
reconstruction and security interest over property and accordingly for the purpose Indian BanksJ "ssociation has obtained a licence under section 69 of #ompanies "ct 1>9; for incorporation of a Government #ompany with 91O shareholding of the #entral Government and balance by select ublic )ector Banks and !ational ,ousing Bank. "ccordingly it is advised as under/ 1. Government of India has made it compulsory that mortgages created by way of deposit of title deeds are to be registered with the #entral (egistry within 02 days from the date of creation of the mortgage. 6. resently financial institutions will be re&uired to file only information relating to the mortgage by way of deposit of title deeds. 0.Branch to incorporate information in respect of all he mortgages created by deposit of title deeds. :. )uch registration system is operative on?line and has been devised to facilitate the banks to assign 8ser IDs to various branches and regional offices to give access to the registration system for the purpose of registration of mortgages by deposit of title deeds. 9. )uch registration shall be subEect to registration fees payable by bank. ;. articulars of any charge created security interest over property is re&uired to be filed with the (egistry within 02 days from the date of creation . <. *ailure to do so will need specific permission for such registration from #entral (egistrar, however, subEect to payment of penalty as specified therein. Right to *odge a caveat The "ct enables the secured creditor or any person claiming a right to appear 3Caveator 5 before the Tribunal, #ourt of District Ludge, "ppellate Tribunal or ,igh #ourt 3Authorit" 5, to file a caveat before the "uthority Conversion o. debt into eE it+ The "ct allows for converting any part of debt into e&uity shares of a borrower company, and such conversion shall always be deemed as valid. 93 Recoveries nder P b*ic Mone+ Recoveries Act 3i5 Tarious )tate Governments have enacted a law generally called the ublic $oney (ecovery "ct providing for speedy recovery of certain dues payable to the )tate Government, )tate *inancial #orporations, !ationalised and other Banks. 3ii5 )uch an "ct authorises the recovery of the dues of these institutions as a recovery of arrears of land revenue. 3iii5 The "ct, generally, covers the loans granted under any of the )tate'#entral Government sponsored schemes.
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3iv5 The "ct enacted by various )tate Governments may differ in operational details and various proforma of forms to be used. Branches are, therefore, advised to refer the issue to the Aegal Department at Honal %ffices or to their approved advocates. 3v5 Given below are some of the salient features of the "ct which may be common to all the )tates. Sa*ient %eat res 3i5 !o suit can be filed in a #ivil #ourt for recovery of any dues under this scheme. !o #ivil #ourt can grant any inEunction against such a move by the bank. 3ii5 In other words, when an advance is granted under a )tate' #entral sponsored scheme no civil suit can be filed. 3iii5 ,owever, a civil suit can be filed against the guarantors. 3iv5 Branches should file an application to the District #ollector re&uesting him to recover the BankGs dues in respect of a particular borrower as if it were an arrear of land revenue and remit to the branch. Branches should submit the re&uest only as per proforma fiBed by the respective )tate Government. 3v5 The collector will then issue a notice of the demand to the defaulter showing the amount and the time within which he has to pay the amount. 3vi5 If the borrower does not respond to the legal demand notice, the collector will issue an order of attachment of hypothecated movable property under relevant section of the Aand (evenue code or mortgaged immovable property. 3vii5 The eBecution of the attachment order has to be carried out by any (evenue %fficer preferably by Tehsildar'$amalatdar. 3viii57hile attaching the property, a anchnama should be prepared in the presence of the defaulter and witnesses. The anchnama should contain the following details/ 3a5 Time, Date and lace of attachment. 3b5 !ames, age, occupation and address of witnesses. 3c5 Description of the properties attached alongwith the value. 3d5 "mount due from the defaulter. 3e5 )ignature of the defaulter should be taken on the anchnama and copy of the same be given to him. If he is absent, the panchnama should clearly state that he could not remain present in spite of notice served to him.
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3f5 If the property attached is handed over back to the defaulter for safe custody by taking two sureties, a clear note of the same be made and signature of the defaulters and sureties taken. In other case, it may be handed over to the applicant institution for safe custody to be kept at the premises of attached property, properly secured and sealed and a watchman put at the cost of defaulter. The panchnama should clearly mention what course is adopted for safe custody of attached property. 3g5 %fficer eBecuting the attachment order should ensure that the properties eBempted from attachment or sale as per the provisions of the #ivil rocedure #ode are not attached. 3iB5 Before eBecuting the attachment order issued by the collector, the eBecuting officer has to give notice to the defaulter. This is obligatory in case of buildings used as human dwellings. The law further provides that in the case of buildings of all descriptions due regard should be paid to the social and religious preEudice of the occupiers. +ntry in the premises for the purpose of the attachment should not be made unless the said notice having been served not less than < days before such entry. 3B5 " notice may be published in newspaper after the attachment, stating the details of defaulter, amount due, and properties attached etc. to pressurise the defaulter. The public may also be warned by such a notice not to enter into any transaction in respect of said attached properties. 3Bi5 In case of immovable properties, the attachment order issued should be sent to the officers, who are keeping record of the properties, i.e. Talati and $amlatdar in case of agricultural Aand'#ity )urvey %fficer and local authority in case of non?agricultural properties, 3building5. These officers should be re&uested to keep a note of attachment order against the entries of the land properties in the property record maintained by them. 3Bii5The proceedings under the Aand (evenue #ode are for the purpose of realisation of net dues and, therefore, if the defaulter or any person on his behalf any time after the attachment order is issued and before the day fiBed for auction, pay dues, the sale should be stayed and proceedings concluded. )ometimes, the defaulters pay the amount under protest to the authority. In such cases, also the amount should be accepted and the proceedings should be stayed. In case of part payment, the collector may decide the issue on merits. 3Biii5+ven after the attachment order is eBecuted, if the defaulter fails to pay the dues, the properties attached should be put to auction for realisation of the said dues. 3Biv5)ale of attached property by public auction has to be made in accordance with (ules which prescribe various stages of the auction proceedings/ 3a5 The local Branch $anager of the bank is re&uired to send to the #ollector a certificate in the prescribed form duly filled in and stating therein, that such sum may be recovered as if it were arrears of land revenue.
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3b5 The collector on receipt of such certificate will make necessary en&uiries 3including giving hearing to the party affected5 as he deems fit to proceed to recover the amount stated therein as aforesaid as arrears of land revenue. 3c5 the amount so recovered from the borrower may be paid over by the #ollector to the branch after deducting the costs of collection incurred in this connection. 3d5 In case of goods pledged to the bank before submitting certificate referred to above, the steps should be taken for sale of the goods pledged after completing necessary formalities and if the sale proceeds are not sufficient to cover the bankGs dues then in that case alone proceedings should be taken for recovery of the balance as if it were a arrears of land revenue. ,owever, these proceedings are taken for the sale of the pledged goods as directed by the #ollector. 3e5 In case of immovable properties, mortgaged or charged to the bank to secure the amount of loan or advance under the said )tate )ponsored )cheme referred to above, proceedings may be taken by the #ollector for the sale of the mortgaged properties under the "ct as an arrears of land revenue. If, however, there is no prospect of realisation of the entire sum due, any other proceedings are permitted to be taken by the bank such as filing of suit etc.D after obtaining the certificate of the #ollector in that behalf. %o**o-- , o. cases *odged nder the Act 3i5 Branches should follow?up vigorously with concerned officials of the )tate (evenue Department'#ollectorate for eBpediting recovery of dues under the "ct. 3ii5 Branches should eBtend all co?operation to the officials of the )tate Government for serving of notices, eBecution of warrant of attachment etc. 3iii5 #harges, if any, prescribed under the "ct may be remitted to the concerned (evenue Department only after recovery of dues by the branch. 3iv5 roportionate share of DI#G# claim, if any, received should be remitted to DI#G# after effecting recovery as above. 3v5 In case accounts have been written?off, the recoveries should be credited to Debt written?off a'c. 3vi5 In other cases, the amount should be credited to borrowerGs loan a'c. 7hile reporting to controlling offices, recovered under this "ct should be reported separately. 'A Bad
TEST O% &NDERSTANDING Baroda Academy Minds 161 Inventing Methods for Igniting
1. The Aegal )ervices "uthority "ct was passed in ZZZZZZZZZZZZto constitute the Aok "dalat District and Taluka Aevel. a. 1>=9 b. 1>=< c. 1>>< d. 1>>2 e. 1>>; 6. In Aok "dalat Bank can refer following cases a. )uit *iled "ccounts b. !on )uit *iled "ccounts c. only B d. a - b e. !one of the above 0. If we have to refer the account to Aok "dalat the total dues should not eBceed a. (s 12 Aac b. (s 92 Aac c. (s 62 Aac d. !o ceiling e. (s 9 lacs :. The (ecovery of Debts Due to Banks and *inancial Institutions "ct was enacted in ZZZZZZZZZZZ a. 1>>0 b. 1>=; c. 1>>9 d. 1>>< e. 6222 9. "ccounts where total dues are of (s ZZZZZZZZZZ and above are referred to D(T a. (s 9 Aac b. (s 12 Aac c. (s 92 Aac d. (s 62 Aac e. (s 122 lacs. ;. $aBimum fee payable for registration of D(T case is (s ZZZZZZZZZZZ a. (s 122222'? b. (s 622222'? c. (s 1922224d. (s 922222'? e. !o ceiling. <. $aBimum fee payable for filing appeal is (s ZZZZZZZZZZZZZZ a. (s 12222'? b. (s 62222'? c. (s :2222'? 162 Inventing Methods for Igniting Baroda Academy Minds
d. (s 02222'? e. (s. 19222'? =. $aBimum period within which an appeal can be filed in D("T, against the order passed by D(T is ZZZZZZZZZZZ days. a. :9 days b. 02 days c. ;2 days d. >2 days e. 122 days >. "n action under )"(*"+)I "#T can be initiated in case of following/ a. If balance outstanding in the account is more than (s 1 lac b. contractual dues in the account are more than (s 1 lac c. !o such ceiling. d. If the balance in the account is () 92222 and above. 12. The Demand !otice under )"(*"+)I "#T must be issued at least for a period of ZZZZZZZZZZ days. a. 02 days b. 2< days c. ;2 days d. 19 days e. 1: days )T"T+ 7,+T,+( *%AA%7I!G )T"T+$+!T) "(+ T(8+ %( *"A)+. 1. "ction under )"(*"+)I "ct can be taken in case of otential ! " accounts. 6. Issue of ossession !otice is necessary in case of immovable assets. 0. Bank can sell the assets taken under possession under )"(*"+)I "#T after issuing sale notice for 19 days. :. ossession of secured assets can be taken forcefully under )"(*"+)I "#T for recovery of bankGs dues. 9. !otices under )"(*"+)I "#T can be sent by e mail. ;. "ction under )"(*"+)I "ct can be initiated in case of suit filed accounts. <. %nce account became ! " bank need not consider any re&uest of borrower for restructuring and can proceed under )"(*"+)I "#T for recovery. =. %nce the action under )"(*"+)I "#T has been initiated to recover bankGs dues, bank can not take any other action to recover shortfall, if any. >. %nce the action under )"(*"+)I "#T has been initiated by bank, borrower can approach any court for redressal of his grievances. 12. %nce the action under )"(*"+)I "#T has been taken, limitation period for documents get automatically eBtended.
163
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164
PO"IC# %OR RECO0ER# IN %RA&D ACCO&NTS ' ic( )ites To nderstand the detai*s o. the . nctioning o. the ,o*ic+ )ac(gro nd/ %ur Bank has decided to frame a policy for (ecovery in *raud accounts 3"dvances5 pursuant to the instructions from the Govt. of India approved by our Board of Directors in the meeting held on 61.12.6216. The above policy would be an integral part of Domestic (ecovery olicy 3"dvances5 6216 as a separate chapter. The silent features of the above policy are as under/ I3 Co11ittee at Rona*4 Regiona* "eve*/ In compliance with the Govt. of India guidelines it is envisaged that fraud accounts will be monitored by a separate committee at the Honal and (egional level for the purpose of maBimizing the recovery in shortest period and reducing the loss to the Bank. The constitution of Honal and (egional #ommittee will be as under/ 23 (egional %ffice #ommittee i3 D($ @ ,ead of committee ii3 )enior $anager' $anager 3(ecovery5 @ #onvener iii3 Aegal %fficer of the (egion ? $ember 53 Honal %ffice #ommittee i3 Deputy Honal ,ead @ ,ead of #ommittee ii3 +Becutive' In?charge of (ecovery at Honal level @ #onvener iii3 Aegal Department in?charge ? $ember II3 A1o nt invo*ved/ The fraud cases involving amount upto (s. 92 lacs will be monitored by the (egional #ommittee - above (s. 92 lacs by the Honal #ommittee. III3 Ti1e .ra1e .or reg *ar revie-4 re,orting -ith deve*o,1ents in recover+ action /
165
i3 (egional #ommittee to review the cases on monthly basis and submit the progress of action taken and recovery made in fraud reported accounts to the Honal #ommittee through (egional $anager on monthly basis. ii3 Honal #ommittee to put up the progress of action taken and recovery made to the Honal committee on monthly basis. iii3 Honal #ommittee will review the progress reported on fraud cases in every Honal committee meeting. This will be a regular agenda for each Honal committee meeting. iv3 Fuarterly report to be submitted by the Honal office on all fraud cases involving (s. 122 lacs and above to the General $anager 3(ecovery, Aegal - ")#(%$5, Baroda #orporate #entre, $umbai. v3 General $anager 3(ecovery, Aegal - ")#(%$5 will submit status report to the #hairman - $anaging Director on &uarterly basis. I03 Action ,oints .or the s,ecia*iOed tea1 at Regiona*4 Rona* *eve*/ 23 The committee would immediately access all related documents'information with regard to the purported fraud. The committee and'or its members'representatives may visit the branch'place of fraud and get hold of documents, papers as warranted immediately. 53 The committee may look into the following aspects/ a> Inspection of moveable and immovable assets charged to the Bank. b> )eek Aegal opinion of "dvocate' law officers and arrange for verification of validity of security documents and enforceability of the title deeds of the securities mortgaged. c> +Bplore seeking services of detective agency to find out uncharged personal assets of borrowers and guarantors. d> To suggest to start action under )"(*"+)I "ct and Aegal action. e> ersonal meeting with the borrower and guarantor.
.> To suggest filing of #riminal action' *I( in case of need. g> "rrange to declare the borrower as willful defaulter in terms of the eBtant guidelines issued by (BI. h> "rrange for seizure of moveable assets charged to the Bank in consultation with Aegal department and "dvocates. i> #ommittee to appraise developments to (egional ,ead and Honal ,ead from time to time. Baroda Academy Minds 166 Inventing Methods for Igniting
?> (ecovery "gent may be appointed if re&uired. (> "rrange to impound the passport of borrowers and guarantors. *> "ny other steps to minimize the loss and to maBimize recovery. The above committees constituted would be looking after fraud cases related to "dvances accounts - focus would be to initiate urgent steps to minimize the loss to the Bank maBimize the recovery. The matters concerning staff accountability and action thereon will be monitored by Tigilance Department as usual. "s such the above committees are not eBpected to go into such issues.
167
S&MMAR# ' ic( )ites To nderstand the G ide*ines .or Strateg+ o. the )an(s to-ards NPA Manage1entC Recover+ o. "oss Assets )ac(gro nd/ The draft strategy paper in the captioned subEect was discussed during the meeting of General $anagers 3(ecovery5 of all )8 Banks at Department of *inancial )ervices 3D*)5, $inistry of *inances 3$%*5, !ew Delhi on 16.2<.6216. The said strategy paper are received by Bank from D*), $%*, !ew Delhi which are reproduced herein below. These are broad guidance on the $onitoring and (ecovery of ! " only. The other details may be obtained from circular !o. B## ' B( ' 12: ' 6>0 1:th "ugust, 6216. The aforesaid Guidelines are in addition to the various various circulars issued from time to time in the matter. olicy Guidelines of our Bank and
G&IDE"INES %OR STRATEGIES %OR E%%ECTI0E NPA MANAGEMENT )trategy of the banks towards eBpeditious recovery of loss assets and timely corrective steps to prevent slippages of )tandard "ssets to ! " is very crucial for the good health of banking system. roblems vary from sector to sector and hence a good strategy would include sector wise identifying the early warning signals, necessary steps to prevent slippage of such accounts to ! "s, and speeding up the pace of recoveries of ! "s. 23 AGRIC&"T&RE SECTOR/ S,eeding &, the Pace o. Recoveries o. NPAs/ 1. )AB# forum, District #onsultative #ommittee and BAB# forum should also be effectively utilized. *urther, the services of *armersJ #lub may also be utilized for better recovery. 6. (esorting to one time settlement'compromise by organizing (in $ukti )hivirs in the branches'cluster of branches. 0. roper tempo should be built sufficiently in advance for launching of (ecovery #ampaigns during 4harif and (abi harvesting'marketing seasons. *ull involvement of branch staff should be ensured in these #ampaigns. 7hile organizing (ecovery #ampaign, active participation of #hronic - Identified Branches should be ensured for better recovery from the borrowers. Baroda Academy Minds 168 Inventing Methods for Igniting
:. )ettling the cases through compromise in Aok "dalats. S,eeding &, the Pace o. Recoveries o. NPAs/ 1. The borrower be served with a Aegal notice during the :th month if irregularity is not rectified. 6. %rganizing (egular (ecovery #amps in general and more number of camps for branches chronic in recovery. 0. Initiating )teps under )"(*"+)I "#T meticulously, as per the provisions of Aaw without giving any chance to obligants to escape or adopt delaying tactics. :. 8nder (ecovery arrangement branches are obtaining ost Dated #he&ues'"dvance #he&ues signed by the borrowers towards monthly installments of the loan. Branches should effectively make use of the remedy available under )ection 10= of !egotiable Instrument "ct, wherein in the event of dishonor of che&ue a person can be punished with imprisonment for a term which may eBtend to 6 years or with fine which may eBtend to twice the amount of che&ue or with both. )imilarly the functionality of D# management system in #B), recovery and regular collection of +$Is need to be monitored on day to day basis the branches. It was further decided that the practice of obtaining D#s may be replaced'supplemented with the system of +#) Debit "uthorizations which too are at par now with dishonouring of che&ues 8') 10= of !I "ct. 53 MSME 4CORPORATE AD0ANCES/ S,eeding &, the Pace o. Recoveries o. NPAs/ 1. In respect of Aoan accounts which get classified as ! ", Incumbent Incharge should immediately serve a formal notice 3say maBimum within 19 days5 to all the %bligants for immediate regularization of the account and demanding a specific overdue amount. 6. In case if the account is not regularised as per the terms of the notice, steps should be taken to serve legal recall notice by taking up the matter with the competent authority without any delay, besides immediately establishing a personal dialogue, maBimum within 02 days. 0. %ne of the strategies to resolve ! "s is ,gradation o. acco nts to standard category by regularizing the accounts either through recovery of overdue amount or bringing the eBposure within the Drawing ower 3D 5 besides other option of (estructuring 're? scheduling. In such cases, bank may permit operations in the account by tagging arrangement, which should be pro?actively implemented to get freshly slipped accounts upgraded to )tandard #ategory. 73 OTFER STEPS/
169
1. Cor,orate Debt Restr ct ring/ The eligible cases of corporates affected by internal or eBternal factors with fund based and non?fund based outstanding of Rs32@ crore and above from the financial system in )tandard')ubstandard' Doubtful categories are being referred to #orporate Debt (estructuring 3#D(5 #ell for revival through restructuring of debts under #D( $echanism. In terms of the revised guidelines issued by (eserve Bank of India, suit filed and large value BI*( cases are also being considered for restructuring under #D( mechanism. "ll field functionaries should identify eligible accounts in the first &uarter of the financial year and report the details to the ,ead %ffice by Luly 01st positively. 6. Debt Restr ct ring Mechanis1 =DRM> .or SMEs/ The obEective of the Debt (estructuring $echanism 3D($5 is to ensure timely and transparent mechanism for restructuring the debts of potentially viable )$+s facing problems for the benefit of all concerned. *or the purpose of the mechanism all industrial units having investment in lant - $achinery upto (s.12 crore including ))I units are eligible. Debt (estructuring $echanism is applicable to the entities, which are viable or potentially viable. 0. One to One Meetings -ith Figh 0a* e NPAs/ In high value ! "s also, dialogue'meeting with borrowers'guarantors is necessary not only to facilitate to resolve the account but also to discuss other issues related to smooth conduct of their accounts. Therefore, besides issuing usual Demand !otices to such borrowers a formal'specific invitation be sent to such borrowers to come forward for %T) 3%ne Time )ettlement5. :. Engage1ent o. Recover+ Agencies In terms of olicy for engagement of (ecovery "gencies ! " accounts 3whether non?suit filed, suit filed or decreed5 with outstanding upto (s. 12 lac are eligible under the scheme. $oreover, written off accounts can also be entrusted to (ecovery "gencies to effect recovery. The progress of the (ecovery "gencies should be monitored at #ircle'Honal'(egional office level and the progress is reviewed by the Board on annual basis. There is a need to implement the scheme with greater vigor and proper planning. 9. Engage1ent o. Reso* tion Agents/ )imilarly all ! " accounts of (s. 1 lac and above including ,igh Talue ! " "ccounts can be entrusted under olicy for +ngagement of )ecuritisation' (econstruction #ompanies 3)#'(#s5' *irms' companies other than )#'(#s'(etired bank +mployees as (esolution "gents. ;. Recover+ thro gh "ega* Action/ 7here )"(*"+)I "ct?6226 is not applicable or where bankJs dues are not fully recoverable through action under )"(*"+)I "ct, legal action should be initiated immediately without loss of further time. In terms of (ecovery of Debts due to Banks and 170 Inventing Methods for Igniting Baroda Academy Minds
*inancial Institutions "ct 1>>0, Debt (ecovery Tribunals have been established to adEudicate claims involving an amount of (s.12 lakh and over inrespect of amounts due to Banks and *Is. )uit'#laim filed before #ivil #ourts'D(Ts shall be pursued effectively. (emedies under )"(*"+)I "ct and D(T "ct are complimentary to each other and can be taken up simultaneously. <. SAR%AESI Act/ The )"(*"+)I "#T?6226 is a handy tool available with the secured creditors to deal with the defaulters. The "ct facilitates enforcement of security interest by secured creditors without intervention of courts. There is provision of transfer of ! "s to "(#s which will realize the impaired assets within a time frame. *ield functionaries should make effective use of the rights of enforcement of security interest as provided in the "ct for &uicker resolution of ! "s. =. Trans.er4Sa*e o. %inancia* Assets to Sec ritisation Co1,anies4 Reconstr ction Co1,anies )ecuritisation and (econstruction of *inancial "ssets and +nforcement of )ecurity Interest "ct, 6226 3)"(*"+)I "ct5 provides also for sale of financial assets 3! "s5 by banks ' *Is to "sset (econstruction #ompanies 3"(#s5. )ale of ! "s is an important mechanism available to lenders for &uicker resolution of ! "s proving difficult of recovery and cleansing the balance sheet. rovisions of this policy should be put to optimum use by field functionaries for reduction in ! "s. >. Sa*e o. NPAs to Other )an(s4%inancia* Instit tions =%Is>4Non )an(ing %inance Co1,anies =N)%Cs>/ Besides selling their ! "s to "(#s Banks are now allowed by (BI to resolve their ! "s by sale to other banks' *Is'!B*#s 3other than )ecuritization #ompanies - (econstruction #ompanies5. 12. Engage1ent o. Detective4 Investigating Agenc+/ Based on eBperience and &ualifications, a panel of Detective'Investigating "gencies may be prepared at #ircle level. erformance of such agencies be reviewed after one year for renewal of the empanelment. #ircle ,ead may approve availment of services of the Detective "gencies' Investigating "gencies on merits of the each case and cost consideration. 11. Negotiated Sett*e1ent .or Recover+/ "fter analysis of the account, when it is found that the unit is not viable for rehabilitation or restructuring then normal course of recovery procedure should be immediately initiated. In case recovery is not forthcoming through normal process, possibilities of settling the account through %T) are to be eBplored.
171
(esolution of !on erforming "ssets through %ne Time )ettlement 3%T)5' !egotiated )ettlement'#ompromise has been recognized as an effective non legal remedy by the Bank due to twin advantages of faster recovery of dues and income generation by recycling of funds, otherwise likely to be blocked for a long time.
172

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PREFACE Banking business is directly dependent on economic conditions in the country. Due to liberalization, our economy is not insulated.

Date/01.20.10 lace/ "hmedabad

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