(This post elucidates on recovery and monitoring process of NPA accounts,advantage and disadvantage of Compromise settlement, and gains of NPA recovery)
The asset of the bank, classified as NPA ceases to generate income to the bank. In addition to stoppage of income generation to the banks, banks are required to make provision for NPA. Therefore, NPA is a double edged razor; damaging the profit, weakening the capital structure and reducing the rating of the bank.
As long as loans and advances remain in bank books, the certain portion of loan accounts ought to remain as NPAs for various reasons. Though NPAs cannot be totally avoided, they can be reduced to the minimum level by continuously monitoring the account and adapting certain precautions at the time of new sanction, annual review/renewal/enhancements of limits. The rehabilitation of viable units, rephasing loan installments wherever necessary,applying for settlement of the claim from CGTMSE/ECGC, Compromise settlements like One Time Settlement (OTS),Out of Court Settlement (OCS), writing off non-recoverable assets are parts of the process involved in reducing NPAs.
Pre-sanction and post sanction credit monitoring has a major role in reducing NPAs. Qualitative appraisal of financial statements understanding the unhealthy developments in accounts and working of the company, examination of the viability of the project before providing financial assistance to a borrowing unit are the essential aspects in reducing NPAs. Projected expansion plan is to be compared with growth in industrial production of peers.Identifying the early symptom of sickness like effective Scrutiny of periodical statements, discussions with the borrower, analysis of borrower’s account with the bank, discussion with co-bankers, may be helpful in identifying the early symptom of the sickness of the unit. Stock-audit by external professionals like charted accountants, at least once a year for large borrower accounts is also essential. Recalling the advance is vital when it appears that borrower is diverting the bank finance to some other purpose or diluting the security offered.
Other tools available to banks for reducing NPAs:
- Recovery through Lok Adalat, DRT, SARFAESI proceedings, filing Civil suit for recovery of dues, are the other methods of reducing NPAs.
- The introduction of Bankruptcy code (IBC) shall give greater relief to lenders in India as secured and unsecured creditors. The Code provides an order of priority while distributing assets/proceeds during liquidation. The assets will be distributed in the following order (i) secured creditors will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.In terms of RBI circular dated February 12, 2018, the ‘Resolution Plans’ (RP) under IBC shall be implemented within the timeline given below in respect of large accounts where the exposures of lender at Rs.20 billion and above.If the account is in default as on the reference date (on or after March 1, 2018), then 180 days from the reference date or if the account is in default after the reference date, then 180 days from the date of first such default.
If a RP is not implemented as per the above timeline, lender requires filing of insolvency application under IBC, singly or jointly with other lenders within 15 days from the expiry of above mentioned timeline.
Click the following to know the procedure of-Recovery through Lok Adalat, Recovery through D.R.T. and Recovery through SARFAESI Act 2002.
The advantage of Compromise settlement:
- Recycling of funds
- Saving of time/expenses involved in legal proceedings
- Tax relief due to write off the unrealized portion of the outstanding.
- Loss of money towards the difference between loan outstanding and the amount actually received.
- Unapplied interest for the period up to which payment is likely to be received after compromise and also other notional waivers which otherwise must have added to outstanding.
- It sets a wrong procedure.
Gains of NPA recovery:
NPA recovery leads to multiple gains to the bank. Every Rupee recovered adds up cost-free resources to the bank. The recovered money can be recycled for further lending which enhances the current earning of the bank. The operating and net profit of the bank would improve. The capital structure of the bank would be strengthened. Recovery in NPA accounts improves the efficiency and profitability ratios of the bank and thereby improves Bank’s rating.