(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:
- Bank may explore the option to implement ‘Scheme for Sustainable Structuring of Stressed Assets’ (S4A) for large enterprises. Under the above scheme, the liabilities of struggling company’s debt will be bifurcated into sustainable and unsustainable portions. The banks shall then convert the unsustainable debt into equity and sell this stake to a new owner who will have the advantage of getting to run the business with more manageable sustainable debts.By this exercise, banks are put into a position to upgrade their loans with cleaning up of the large portion of bad loans. Nevertheless in this exercise, banks may have to take a haircut as the market value of the stressed company might be less than the value of debt that is converted into equity. (Click ‘S4A’ to know more about the scheme).
- Recovery through Lok Adalat, DRT, SARFAESI proceedings, filing Civil suit for recovery of dues, are the other methods of reducing NPAs.
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.