NPA MANAGEMENT

MANAGEMENT OF NON-PERFORMING ASSETS A BRIEF OVERVIEW INTRODUCTION In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is the case with advances, which fall sick, go into liquidation and die much against the wishes of all concerned. Realities cannot be escaped. It is necessary to face them. In the context of non-performing assets the situation is no different. The frequent references to non-performing assets primarily concern sick industrial units and mounting overdues in all other sectors of advances, particularly in agriculture. Financial assets become non-performing primarily because of the failure of the units financed by banks. The costs of managing non-performing assets are exorbitant. Bankers are compelled to get bogged down with these matters thereby neglecting their role as a developing catalyst. NATURE OF NON-PERFORMING ASSETS The term non-performing assets can be defined both in the wider and in the narrower sense. While in the narrow sense it includes only non-performing credit portfolio, in the wider sense it may also include the volume of unutilized cash balances unutilized or underutilized physical assets like buildings and premises in the still wider sense, it may also include non-performing human resources a large volume of workforce not effectively unutilized. A non-performing asset in the banking sector also is termed as an asset not contributing to the income of the Bank. In other words it is the zero yielding assets that are considered. The non-performing assets, interalia, includes surplus cash and bankers balances hold over the optimal levels, amounts lying in the suspense account, investments in shares or debentures and other securities not yielding any dividend or interest, advances where interest is not forthcoming and even the principal amount is difficult to recover. In terms of Health code basis, we may say that advances classified under the Health Code Numbers 6,7,8 and those advances under the Health Code Numbers 4,5.on, which no interest is being charged, may be classified among non-performing assets.

K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

REASONS FOR ACCUMULATION OF NON-PERFORMING ASSETS:

There may be various internal and external factors behind the transformation of an asset from a performing one to a non-performing one. Some of the reasons for accumulation of the non-performing assets are: The fast and rapid geographical expansion of the banking sector during a short span, throughout the country, and our inability to cope with the voluminous work in an orderly manner. Lack of adequate care while appraising the various proposals in the initial stage. Inadequacy of the technical staff equipped with the latest market information and the technological developments is also an important factor in faulty appraisal of proposals. In case of most of the large and medium scale industries, the main reason for sickness has been found to be mismanagement. Power shortages, outdated machinery, fluctuations in supply of raw materials due to various causes, non-release of subsidy in time and deficiency in demand are also important reasons. Small scale industries are prone to sickness mainly due to lack of managerial experience, technical incompetence and decline in demand for their products and overall demand recession. Further cases are not unknown where deliberate efforts are made by a certain category of borrowers to declare their units sick, or weak to avail of benefits from different sources. (This list is only indicative and not exhaustive)

K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

OBJECTIVES OF THE STUDY

To understand the criteria for identification of non-performing assets in banks. To review Bank of Indias performance in non-performing assets for the time period of 2003-2005. To study the sector wise distribution of non-performing assets in Bank of India. To review Bank of Indias performance under the Reserve Bank of Indias One Time Settlement Scheme. To understand the Rehabilitation Policy of the Bank of India.

METHODOLOGY
Sources of data: The sources of data for this Report include the literature published by the Bank of India and also the Reserve Bank of India. Also the various Workshops on of nonperforming assets management conducted by the Indian Bankers Association to appraise the officers to tackle the menace of non-performing assets have also been a source of information. The booklet on Recovery Policy published by the Asset Recovery Department of Bank of India has been of great help. Limitations of the study: The study on management of non-performing assets is limited to the Bank of India. The basis for identifying non-performing assets is the one that has been mentioned in the report but some minor changes may have been carried out through the Reserve Bank of India circulars, which are received on a daily basis by the bank.
K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

Since non-performing assets are a critical issue, bank officials are not willing to part with all the information on them.

Non-performing assets is a vast topic and to do full justice to all the aspects of non-performing assets is an impossible task for me.

Scope Of The Study: The scope of the study is limited to the objectives as mentioned earlier. The study ranges from understanding the significance of non-performing assets to defining the criteria of identifying non-performing assets in the banking sector, to review Bank of Indias performance in the management non-performing assets, to tabulate Bank of Indias non-performing assets history from 1995-2004. It also reviews the framework of Bank of Indias recovery policy with which it hopes to bring down the percentage of net non-performing assets to the net advances. The study also encompasses the recommendations, the adhering of which will bring good results to the organization.

K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

ORGANIZATIONAL PROFILE
Bank of Indias Vision: To become the bank of choice for corporate, medium businesses and up market retail customers and to provide cost effective developmental banking for small businesses, mass market and rural market. Bank of Indias Mission: To provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our as a development bank, and in so doing meet the requirements of our shareholders.

K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

HEALTH CODE SYSTEM AND ASSET CLASSIFICATION

Begin with June 1982; Bank of India introduced the system of classifying the credit portfolio in terms of various health codes. Subsequently, in the year 1985, when the Reserve Bank of India introduced the health code system in the entire banking industry. Branches are advised to grade the borrowal accounts on an ongoing basis into 12 health codes. Guidelines for classifying advances as per health code system: Code 1: satisfactory This category covers all borrowers where: Conduct of the account is satisfactory. All terms and conditions (like punctual submission of stock statements, balance sheets for annual review, execution of annual acknowledgement of debt and security etc) are complied with. Accounts of the borrower are in order. The safety of the accounts is not in doubt.

Code 2: Irregular This category covers those accounts where the safety of the advance is not suspected, though there may be occasional irregularities. The accounts are overdrawn beyond the drawing power or the sanctioned limit for a temporary period. Installments in respect of term loans overdue for less than 6 months or under deferred payment guarantee, if overdue for less than 3 months. Some of the bills (not exceeding 10%-15% of the total outstanding in the bills purchased or discounted, account of the borrower) are overdue for payment by less than 3 months and/or refund in respect of unpaid bills is not forthcoming immediately.
K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

Code 3: Sick: viable/ under nursing. Units in respect of which nursing revival programmes are taken up should be included under this category. Code 4: Sick: Non-viable/ sticky: Accounts of borrowers under this category are those where the irregularities mentioned above persist say for a period of six months and over and there are no immediate prospects or regularization. Apparent stagnation in the business as reflected by slow negligible turnover in the account. Frequent requests for overdrawing or issue of cheques without ensuring availability of funds in the account. Bills purchased or discounted drawn by the borrower remaining overdue for 3 months. In the case of term loans, 6 or more monthly installments or 2 or more quarterly installments are overdue. Unexpected delays in submission of stock statements/quarterly/half yearly operating statements or balance sheets and other information required by the Banks. Slow movement of stock observed during inspections. Low or negligible level of activity observed during inspections. Diversion of funds to sister units/ acquiring capital assets not relevant to the Business/ large personal withdrawals. Current liabilities exceeding current assets. Basic weaknesses revealed by the financial statements of the unit such as continued cash losses beyond one year.

K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

It should be noted that above indications are only indicative and not exhaustive and not all of them may be simultaneously observed. Code 5: Advances Recalled This category consists of those accounts where the repayment is highly doubtful and nursing is not considered worthwhile. If a decision has been taken to recall the advance, such borrowers will be classified under this code. Code 6: Suit-Filed Accounts This category consists of accounts where legal action or recovery proceedings under the Public Debt Recovery Act wherever applicable have been initiated. They may be classified as under: Amount of advances where suits are pending for more than 5 years. Advances where suits are pending for more than 2 and up to 5 years. Advances where suits are pending for 2 years or less.

Code 7: Decreed Debts The advances where suits have been filed and decree obtained will come under this category. This may be further classified into following: Amount of debts where decrees are pending execution for more than 5 years. Amount of advances where decrees are pending execution for more than 2 and upto 5 years. Amount of advances where decrees are pending for 1 to 2 years. Amount of advances where decrees are pending for less than 1 year.

Code 8: Debts Classified By The Bank As Bad/Doubtful All advances appearing under the health code Nos. 3 to 7 and where the recoverability of the bank's dues has become doubtful on account of shortfalls in value of security, difficulty in enforcing and realizing the securities, or inability/unwillingness of
K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

the borrowers to repay the bank's dues partly or wholly, would come under this code. Such advances which are classified under health code No.8 should be excluded from the categories under health code No.3 to7. In the year 1992, as a follow-up of Narsimhan committee recommendations, the RBI introduced the concept of non -performing assets, based on Income Recognition criterion, and directed banks to classify their advances into the following four categories of assets: Standard, Substandard, Doubtful, and Loss.

The guidelines for classifying advances under the Health Code System as well as under the Asset Classification System (ACS) are given below. It will be observed that while branches classify their advances into both these categories following different criteria, there should be no serious contradiction between these two classifications. Standard Assets: These are Non-NPA borrowers. Hence, corresponding Health Codes should be either 1 or 2, as the case may be. Accounts under Health Code 3 i.e., Sick: Viable/under Nursing, may also be treated as standard, provided after 2 years of implementation of Rehabilitation Programme, if the interest is serviced as per income recognition criterion and installments are not overdue for more than 1 year and there arc no serious aberrations in the operations in the account, including out - of- order position, if any, persisting for more than the stipulated period. Substandard Assets: These are NPA upto 18 months (revised as on 31-03-01), wherein we are required to make general provisions of 10% of outstanding. Hence these are to be classified under Health codes 3, 4, 5, 6 or 7, as the case maybe. Accounts wherein the irregularities like unpaid interest/installments and irregular
K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

cash credit account are funded and these should also be classified under health code 3. Doubtful Assets: These are NPAs of over 18 months (revised as on31-03-01), wherein we are called upon to make specific provisions for not only uncovered Gap in realizable value of security but also on secured portion, depending on how long the asset is of doubtful nature. Hence, these accounts should be classified under Health Codes 3, 4, 5, 6, 7 or 8 as the case maybe. Loss Assets: NPA with "nil" or negligible realisable value of security, say, less than 1% of outstanding, identified so by the internal or external auditor or RBI Inspection team, wherein we are required to make 100% provision, are to be classified under Health Codes 3, 4, 5, 6, 7,8 as the case maybe. NOTES: Accounts guaranteed by the State/ Central Government need not be treated as NPA. Hence these are standard assets. Their health codes could however be 1,2, 3, 4, 5, 6 or 7, as the case maybe, and the Asset Classification should be doubtful.

K.J.Somaiya Institute of Mgmt Studies and Research

10

NPA MANAGEMENT

ANALYSIS OF NPA HISTORY FROM 94-95 TO 2000-01

Gross NPA has been contained at Rs 3434 crores (with India card) as on 31.03.01 as against Rs. 3464 (without India card) as on 31.03.00, whereas gross NPAs in the year 1995 was only Rs. 2782 crores. This increase of around Rs.700 crore has to be seen in terms of gross credit which has increased from Rs. 13546 crores in 1995 to Rs. 33085 crores in the year 2001 which is an increase of almost 3 times. Gross NPA percentage, which were as high as 20.54% in 1995 have come down to 12.9% in 2000 and further to 10.3% in 2001. A reduction/recovery of Rs. 1287 crore (including recovery of Rs. 428 cr. and up gradation of Rs. 185 crore) has been achieved during the year 2000-01. In addition to Rs. 942 cr. which is the Gross Reduction, the Bank has recovered Rs. 346 cr. in the form of recovery in written off accounts, realization of uncharged interest and unrealized interest, release of provisions, etc. which has gone to improve the bottom line. The Bank has received moderate success compared to the last year's figure of Rs. 872 cr. The year 1995 was the best year as far as Gross Reduction was concerned when BOI achieved 1418 cr. The RBI has laid down provisioning rules for the NPAs. This means that Banks have to set aside a portion of their funds to safeguard against any losses incurred on impaired loans. Banks have to set aside 10% of substandard assets as provisions. The provisioning for doubtful assets is 20% and for loss assets it is 100%. In the BOI, the provisioning for NPAs have remained static from 1176 crores in 1995 to 1097 crores in 2001. The year-end saw the net NPA figure at 8.7% for the domestic portfolio in comparison with 10.7% for the previous year and 11.6% in 1995. Also the net NPA, as a percentage of net advances for the Bank as a whole has also declined to 6.7% in 31.03.01 from 8.6% in 31.03.00.
K.J.Somaiya Institute of Mgmt Studies and Research

11

NPA MANAGEMENT

ANALYSIS OF SECTOR WISE BREAK UP OF NPAs

The sector wise breakup of NPAs also shows that overall there is a decline in the percentage of NPAs, which can be seen as good news for BOI. Agriculture, which is one of the primary sectors of our economy understandably, has a sizeable amount of NPAs. Although the total amount of NPAs has risen from Rs. 435 crores to 443 crores, in terms of percentage to the actual credit given it has actually come down from 16.09% to 14.80%. SSI, which constitutes another important sector of the economy, has not shown signs of improvement in this period of 1 year but with the Recovery Policy Of BOI, hopefully there will be some improvement in this sector as well. Other priority sectors, which include loans to transport operators, educational loans etc. have shown a dramatic decline from 16.61% to 12.99%. This can be attributed to the adhering of the rules by the bank officials. The medium and Large Scale Industries is the only sector in which the amount of NPAs has come down which is remarkable considering the recession in this sector for the past 2 years.

ANALYSIS OF BOIs (OTS) Performance

RBI announced guidelines for settlement of NPAs on One Time Settlement (OTS) basis. Which was non- discretionary and non - discriminatory, was implemented by the Bank. Of the Total 190422 accounts involving Rs. 675 crores eligible under the scheme, compromise proposals were received from 70310 borrowers for Rs. 400.50 crores. Approvals were given in respect of 60109 borrowers for Rs. 310.60 crores. Cash recovery affected upto 31.03.01 is Rs 150.15 crores in 55592 accounts, which increased in 31.06.01 to Rs. 165 crores in 58913 accounts. The Bank is targeting for the remaining accounts during the extended period of scheme upto 30.09.01. The Bank of India also holds the distinction of being one of the Top Performers amongst the Pub lie Sector Banks under RBI's OTS.
K.J.Somaiya Institute of Mgmt Studies and Research

12

NPA MANAGEMENT

REHABILITATION POLICY
Philosophy of Rehabilitation - a reorientation The emergence of prudential norms and transparency in Banking as an agenda in the financial sector reforms suggested by Narsimhan Committee made banks study their Balance Sheets critically. The result highlighted the alarming Non-Performing Assets (15%) in the Banking Industry - Bank of India was no exception. The compulsion for huge provisions has now made Management of NPA a very critical area of top priority in Banks. While the BOI did set on huge recovery programmes in 1996 and 1997, the fresh slippages in the quality of advances (health codes) due to internal as well external factors posed severe challenges in containing NPAs within budgeted levels. Higher NPAs not only stunt the growth of the Bank but the profitability also takes a beating, as such advances no more yield interest. Bank is also required to apportion a sizeable sum by way of provisioning, out of earned profits. With the disinvestments measures of the Government and with banks going public, every man keeps an eye on banks' profitability and any negative growth further spoils the Bank's image - particularly in the now highly competitive scenario. It is in this light, an attempt is made in this handbook to redefine the Bank's Rehabilitation Policy to ensure revival of sick ailing units and to effect recoveries in these accounts. Present Policy: Our Bank's rehabilitation policy is now restricted to the defined norms of RBI in the matter. Rehabilitation is proposed strictly as an obligation to be performed rather than with any seriousness to ensure success. The units taken for rehabilitation programme are already crippled babies (having incurred cash losses and undergone huge erosion in their Net Worth). Considerable time is lost and the programme proposed is often an exercise in futility as lot of damage is already done to the unit. Further, once an account becomes an NPA, the branch-level authority over the account is lost and every matter requires sanction from Regional Office/Zonal Office. So the safer route chosen is to freeze the account (for fear of accountability) and wait for time to take its own course - either litigation, or rehabilitation efforts after 213 years of loss in operations. Thus the present
K.J.Somaiya Institute of Mgmt Studies and Research

13

NPA MANAGEMENT

policy bristles with weaknesses and remains merely a policy on paper. Success stories in this form of rehabilitation are very few - in fact negligible. Revised policy: It is proposed to go beyond RBI norms, study the activity and adopt a "Holistic Approach" towards the borrower/unit right from the first signal of "aberrations" noticed, other words, a pre-rehabilitation stage is identified to provide proper guidance and support either by rescheduling or arresting the slippage at the earliest stage and lead to "revival" of the unit to sustain it as performing asset. Certain imbalances in the unit's running is but natural and no panic signals are to be sounded by classifying them as NPA/ stopping operation/imposing rigid rules etc. at such stage where liquidity aberrations are of temporary/short duration. In other words, the suggested policy should make the Bank feel as a partner interested in the unit's survival and not a mere financier when the going is all good. The developments need to be monitored with circumspection and need-based/ timely decisions are warranted. This is the best way to arrest slippages in future. In short, the new policy of rehabilitation introduces a third stage in the process, which would actually precede rehabilitation/nursing and recovery. This stage is referred as " Restructuring and Revival" which is dealt with in the further section.

K.J.Somaiya Institute of Mgmt Studies and Research

14

NPA MANAGEMENT

RESTRUCTURING AND REVIVAL

This stage is identified as crucial and refers to holding on operations and minor corrections/deviations - permitted for the unit to limp back to normalcy - a stage where the unit is not as such sick but tends to slip with symptoms of strain on its operations and finance. A critical study of the malady at this juncture and arriving at a Restructuring Plan is very essential. Restructuring for revival at this stage is not expected to involve any additional financial outlay on a regular basis. This exercise is therefore expected to be handled at the Branch level itself. Branch Managers are to be delegated adequate powers as decisions are required on the spot on day -to-day basis and the issues cannot brook any delay. However, as restructuring measures will result in changes in terms of original sanction even if it is temporary, it is proposed that restructuring plans approved at the branch level be reported to the next higher authority (Regional Manager/Zonal Manager) on monthly basis for information/data base and guidance if any. A. Symptoms of Imbalance and Need for Restructuring. Broadly the factors warranting restructuring are as follows: Technical problems in production/temporary break down of plant. Commercial compulsions caused by demand and supply position, pricing and market. Managerial inadequacies such as delay in appointing professional staff. Economic factors - external in nature caused by changes in Government policies. Financial factors such as cost overrun in project implementation resulting in liquidity crunch, unexpected payments, delay in release of Bank finance etc. If the above problems crop up, the account starts throwing one or more of the following symptoms: Request for frequent overdrawing. Bouncing of cheques issued by the company/unit. 15

K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

Non-submission of periodical statements. Inspection reveals slow or no activity. Large labour turnover. Pressing creditors and large block-up in receivables. Wages/statutory dues not paid on time. Non-payment of interest or installments In the above situation instead of striking an alarm there is an urgent need to study

problems by inspection of the unit and its records, take market reports and hold detailed discussions with borrowers and arrive at a restructuring plan for revival/ retrieval from the distress. Sudden rigidity, if imposed, will make the revival attempt very difficult as human factors (emotion and temper run high) are to be valued. The mechanism by which the unit is allowed to function without increasing the banks exposure is called a "holdingon-operation". This is to ensure that the borrower is not weaned away or tempted to open an account with another bank for his day -to-day operations. B. Eligibility Eligibility norms for undertaking restructuring cannot be rigid but will include: Reasons for the request are genuine. Unit being sick for reasons beyond control of the unit. Owners stake in the project is adequate. Seriousness and concern of the borrower to come out of the muddle. Concrete steps are taken/ proposed by the borrower to improve the position. Prospects of correction of imbalances should be reasonably promising. All compliance of terms of sanction met, No diversion of funds outside the company/unit has taken place. 16

K.J.Somaiya Institute of Mgmt Studies and Research

NPA MANAGEMENT

Default / aberrations are not willful or deliberate.

Once satisfied on the above aspects, the restructuring exercise right should be taken up in right earnest and implemented. C. Plan of Action/Reliefs Plan of Action and Reliefs proposed shall vary from case to case and there can be no general prescription. However, one or more of the following reliefs can be considered under Restructuring Plan: Extending the moratorium period for repayment of installment/interest in case of new units and deferral of their recovery (for period not exceeding 3 to 12 months) in existing units. Reduction in margin on various fund based and non -fund based limits - relief not more than 10% with minimum margin of 15%. Permitting need-based interchangeability of working capital limits sanctioned, or realignment of limits. Allowing over limits - up to certain level say 20% up to a maximum of 3 to 12 months. Purchasing fresh bills to pay off past due bills with interest. Permitting cheques/Demand Draft Purchase over and above the sanctioned limit for genuine transactions. Lowering of rate of interest according to cash flows need-based basis. Any other relief not involving financial outlay (additional funds).

Pre-conditions: Before granting any of the above reliefs it should be ensured that: All terms and conditions of original sanction are complied with/without any exception.
K.J.Somaiya Institute of Mgmt Studies and Research

17

NPA MANAGEMENT

Perfection of security is done. Aberrations are of temporary nature and expected to get corrected by reliefs in a short duration say 3 to 12 months - thereafter reliefs and concessions are expected to be withdrawn.

No willful/deliberate default of diversion of funds about the unit operations. Sacrifice, if any, is quantified and the bank reserves right of recompense.

D. Control Mechanism and Monitoring The control mechanism shall include: Control over cheques issued by borrower. Monthly statement of borrower's performance (present MSOD forms with additional remarks for corrections effected during the month can be used). Monthly reporting on the results of restructuring by Branch Manager to next higher authority. Compulsory Monthly inspection in accounts with fund based limit of Rs.5 Lakhs and over and quarterly inspections in smaller accounts. With the above measures constant monitoring of the "Restructuring Plan" and its progress can be done by Branch/Regional Office/zonal office. A quarterly review of such accounts can be done in forums like Zonal Committee/NPA Management Meeting etc. for farther course of action. The steps outlined above are short-term in nature. These are to be adopted in the case of Aberrations of: Temporary nature, where the borrowal account will be restored to health in a relatively short period by adopting these measures, and Other accounts where a viability study has to be conducted, pending finalisation of the viability study, and approval of a rehabilitation programme, the short-term steps may be adopted.
K.J.Somaiya Institute of Mgmt Studies and Research

18

NPA MANAGEMENT

Viability study should be undertaken in the case of accounts falling under category above as soon as possible, but not later than 2 months from the identification of the need for restructuring, and rehabilitation. After a viability study has been conducted, the Bank may reach a decision on either rehabilitating the unit, or recalling the advance. In case the rehabilitation route is adopted, the restructuring operations should stop within one month of the rehabilitation package being approved, and the rehabilitation package put into operation. This limit would not be applicable in cases under reference to BIFR.

K.J.Somaiya Institute of Mgmt Studies and Research

19

NPA MANAGEMENT

REHABILITATION PROGRAMME
Rehabilitation programme comes into picture when the unit is declared "sick". In view of Government guidelines/RBI norms, Banks/FIs are required to be in line with the norms as far as rehabilitation, reliefs/concessions etc. are concerned. Often the units being taken up under rehabilitation programmes are chronic cases having suffered losses, erosion in net worth etc. We are not allowed to deviate much from the norms because normally such programmes are drawn within the prescribed norms/ parameters of Govt./RBI. It is a welcome sign that by a recent directive, RBI has permitted Banks/agencies to extend reliefs/concessions beyond the broad parameters laid down by RBI, without its prior approval for potentially viable non SSI sick/weak industrial units only. The eligibility norms, extent of relief are discussed in the following chapter. What is pertinent is proper diagnosis of the causes of sickness and if so whether such rehabilitation programme can turn around the unit in a given time frame. If it can, no time should be lost in formulating the rehabilitation programme for speedy implementation. On the contrary, if it is believed that a rehabilitation programme will not be fruitful it is equally important to counsel the borrower and suggest ways and means of liquidating the dues. This aspect is discussed in Chapter on "Recovery Policy". Any rehabilitation programme is a conscious exercise for the revival of the unit to recover the debt. Hence these units require constant support, monitoring and review. We should be human in approach to the problems of the unit under rehabilitation. As rehabilitation may involve additional infusion of funds it is necessary that all efforts should be made to ensure success of the programme.

K.J.Somaiya Institute of Mgmt Studies and Research

20

NPA MANAGEMENT

Symptoms of Sickness To nip sickness in the bud, we should be watchful about the early symptoms of sickness, which are one or more of the following: Continuous irregularity in Cash Credit Account by way of a) Non-operation or reduced operations. b) Turnover not commensurate with Sales. c) Limit utilised to the hilt. d) Frequent requests for over limits for meeting routine expenditure. e) Frequent return of cheques drawn by the borrower. f) Frequent return of cheques deposited in the account (due to rejection of supplies) g) Cheques drawn for unconnected purposes (diversion of funds). h) Cheques favoring finance companies/ banks/ FIs.

(A close monitoring of the account operations is enough to find the above features). a) Low capacity utilisation. b) Higher rate of rejection of goods manufactured. c) Rapid turnover of key personnel. d) Rapid expansion and too much diversification. e) Closure/lock-out of factory. f) Low level of plant activity. g) Borrower/books not available during inspections. h) Profit fluctuations, downward trend in sales followed by contractions in market share. (Items (b) to (h) above can be examined during physical inspections).

K.J.Somaiya Institute of Mgmt Studies and Research

21

NPA MANAGEMENT

i) Failure to pay statutory liabilities. j) Larger and longer outstanding bills/receivables. k) Non-submission of financial data, stock statement etc. in time. l) Investment in subsidiaries or capital expenditure at the cost of reducing Net Working Capital. m) Major changes in shareholding pattern. n) Erosion in Net Worth, increase in losses, reduction in current ratio and high debt equity ratio coupled with falling sales, rising debtors and creditors.

K.J.Somaiya Institute of Mgmt Studies and Research

22

NPA MANAGEMENT

Factors creating sickness Sickness may also result due to external factors such as: a) General glut in the particular industry. b) Change in taxation/duty etc. by Government. c) Changes in import/export policy. d) Market competition and technological obsolescence. The above list is only indicative and there could be many more symptoms. What is required is to keep our eyes and ears open, take market reports on the borrower, critically examine account operations, cheques tendered for collection, etc. to catch early signs of financial indiscipline and slippage. Once the symptoms of sickness are noticed, immediate steps should be taken to contact the borrowers (any lethargy at this critical point of time may be a costly error) and ascertain the causes of sickness. The causes of sickness are briefly listed below and each case is to be examined in the background of the following factors: A. Internal causes: a) Planning: Technical feasibility: I. Inadequate know-how. II. Locational disadvantage. III. Outdated process in production. Economic viability: I. High break even level. II. Uneconomic size of project. III. Under estimation of financial requirements. IV. Unduly large investments in fixed assets.

K.J.Somaiya Institute of Mgmt Studies and Research

23

NPA MANAGEMENT

b) Implementation: Cost overrun due to delay in getting licenses, power etc. Inadequate mobilisation of finance (promoters contribution).

c) Production: Production Management: I. Poor inventory management. II. High wastage. III. Poor quality control. IV. Poor capacity utilisation. V. Poor maintenance. Labour Management: I. High Wage Island. II. Excess manpower. III. Poor labour relations. IV. Poor HRD and Monitoring. Commercial Management: I. Dependence on one or two buyers. II. Dependence on few. III. Defective pricing. IV. Lack of Market Research. V. Lack of marketing techniques. VI. Unhealthy practices. Financial Management: I. Poor financial control/planning. II. Liberal Dividend/pay policy. III. Financial indiscipline.
K.J.Somaiya Institute of Mgmt Studies and Research

24

NPA MANAGEMENT

IV. Over-trading. V. High capital-gearing/trading on thin equity. VI. Absence of cost control. VII. Poor collection mechanism. Administrative Management: I. Lack of Management Information System. II. Excessive expenditure on R&D. III. Incompetence. IV. Dishonesty. V. Dissension/disputes in Management. VI. Defective Organisational flow chart.

B. External causes a) Government controls/policies - procedural delays in sanction/corruption etc. b) Financial bottleneck. c) Infrastructure inadequacies like power, transport, raw material etc. d) Market limitation - product is obsolete - fall in demand - greater choice availability. e) Lending Institutions - improper assessment, faulty disbursal, lack of guidance during gestation, poor post-sanction controls, neglecting early signs of aberrations/ sickness, lack of dialogue with borrower/ guarantor, adopting rigid stand like threat of legal action etc. f) Other factors like natural calamity, political turmoil and labour problems.

K.J.Somaiya Institute of Mgmt Studies and Research

25

NPA MANAGEMENT

Eligibility Eligibility for undertaking rehabilitation programmes centres round the following: a) The unit is falling within the definition of "sickness" as defined by RBI. b) The causes of sickness are such that there is hope of revival of the unit within a span of 5 to 10 years. The prospects of revival depend on technical feasibility and economic viability of the proposed scheme. c) There is no deliberate intention of the borrowers to make the unit sick and they are serious about revival plan. d) No serious staff accountability.

Having defined the eligibility norms, it will be prudent to look into definition of Sickness. Sick SSI Unit: RBI Definition. A Sick SSI unit is one, which has at the end of any accounting year accumulated losses equal to or exceeding 50% of its peak net worth in the immediately preceding two accounting years, and any of its borrowal accounts has become a doubtful asset. Sick Non-SSI Unit: BIFR definition. A sick non-SSI unit is defined as one which has been registered for a period of 5 years and whose net worth is fully eroded by accumulated losses Weak Industrial Unit: These units are those whose net worth has been eroded by 50% by accumulated losses. Such companies should report to the BIFR. Once a unit is Sick as per the norms and revival prospects are bright, the cases become eligible for rehabilitation programme.

K.J.Somaiya Institute of Mgmt Studies and Research

26

NPA MANAGEMENT

Viability of sick units As per RBI guidelines in regard to viability of sick units here are the prescribed norms For units in Corporate Sector under SICA. 1985 including units under non SSIU: After implementation of package of reliefs and concessions the company can be considered as potentially viable provided o After extending the reliefs and concessions for a period of 7 years the unit is in a position to service the debt and interest. o The restructured debts should be repaid within the following periods: FITL WCTL Other T/L For units under SSIU Sector After implementation of package of reliefs and concessions the unit can be considered as potentially viable provided o After extending the reliefs and concessions for a period of 5 years the unit is in a position to service the debt and interest. o The average DSCR over the rehabilitation plan should not be less than 1.33 o The restructured debts should be repaid within the following periods FITL WCTL Other T/L 3 years 5 years 7 years 3 to 5years 5 to 7 years 10 years (max)

K.J.Somaiya Institute of Mgmt Studies and Research

27

NPA MANAGEMENT

Preconditions Pre-conditions for any rehabilitation programme are briefly as follows: The terms of the package are to be duly acceptable to the borrower. Any reservations and non-compliance of the terms of the package will render the exercise a non -starter. The promoters' contribution required for the programme should be fully tied up and satisfactory proof available of the same. Bank should not lose track of validity of documents. Any deficiencies in documentation, strengthening of security should be removed/done before agreeing for rehabilitation. Necessary approvals from Bank's authority, BIFR (if applicable), consent from other FIs/agencies should be obtained. All terms of sanction of the rehabilitation programme are to be meticulously complied with including documentation, funding of debt, interest reliefs, submission of data etc. The financial issues are in place.

K.J.Somaiya Institute of Mgmt Studies and Research

28

NPA MANAGEMENT

Schemes - Reliefs and Concessions The Bank in case of SSI units may formulate rehabilitation scheme. In case of Sick Industrial Companies, BIFR appoints an Operating Agency to formulate the rehabilitation package on behalf of multiple Banks/Fl or consortium of lenders. The scheme of rehabilitation inter alia involves Ascertaining the unsecured portion of working capital fund based on limits and converting them into funded loan called Working Capital Term loan. Similarly the overdue installments in term loan can be funded or rescheduled Overdue interest in Term Loan accounts can be funded in the form of Funded Interest Term Loan (FITL). In addition to the existing working capital (secured) limit, additional working capital limits can be considered. New term loan for purchase of balancing equipment etc. may be granted. Interest concessions may be considered from the cut-off date. This is defined as the date on which the Rehabilitation Package is implemented. Some rehabilitation packages may not involve additional funds but only rescheduling of payments and extended moratorium may be considered. Similarly unpaid interest can be funded into Funded Interest Term Loan (FITh). Conversion of debt to equity or debentures (Working Capital limit) can be explored. Even in interest serviced accounts - need-based write off (like moratorium period interest etc.) or fresh loan may be considered. Offering other loan services such as "factoring" of debt and syndication of required additional funds to medium/large units also help in rehabilitation.

K.J.Somaiya Institute of Mgmt Studies and Research

29

NPA MANAGEMENT

Recovery Policy Any form of a rehabilitation policy or restructuring exercise should finally be linked to recovery of Bank's dues to the maximum possible extent. Hence the entire policy should revolve around achieving recoveries. Hence certain recovery policy measures are listed below: When Bank is not sure about success of the project in its present form the best decision would be to counsel the borrower to agree for sale of the unit to certain prospective buyers on as is where is basis with One Time Settlement (OTS). This is the best form of earliest recovery. If any gap persists, necessary reliefs may be considered with some cash contribution from the owners. Where the project is not viable and there are no ready buyers, we may pressurize the borrower to sell off the assets at the best available price and reduce the dues. There may be some other units interested not in outright settlement but in taking over the management of the company and Bank can transfer the liability to the new management (company). Takeover, mergers and acquisitions are various means of converting the bad debt into realizable one. The branches can explore the possibility of merger and acquisition of sick unit by another AAA/AA rated unit engaged in similar/related activities in the same or nearby centres. Some of the profitable units may take-over sick units under their diversification programme. The Regional Office/zonal Office should have required base and assist branches in this regard with details of such potential prospective buyers. Financial Consultants/Chartered Accountants can play major role in furnishing information. BLBC meetings should be used for exchange of information in this regard. By means of takeover/ merger/ acquisition the NPA may get paid off fully and liability to other unit can be treated as standard asset in future. Once rehabilitation is implemented, the unit may be asked to adjust a portion of their bill realization towards overdues.
K.J.Somaiya Institute of Mgmt Studies and Research

30

NPA MANAGEMENT

Problems of recovery: Recovery process has two dimensions: a) Voluntary Recovery - This is achieved partially by a. Rescheduling of repayment installments. b. Undertaking effective nursing. c. Extending reliefs and concessions. d. Releasing charge over flabby assets for sale/realisation and repayment of dues. e. Compromise proposals involving certain sacrifice based on present value realisation. b) Forced Recovery - Where nursing is not viable and borrower is not co-operative, forced recovery is undertaken by a. Filing of suit and attachment of assets. b. Proceeding against guarantors. c. Launching of liquidation/insolvency proceedings. d. Resorting to takeovers / referring the case to BIFR, etc. It is pertinent to note that even after filing suit, the channel of communication with borrower should be kept open and a compromise offer can be entertained at any point of time. e. Reference to Lok Adalats, Debt Recovery Tribunals etc. f. Peer pressure from group is another effective way recovery. Assistance from Social and Voluntary Organisations, SHG's etc. can be useful. Group Approach concept in NPA recovery is very effective.

K.J.Somaiya Institute of Mgmt Studies and Research

31

NPA MANAGEMENT

Suggestions for improving recovery: Plan all recovery aspects under one umbrella - area-wise crack team approach/recovery cells. Improve infrastructure for recovery at various levels. Close liaison with Government agencies/State Government for administrative support. Adopting cluster-wise recovery approach in rural areas. Introduce System of collecting cash at borrower's door-step/market place etc. Follow up recovery certificate cases closely. Constant updating of the details of assets owned by borrower/guarantor will greatly help in recovery. Test cases of seizures of vehicles, assets etc. have had telling effects on other defaulters. Thus recovery by itself is an art and at every stage of restructuring and rehabilitation programme, recovery should be the guiding factor.

K.J.Somaiya Institute of Mgmt Studies and Research

32

NPA MANAGEMENT

RECOMMENDATIONS
Following Recommendations may be adopted to tackle the Problem of NPAs: Persuasion: It is very much an effective tool of recovery. It is very much an effective tool of recovery. Continual follow- up will be very effective in most cases. Filing of Suits: The effectiveness of this tool depends on two major factors: o Whether other tools have been used; o Whether there are adequate securities to be realized. Compromise and Revival: It has been argued that a compromise, whereby the Bank allows remission of principal and/or interest along with rescheduling of the repayment of debt is a better way to deal with such advances, especially when banks are drawn into long legal battles. Involvement of other Agencies: Sometimes other agencies especially govt. agencies are involved in the recovery of dues and stagnant accounts in the priority sector. Their involvement in the recovery of loans is very much desirable. Reference to B1FR: In case of large and medium units, when they are Registered for not less than seven years as companies, we can refer the case of sickness to the Board for Industrial and Financial Reconstruction (BIFR) for early liquidation or suggestion of rehabilitation packages. Enforcement of Securities: Enforcement of Securities charged to bank is equally important aspect of the management of NPAs. Banks, wherever necessary, have to move courts not only to obtain decrees but also to get them executed.

K.J.Somaiya Institute of Mgmt Studies and Research

33

NPA MANAGEMENT

Rehabilitation and Nursing: Rehabilitation and nursing of sick units, as a matter of policy should be given a fresh look. Only viable sick units with proven capacity of the management to run the units should be nursed. Merger and Amalgamation of Units: Wherever feasible, efforts should be made to merge the sick units with healthy units. Appointment of Special Tribunals: In view of ever mounting cases involving bank advances in the various courts of India, it is highly desirable that special tribunals are established all over India exclusively for bank's litigation. Writing off of Bad debts: When no other course will bring positive results it is always preferable to write off bad advances at the earliest to avail of tax deductions, rather than carry them forward.

K.J.Somaiya Institute of Mgmt Studies and Research

34

NPA MANAGEMENT

CONCLUSION
Bank Of India has performed extremely well in NPA management. Persistent and follow-up of potential and other NPAs with outstanding of Rs. 1 crore and above is being done through the introduction of ACTION TAKEN REPORT (ATR) mechanism on periodical basis. Loan Restructuring and Loan Review Cells have been established to set up restructuring exercise in all viable cases expeditiously. Responsibilities have been assigned to monitor large NPAs (Rs l0 Lakhs and above) at administrative levels. The Chairman and Managing Director is personally monitoring all accounts with outstanding of Rs. 5 crore and above. Banks need to have better credit appraisal systems so as to prevent NPAs from occurring. However, once NPAs do come into existence, the problem can be solved only if there is enabling legal structure, since recovery of NPAs often requires litigation and court orders to recover stock loans. With long-winded litigations in India, debt recovery takes a very long time. Banks are now working on developing debt recovery tribunals to solve this problem. The Govt. has also mooted the suggestion of an asset reconstruction company for augmenting recovery measures.

K.J.Somaiya Institute of Mgmt Studies and Research

35