PROGNOSIS-STRATEGIES

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Preventive


Detective


Corrective
STOP
PREVENTIVE
1. Implementation of NPA MANAGEMENT POLICY

Basic tenets
Seeks to lay down banks policy on management &
recovery of NPAs.

Stresses to prevent fresh NPAs by prescribing time
norms for detection of early warning signals for
taking corrective actions

Aims to contain the NPAs to manageable level

Lays down a broad approach for recovery of loans
through compromise settlements
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MACRO LEVEL
A clear credit policy- keeping in view

the cost of funds Vs.Return on asset

exposure norms

industry / region wise exposure

effective rating system

past experiences

periodical review of policy
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effective market intelligence

periodic dialogue with borrower

Scrutiny of financial statements

Control over excess drawings / ODs.

periodical evaluation of securities

continuous watch over management of
borrowing company

existence of system to identify border line
NPAs and monitoring of their migration
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TONING UP OF CREDIT
SUPERVISION & FOLLOW UP
Regular review /renewal of credit limits

Close watch on excess drawals /ODs.

Toning up the Audit & Inspection system

Credit Audit

Effective MIS to identify border line cases

Increased and effective role by controlling
offices

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MICRO LEVEL

Continuous vigil over the conduct of A/Cs

Recognition of early warning signals in the
A/Cs

Compliance of pending audit/inspection
irregularities

Up to date documentation / ROC search

Unit inspection- Pre & Post sanction and
periodic.
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PROBLEM LOAN REVIEW &
MONITORING
Diagnose the reasons for the deterioration in
asset quality and put the account under close
monitoring

Verify the adequacy of cash accruals

Revalidate the assumptions made at the time of
sanction particularly the assessment of credit
risk

Bring to the notice of borrower/guarantor the
deterioration in asset quality and call upon them
to remedy the same
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Verify the completeness and correctness of
documentation, creation/registration of
charge, insurance cover etc.

Evaluate collateral for liquidity,
marketability and value

Obtain realistic and time bound commitment
from borrower/guarantor to arrest the
deterioration- have a dialogue where
possible
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A formal programme for reviewing
all existing loans regularly,
frequently, carefully and critically
is essential to the continued
soundness of any banks loan
portfolio.Just because a loan
looked good at the time it was
made, is no assurance its going to
remain good.

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DETECTIVE-
WARNING SIGNALS

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Internal Records - Look for pressure on
the accounts
Unauthorised excesses;

Turnover increasing /decreasing unusually

Hard core borrowing

Unpaid cheques in or out
Cheques for round amounts
Frequent requests for increase in facilities

Delays in realisation of bills receivables

Frequent devolvement of LCs and invocation of BGs

Increasing average debit balance

Local news, rumours, information from staff about
problems
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Requests for release of security
(particularly third party)

Changes in terms of trade

Idle assets

Dead stock

Pressure from creditors

Management changes, succession,

Changes in attitude since last meeting
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Un cleared effects

Status enquiries in or out

Court judgements

Stopped cheques-in or out

Unusual cash withdrawals
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AUDITED ACCOUNTS

Look for
Evidence of borrowing elsewhere

High gearing

Small surplus or loss

Accounts late or only draft

Two sets of accounts

Auditors certificate qualified

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Other bankers

Revalued assets

Material difference from forecasts to
actuals
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VISITS OR INTERVIEWS

Look for

Difficulties in getting hold of promoters/directors

Lack of long term plans

Failure to meet orders

Reliance on one supplier or customer

Diversification
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CORRECTIVE
Action check- list

Discuss with customer

Collect as much information as possible

Carry out a SWOT analysis

Consider what information is available- is
more needed? Visit business premises.

Check the existing security. Is additional
security available?

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Obtain borrowers commitment or any plans for
repayment, particularly timing and amounts. Get
agreements in writing, if possible.

Set objectives for the way forward. Investigate
as to what went wrong with original proposal

Take firm control of the position. If
commitments are not met take speedy and firm
action.

Keep controlling office informed.

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RECOVERY OF NPAS AVAILABLE
MEASURES

Basically two types of
measures

1. Legal
2. Non legal

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RECOVERY OF NPAS LEGAL MEASURES
Lok Adalats
It is an institutions help banks to settle
disputes involving accounts in "doubtful"
and "loss" category, with outstanding
balance of Rs.5 lakh (Rs 20 lakh) for
compromise settlement under Lok Adalats
convened by DRT/DRTAs.

- It proved to be quite effective for
speedy justice and recovery of small loans.

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RECOVERY OF NPAS LEGAL MEASURES
Debt Recovery Tribunals
The Recovery of Debts due to Banks and Financial
Institutions (amendment) Act, passed in March
2000 has helped in strengthening the functioning
of DRTs.

- Provisions for placement of more than one
Recovery Officer,

- Power to attach defendant's property/assets
before judgement,

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RECOVERY OF NPAS LEGAL MEASURES
- Penal provisions for disobedience of
Tribunal's order or for breach of any terms
of the order and

- Appointment of receiver with powers of
realization, management, protection and
preservation of property provides necessary
teeth to the DRTs and speed up the
recovery of NPAs in the times to come
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The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002

It provides for enforcement of security interest for
realisation of dues without the intervention of courts
or tribunals.

It also provides sale of assets by banks / FIs to
Securitisation companies / reconstruction companies.
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Recovery of NPAs Legal Measures
RECOVERY OF NPAS LEGAL MEASURES
Asset Reconstruction Company:
It negotiates with banks and financial
institutions for acquiring distressed assets
and develop markets for such assets.

It will buy NPAs at the pre determined
discounted value and issue NPA Redemption
Bonds which carry a fixed return.

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RECOVERY OF NPAS LEGAL MEASURES
Circulation of information on defaulters
Credit Information Bureau of India Ltd. (CIBIL).
Suit filed cases and willful defaults/diversion of
funds for arriving at credit decision.

Its success depends upon cooperation extended
by the members in supplying required information
on timely basis.

Civil Courts: Recovery through courts is possible
provided decrees are awarded early.

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RECOVERY OF NPAS NON-LEGAL
MEASURES
Reminder System

The cheapest mode of recovery is to send reminders
to the borrowers before the loan instalments falls
due.

Visits to Borrowers Business Premises/ Residence

This is a more dependable measure of recovery
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Recovery Camps
It helps in recovery for small and agricultural
advances.

Rephasing Unpaid Loan Instalments
Due to natural calamities or for some other
convincing reasons, unpaid loan instalments may be
rephased / rescheduled.

Rehabilitation of Sick units
Causes of sickness should be genuine. If project is
found viable, rehabilitation package should be
prepared.
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Recovery of NPAs Non-Legal Measures
RECOVERY OF NPAS NON LEGAL MEASURES
Compromise and Settlement
This is the last resort of recovery.
Banks are free to design and implement their
own policies for recovery and write-off
incorporating compromise and negotiated
settlements with the approval of their Boards,
as per broad framework advised in July 1995
by RBI.
One Time Settlement Scheme - Specific
guidelines were issued in May 1999 to public
sector banks for one time non discretionary
and non discriminatory settlement of NPAs
and subsequent schemes.
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Appointment of Professional Agencies for recovery

Other Measures
- Staff incentives for recovery of hardcore NPAs
- incentives to lawyers to get decrees in record time.
- Close monitoring of suit-filed cases.
- Loan write-off in small advances if chances of
recovery are remote.
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POINTS TO PONDER UPON & REMEMBER
The NPA Reduction Mantra:

Do not give money but lend

What matter is what for you are
financing and not what against

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Borrowal accounts in general need real time
monitoring; not post-mortem.


An NPA account need not necessarily mean that the
borrowing company is unviable or sick.

Try to identify and bridge viability gaps of industrial
units.

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Many sick units need nourishment in the form
of fresh dose of loan funds to regain health.

One time settlement with wilful defaults may
be good mathematics but bad banking.

Always follow basic lending norms.

Put credit decision on fast track.
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FOR REGULATORS
Loan failures due to malafide decisions warrant
fixation of accountability.

Radical legal reforms to expedite suit
proceeding.

Say no to loan waivers.

If a unit cannot exist, let it exit.

Facilitate mergers and acquisitions involving sick
units.
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Prevention is better than Cure

In any financial institution, NPAs are
inevitable in the loan portfolio. But
efforts should be made to maintain a
reasonable level of NPAs.

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