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SARFAESI Act -Management Of NPA (Non Performing Assets) – Part I

“Economic policymakers require an enormous dose of humility, openness to various alternatives (including the possibility that they might be wrong), and a willingness to experiment,” Reghuram Rajan, the New Governor of Reserve Bank of India wrote in a column on the Project Syndicate website. Regarding NPA recovery he said, “We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present. Recovery should be focused on efficiency and fairness – presenting the value of underlying assets and jobs where possible, even while redeploying unviable assets to new uses and compensating fairly. All this should be done while ensuring that contractual priorities are met. The system has to be tolerant of genuine difficulties while coming down on mismanagement or fraud,” he said. The RBI Governor has given the clarion call on a positive note to the banks and financial institutions with regard to the recovery of dues. He may try to take the horse to the pond. But will he be able to make it drink?

The net non-performing assets (NPAs) of banks had gone up 51% in FY13 to RS.92825/- crores. According to a recent CRISIL report, the gross NPAs of banks are slated to increase from 3.3% in March 2013 to 4% by March 2014.The pertinent question is, will the banks and the financial institutions shed heir jaundiced view towards declaring the accounts as NPA and recovery of their dues coming under the category of NPA and will they take a new and pragmatic and practical approach of focusing on “efficiency and fairness” and taking a tolerant view of “genuine difficulties while coming down on mismanagement or fraud.” as exhorted by the Governor of RBI? The answer is a Big No if the present approach and attitude of the banks and financial institutions are taken into consideration in the matter of recovery of dues and financing.

In the wake of the financial reforms undertaken by the Government of India based on the Narasimhan Committee report I and II, prudential norms were introduced by Reserve Bank of India to address the credit monitoring process being adopted and pursued by the banks and financial institutions. To strengthen further the recovery of dues by banks and financial institutions, Government of India promulgated The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. But have the banks and financial institutions reduced the level of NPA in spite of introducing such acts? Statistics shows that the NPA level is ever increasing and the introduction of the aforesaid acts have not served their purpose fully. What prevents the banks and financial institutions to implement an effective process to recover their dues? There are primarily two reasons, the fist being their attitude and approach towards financing and recovery particularly of SMEs and the second are the lack of full knowledge about the law and practice of banking and the violations of RBI directives through their circulars which are mandatory to be followed by the banks and the financial institutions.

An account is declared as NPA based on the recovery of installments and interest on loans and advances and other aspects as per RBI norms. The updated norms to declare the account as NPA are as follows as per RBI guidelines:

  1. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

  2. A non performing asset (NPA) is a loan or an advance where;

(i) Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,

(ii) The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC), if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit / drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.

(iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

(iv) The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

(v) The installment of principal or interest thereon remains overdue for one Crop season for long duration crops,

(vi) The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.

(vii) 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 90 days from the specified due date for payment.

  1. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

The said guidelines further elaborate certain other aspects of Prudential Norms on Income Recognition, Asset Classification and provisioning pertaining to Advances and loans.

A close look at the way the banks and financial institutions declare the accounts as NPA shows that the very fundamental principles as envisaged by RBI in their preamble are being overlooked which states, “the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts.” Further, RBI also expects, The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms.” RBI again exhorts the banks and financial institutions, “Banks are urged to ensure that while granting loans and advances, realistic repayment schedules may be fixed on the basis of cash flows with borrowers. This would go a long way to facilitate prompt repayment by the borrowers and thus improve the record of recovery in advances.” Thus it is evident that the crux of the problems of recovery of loans in the banks and financial institutions lay on the aforesaid facts as stated by RBI in their guidelines.

That Supreme Court of India in the matter of Mardia Chemicals judgment states, “Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved.” It is thus obvious that whatever actions that the banks and financial institutions initiate to recover the dues should not be in derogation of the rights which are guaranteed to the people under the constitution coming under the purview of Fundamental Rights and also should not infringe in to the Human Rights and Principles of Natural Justice.

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