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SARFAESI Act Management Of NPA – Part V – Concluding part

Action alone produces the result and credibility does not depend upon what one says but what one does to produce the desired result. After having known the impact of NPA on the performance of the banks and financial institutions, understanding the reasons for the creation of NPA and its symptoms, a plan of action is to be drawn and initiated to arrest the deteriorating trend and to bring order in the NPA account out of its chaotic conditions. The measures are:

2. Preventive measures.

RBI issued a circular DBS.CO.OSMOS/ B.C / 4 /33.04.006/2002-2003 dated September 12, 2002 addressed to The Chairman/Managing Director /Chief Executive Officer of All Commercial Banks (Excluding RRBs) on Study on preventing slippage of NPA accounts wherein the steps to be taken by the banks to prevent accounts going NPA have been elaborated and if diligently followed by the banks, they can to a great extent reduce the incidents of accounts becoming NPA. (The circular has been dealt in detail in Part II of this series of articles)

3. Curative measures.

Many studies have been undertaken by Government and Reserve Bank of India to find out ways and means to reduce the level of NPAs. They have formulated CDR (Corporate Debt Restructuring), rehabilitation / restructuring schemes for SMEs and also those accounts which do not come under the purview of these two categories. Detailed instructions have been issued by RBI from time to time regarding the various schemes on rehabilitation / restructuring. The gist of the schemes is as follows:

a. Restructuring/ Rescheduling of Loans

(i) The stages at which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place can be identified as under:

a) before commencement of commercial production;

b) After commencement of commercial production but before the asset has been classified as sub standard,

c) After commencement of commercial production and after the asset has been classified as sub standard.

In each of the foregoing three stages, the rescheduling, etc., of principal and / or of interest could take place, with or without sacrifice, as part of the restructuring package evolved.” RBI has further given instructions on treatment of restructured standard accounts, treatment of restructured sub-standard accounts, upgradation of restructured accounts and other general instructions.

(b) Corporate Debt Restructuring (CDR) Mechanism

“The CDR guidelines cover accounts of all corporate borrowers having outstanding fund based and non-fund based exposures of Rs.10 crore and above from more than one bank / FI. The prudential norms applied under CDR mechanism have been largely based on the general asset classification norms applicable to restructured accounts of borrowers engaged in manufacturing / industrial activities. As trading involves only buying and selling of commodities and the problems associated with manufacturing units such as bottlenecks in commercial production, time and cost escalation etc. is not applicable to them, these guidelines should not be applied to restructuring/ rescheduling of credit facilities extended to traders.”

Reserve Bank of India has issued detailed circular on Corporate Debt Restructuring scheme (CDR) and the following is the summery of the salient features of the scheme.

One of the main features of the restructuring under CDR system is the provision of two categories of debt restructuring under the CDR system. Accounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the creditors, will be restructured under the first category (Category 1). Accounts which are classified as ‘doubtful’ in the books of the creditors would be restructured under the second category (Category 2). The main features of the CDR mechanism are given below:


The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporates that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme.


CDR system in the country will have a three tier structure:

• CDR Standing Forum and its Core Group

• CDR Empowered Group

• CDR Cell

Other features

(a) Eligibility criteria. (ii) Reference to CDR system. (iii) Legal Basis. (iv) Other Aspects. (v) Stand-Still Clause. (vi) Additional finance. (vii) Exit Option. (viii) Conversion option.

Category 2 CDR System

There have been instances where the projects have been found to be viable by the creditors but the accounts could not be taken up for restructuring under the CDR system as they fell under ‘doubtful’ category. Hence, a second category of CDR is introduced for cases where the accounts have been classified as ‘doubtful’ in the books of creditors, and if a minimum of 75% of creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the account and consent for such restructuring.”

The RBI directives on CDR also cover Creditors’ Rights, Prudential and Accounting Issues, Asset classification of repeatedly restructured accounts and Disclosure norms.

A myth is an existing among the bankers and borrowers that once an account is declared as NPA no CDR / rehabilitation / restructuring can be considered by the banks and financial institutions But this myth demolished with the introduction of Category 2 CDR system. The bigger myth perpetuated by the banks and financial institutions is that there is no provision for repeated CDR / Rehabilitation / Restructuring for NPA accounts. This bigger myth also has been destroyed when RBI states under CDR scheme, “Asset classification of repeatedly restructured accounts:

The regulatory concession in terms of paragraphs 4.2.15.F (iii) and 4.2.15.F (v) would not be available if the account is restructured for the second or more times. In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as sub-standard. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion its asset classification would be reckoned from the date when it became NPA on the previous occasion. However, such assets restructuring for the second or more time may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance.”

C. Debt restructuring mechanism for Small and Medium Enterprises (SMEs).

These guidelines encompass (a) all non-corporate SMEs irrespective of the level of dues to banks. (b) All corporate SMEs, which are enjoying banking facilities from a single bank, irrespective of the level of dues to the bank. (c) All corporate SMEs, which have funded and non-funded outstanding up to Rs.10 crore under multiple/ consortium banking arrangement. RBI directives on Debt Restructuring Mechanism for SMEs contain the following criteria also.

(i) Eligibility criteria. (ii) Viability criteria. (iii) Prudential Norms for restructured accounts. (iv) Additional finance. (v) Upgradation of restructured accounts. (vi) Asset classification status. (vii) Repeated restructuring. (viii) Procedure. (ix) Time frame. (x) Disclosure. (xi) Projects under implementation. (xii) Availability of security / net worth of borrower/ guarantor. (xiii) Take-out Finance.

d. One time settlement as part of restructuring package.

CDR Mechanism

CDR mechanism allows one time settlement option as a part of the restructuring package in order to bring more flexibility in the exit option to the lenders who are no more interested in continuing their exposure in the corporate.

SMEs debt restructuring

One time settlement option as a part of restructuring not envisaged. However the borrowers can go for OTS scheme as envisaged by RBI under their norms which can be negotiated at any time creating win-win situation for the banker and the borrower.

In the ultimate analysis, what is required is to create a better understanding between the banks and the borrowers regarding their respective roles in the promotion of industries and commerce and their socio economic contribution to the nation and the society. Whereas the banks should distinguish between honest borrower who faces problems due to circumstances beyond their control and the one who is a wilful defaulter, stringent action should be initiated against a wilful defaulter and all timely help should be extended to the borrower whose intention and integrity are beyond doubt. By understanding the psychology of the borrowers, by analyzing the causes of default by them and by adopting a practical and pragmatic approach , and removing the ‘fear psychosis’ prevailing among the decision makers, incidents of NPA can be reduced and recovery of NPA can be made more effective through mutual trust and faith between the bankers and borrowers. Both the banks and the borrowers should remember the old dictum that “Where there is a will, there is a way” is very much applicable in the management of NPA.

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