Non-Performing Assets(NPA) and SARFAESI Act - Banking Awareness Notes

Non-Performing Assets(NPA) and SARFAESI Act - Banking Awareness Notes

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Non-Performing Assets 

If the customers do not repay principal amount and/or interest for a period of 90 days then such loans become non-performing assets (NPA). 
All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA).

An NPA is a loan or advance where:

1. Term Loan – interest and/or installment of principal remains overdue for more than 90 days.
2. Overdraft / Cash credit - account is out of order.
  • Outstanding balance remains continuously in excess of the sanctioned limit / drawing power.
  • Outstanding balance is within the sanctioned limit / drawing power, but there are no credits continuously for 90 days as on the date of balance sheet, or the credits are not enough to cover the interest debited during the same period.
3. Bills purchased and discounted – bill remains overdue for more than 90 days.
4. Short duration crops (crop season is upto a year) – installment of principal or the interest thereon remains overdue for two crop seasons.
5. Long duration crops - installment of principal or the interest thereon remains overdue for one crop season.

Types of NPA

NPA have been divided or classified into following four types:-
  1. Standard Assets : A standard asset is a performing asset. An assets which is generating regular income to the bank.
  2. Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of more than 90 days but less than 12 months are called as Sub-Standard assets. ( Special Mention Account : It includes those assets (loans and advances) which are due for a period of 90 days. "Till 90 days = Special Mention Account and Till 12 Months it becomes Sub-Standard Assets")
  3. Doubtful Assets : All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets.
  4. Loss Assets : All those assets which cannot be recovered are called as Loss Assets.

Example of NPA 

We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010. But the party does not make a payment. So It will be an Standard Asset from January 1, 2010 till June 1, 2010 (Due Date) It will be a Special Mention Account From June 2, 2010 till August 29, 2010 (90 days) It will be Sub-standard from August 30, 2010 till August 29, 2011 It will be doubtful  from August 30, 2011 till August 29, 2012 It may remain doubtful Asset for a period of 3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it will be assigned a loss asset; however, the period may be anything above 3 years.

Causes of NPA

NPA arises due to a number of factors or causes like:-
  1. Speculation : Investing in high risk assets to earn high income.
  2. Default : Willful default by the borrowers.
  3. Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc.
  4. Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business.
  5. Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies.
  6. External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

SARFAESI Act 

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allow banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction. The Act provides three alternative methods for recovery of non-performing assets, 
  1. Securitisation - This is a process where financial assets (dues from a borrower) are converted into marketable securities (security receipts) that can be sold to investors.
  2. Asset Re-construction - The Act uses the term ‘asset re-construction’ for the acquisition of any right or interest, of any bank or financial institution, in any financial assistance, by any securitization company or Re-construction Company, for the purpose of realization of such financial assistance.
  3. Enforcement of Security Interest - In the normal course, court intervention is required for sale of property and realization of money due from a defaulter. SARFAESI Act has made provisions for banks and financial institutions to take possession of securities given for financial assistance and sell the same in the event of default.

Here is how this process is takes place:

1. A borrower makes any default in repayment and his account is classified as NPA.
2. The secured creditor has to issue notice to the borrower giving him 60 days to pay his dues.
3. If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it.

Reselling of NPAs:

The NPAs can be resold as well. The purchasers are called Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).
1. A bank can sell NPA from its books to asset reconstruction companies such only if it has remained NPA for at least two years.
2. These sales are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15 months before it sells to other bank.
3. Once the NPA is purchased, it is classified as Standard for a period of 90 days.

Debt Recovery Tribunal (DRT)

The Debts Recovery Tribunals have been established by the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions.
Debts Recovery Tribunal is the appellate authority for appeals filed against the proceedings initiated by secured creditors under Sub-Section (4) of Section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.

Appellate Tribunal

Any person aggrieved by an order of the DRT can appeal to the Appellate Tribunal within 30 days of date of receipt of the order. The borrower has to deposit 50% of the amount claimed by the secured creditor, before filing an appeal. The Appellate Tribunal can reduce the deposit requirement to 25% of the amount claimed, after recording the reasons for such a concession.