Debt restructuring can be a lifesaver for borrowers who are struggling to service their debts. In this, the creditor consents to changes in the terms of the debt agreement so that the debt becomes more affordable. The process can be undertaken through a modification of the loan repayment period or lowering the interest rate, and so on.
Debt restructuring is a choice used by firms and individuals for npa management. Debt restructuring can be negotiated with the creditor by agreeing to a lower interest rate. It is for the benefit of both the lender and the borrower. If the borrower is in financial trouble and cannot meet debt obligations with the present terms, then the restructuring of debt is a less expensive alternative.
Restructuring is a part of npa debt settlement process.
Debt restructuring serves various vital purposes:
How does Debt Restructuring Work?
Debt restructuring is a way of performing npa management. The steps involved in debt restructuring are:
Contact the Lender
Debt restructuring is the lender’s response to a borrower that is finding it difficult to service debt. It is best to contact the creditor as soon as the lender realizes that he will not be able to meet the debt repayment schedule.
Wait for the response by the lender
Once you have informed the lender about the delay in the repayment schedule, you have to wait for their response. Remember, a lender is not obliged to come to your help. In case of long-pending repayments, he might have started the npa debt settlement process.
Compare the alternatives
If the lender agrees to provide you interim assistance to tide you over temporary financial difficulties or he offers a debt restructuring plan, you need to compare the alternatives. There could be many options in both these choices.
It is important to negotiate your new contract to arrive at mutually agreeable terms. Before you agree to any new terms for debt repayment.
Finalize the new terms/p>
Once the new terms have been agreed upon, you need to formally sign the revised agreement with the revised terms. These new terms become binding on you for debt repayment.
Some Methods for Debt Restructuring are
Non-performing assets (NPA) have become a major problem and a big threat to the economic well-being in India during the past decade. It is a symptom of an ailing banking sector. According to the reports, in the end of the past decade, the figures touched an unbelievable height of around 2 trillion rupees. Due to that, the government has introduced stringent measures to control the NPA and to define a structured npa recovery process.
What Is A Non-Performing Asset?
The Non-performing assets are loans or advances that are in default or in arrears.
In India, an asset is classified as an NPA if the borrower has the principal or interest on the loan or advance given by the lender overdue for a period of 90 days.
It has three categories:
The npa recovery process has been defined to deal with all these categories.
The recovery mechanism is a process of carrying out the recovery procedures and mechanisms required to restore financial assets.
The Lok Adalat is one of the dispute redressal mechanisms. This forum takes the disputes or cases pending in the court of law and settle them mutually. They have been given statutory status under the Legal Services Authorities Act, 1987.
Debt Recovery Tribunals (DRTs)
The Recovery of Debts Due to Banks and Financial Institutions Act,1993 (RDDBFI Act) made provisions to file Original Applications in the Debt Recovery Tribunals (DRTs) and appeals in Debts Recovery Appellate Tribunals (DRATs).
Under the Securitization Act, DRT has the power to decide upon the applications filed against the secured creditors by the borrower or mortgager for the action taken by them.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was formed after the considerations were carried out by committees constituted by the government.
Insolvency And Bankruptcy Code (IBC)
After the enforcement of the IBC, all the matters in relation to the code were to be filed in the National Company Law Tribunal (NCLT). The main purpose of the IBC is to provide a speedy npa recovery process and remedies for the banks against NPAs and to reduce the burden of the long pending cases in courts.
What is Non-Paying Assets or NPA? When a person takes a loan from a bank or financial institute and fails to repay, then the loan goes into the NPA category. The bank has no choice other than to seize the mortgaged assets and selling them. There could be complications in this process because the asset will have to be sold at a lower price than the original.
When a loan goes into the category of NPA, banks can transfer the loan into equity. It will bring new promotors or management. It is called SDR or Strategic Debt Restructuring Scheme. It has been a good solution to control the npa in India.
The bank can also help out the borrowers by restructuring the loan. Alternatively, the bank or financial institution can take the following steps:
You can sell the NPA to the Asset Reconstruction Company(ARC). It procures the bad loans or non-performing assets that commercial or other banks issue. In this process, banks can receive a heavy loss. However, the complete loan still exists in the balance sheet. The npa loan takeover process is also one of the various ways of recovering from the problem.
What happens to a loan after NPA?
When a loan becomes an NPA, Non-Performing Asset, the bank has the right to confiscate the property or assets purchased through the loan. The bank can auction the asset so that all outstanding amount against the loan is repaid.
If a loan goes into the NPA category, then lowers the Credit rating of the borrower. It is because the unpaid loan is called a Bad Loan.
Reserve Bank of India (RBI) guidelines mandate banks to classify nonperforming assets (NPAs) at the borrower level and not on a specific loan basis.
Hence, when a borrower does not want to be labeled as a Non-Performing Asset (NPA), it is important that all of the loans are repaid on time.
Recording Nonperforming Assets (NPA)
Banks are supposed to classify nonperforming assets into one of three categories according to how long the asset has been nonperforming:
NPA or Non-Performing Assets put a negative impact on the economy and they have to be controlled.
When banks and financial institutions lend money, they do it with the intention of recovering the amount. But, sometimes, the borrower is incapable of generating adequate resources. As a result, the loan goes into the state of Non-Payment Assets or NPA. In the last few decades, a lot of work has been done to control the NPA in India.
Financial institutions and banks work towards settling non-performing assets according to RBI’s guidelines. In that process, they are supposed to negotiate and settle outstanding loans based on the value of the assets mortgaged by the borrower.
There is a term OTS very popular in NPA management. The meaning of OTS is a one-time settlement to pay the dues. OTS Finance or OTS Funding for a loan can be availed of either in part or fully based on the requirement of the borrower. Other considerations in this regard are the value of collaterals and the cash flow of the business. There are different settlement arrangements plans for NPA are different by industry.
The OTS scheme is offered by all banks, but all borrowers are not eligible. Banks exercise discretion while offering money to settle the account. Sometimes, financial institutions may deny a borrower’s request for OTS. It happens when they believe that they will be able to recover the total amount (principal and interest components). If the value of mortgaged assets falls short of the amount owed or the financial institution believes that the business will be unable to generate adequate revenues to repay the loan, then it may offer an OTS offer.
One Time Settlement Finance (OTS) - All you need to know
This settlement is preceded by forensic audits so that nothing is questionable, and all documents are in place.
One Time Settlement Funding (OTS) can address many concerns related to unpaid loans, for example, litigations, undesirable costs and other relevant challenges. Financial institutions that assist the process leverage the relationship with banks so that they can discuss and negotiate the terms and conditions to settle the account.
The firms do not just assist with funding requirements, but they can also help borrowers to monetize their assets and improve the cash flow of their business. It reduces the debt burden. OTS has been a good method of NPA settlement.
It is essential to consult right financial consulting option for debt transactions including asset funding or OTS. The company should have a deep domain experience in complex debt transactions.
When you study about Non-Performing Assets or NPA and NPA account settlement, you need to read a few terms associated with it. Two terms are very popular- DRT and DRAT. They are so similar, that people get confused and consider them one. In this blog, we are going to understand their meaning and difference.
What is DRT?
As mentioned in the blog previously, the main purpose of establishing DRT was to resolve issues related to tax-related disputes or administrative issues. The objective was to facilitate a quick collection of debt. It ensures fast adjudication and recovery of debts owed to financial institutions and banks. The minimum amount owed to banks or financial institutions should be more than 20 lac rupees. It has a Presiding Officer, who should be qualified to work as a district judge. He can have a term of five years and can serve until his age is 62 years. It may be possible that the government appoints a recovery officer (or officers) to assist the Presiding Officer.
As far as the scope and extent of the DRT are concerned, then it is possible to collect the debt of more than 10 Lakhs after contacting DRT. If the amount is less than that, then the banks or financial institutions (referred as creditors) should apply to a civil court under CPC (Civil Procedure Code). A law degree is not necessary to provide DRT legal solutions or present cases in DRTs. For amounts more than 1 Lakh, the Central Government may order that some cases can be dealt with by DRT. In case of disputes in foreign exchange, the amount in dollars needs to be specified.
What is DRAT?
A person or business that feels wronged by DRT orders may appeal those decisions to Debt Recovery Appellate Tribunal or DRAT. The appeal must be filed within 45 days of obtaining DRT orders. The appellate will not consider it until the person pays 75 percent of the debt that was judged.
Both DRT and DRAT operate by the notion of natural justice. Both are endowed with the same authority as any civil court. DRT also has only one member, who is called the Chairperson. He should be qualified to be the judge of the high court and he should be a member of legal service. He can have a term of five years and can serve in the position until the age of 65 years.
There has been a lot of focus on the Non Performing Assets or NPA in India. Gone are the days when people used to borrow huge money in the name of business expansion and escape without repaying the same. Today, NPA control and NPA Management are the key activities carried out by banks and financial institutions. There is a close check on the borrowers, regular payers, and defaulters.
As per the guidelines and norms are given by the Reserve Bank of India, there has been a significant improvement in the process of recognition and provisioning of weak assets.
When a company or individual fails to pay up, due to whatever reason, things go wrong on the financial institution’s part. Sometimes, the reason behind non-payment is genuine and real. But sometimes, it is just intentional and deliberate.
=Despite having the capability of repaying the loan, they do not pay. Such an act is called a willful default. Getting money recovered from such defaulters would be very difficult. Sometimes, it involves a very long battle.
But the question is how a company or individual is declared as a ‘wilful defaulter’? What is its impact of it on NPA Management?
Let’s understand it quickly.
When is a defaulter termed a “willful defaulter”?
As per the guidelines given by the Reserve Bank of India, a defaulter can be declared a “willful defaulter” under these circumstances:
When the guarantee or letter of comfort given by the group company is not honored when invoked by the lender, then also it will be a case of willful default.
A non-willful defaulter is when the default is done because of a genuine financial crisis and the borrower doesn’t have any intention of skipping the payment. The payment terms and norms are properly followed. Such cases need different treatment as far as NPA Management is concerned.
Maharashtra Cooperatives Society Act or MCS Act 1960, which is Maharashtra Cooperative Societies Act 2019. It was brought into action on 26th January 1962. There were various amendments made to this act.
The Maharashtra Cooperative Societies Act or the Maharashtra Housing Society Act 1960 states its key features are based on better housing plans for its people.
The act offers an easy and quite inclusive registration system. It also includes membership perks, privileges, and duties offered across Maharashtra. The Maharashtra Cooperative Act aims to offer a fair system and solutions in Maharashtra for cooperative societies. This act has defined very clear criteria for housing societies that enjoy membership perks.
With the increasing NPA in India, it is important that cooperative societies need to be examined carefully to safeguard the interests of financial institutions.
Types of housing societies defined in the act
The act clearly defines and classifies different types of housing societies and their characteristics.
Tenant Ownership Housing Societies
According to the MCS Act, Tenant Ownership Housing Societies are societies that aim to allot plots or flats on a parcel of land that is owned by the society. This ownership is on a freehold or leasehold basis, while all members own the house.
Tenant Co-partnership Housing Societies
MSC Act rules that the objective of Tenant Co-partnership Housing Societies is to provide flats to their members. Here, the society owns both the land and the building, either on a freehold or leasehold basis.
Other Housing Societies
Societies that do not fall under the two above-mentioned categories are called other housing societies. Some of the examples are House mortgage cooperative societies, house construction cooperative housing societies, and foundations cooperative societies with all units being offices or commercial establishments.
To control NPA in India, the government is enforcing additional regulations on cooperative housing societies so that timely repayment of loans is ensured.
According to Section 22 of the Maharashtra cooperative societies act, it is made very clear that if a person meets all eligibility criteria, then the person cannot be denied membership. As per Section 79 of MCS Act, every transaction, whether it is a money exchange, expenditure, or receipt, has to be documented legally and it should be preserved for further verification. Section 91 of this act takes care of the dispute occurring in the authorship of the property.
Various amendments have been made with the intention to combat increasing corruption, governmental involvement, and politics in Cooperative societies.
When we talk about NPA Management, two important concepts come to our mind. They are the diversion of funds and siphoning of funds. These two concepts are critical because they can help business owners to manage their funds in a proper way.
Let’s know about these two concepts in detail.
Diversion of funds
Diversions of funds is the use of funds for a particular purpose for which the loan was never sanctioned. For example, the loan was given to arrange working capital purposes, but it is utilized in buying immovable property out of the cash credit limit.
The use of short-term working capital funds for long-term purposes is not in conformity with the terms of the sanction of the loan. Some examples of diversion of the fund are:
NPA Management is an important activity that considers the diversion of funds.
Siphoning of Funds
Siphoning of funds, on the other hand, is a different scenario. If the fund borrowed from a lender is used for a purpose not related to the operations of the borrower, to the detriment of the financial health of the entity of the lender, then it is called siphoning of funds.
Whether an instance falls under the umbrella of siphoning or not depends on several aspects. It will be on the judgment of lenders and it is taken on objective facts and circumstances of the case.
Diversion of funds or siphoning of funds can be detected if the end use of funds is being periodically verified or monitored. It is an effective NPA Management activity.
Some of the effective measures are:
These measures are responsible for the proper management of assets and loans.
In the year 2016, the Indian parliament implemented the Insolvency and Bankruptcy Code (IBC) 2016 through an act, which got Presidential assent in May 2016. The fundamental purpose of introducing it by the central government was to resolve claims pertaining to insolvent companies.
According to experts, this code was a one-stop solution and a single answer to all the problems related to insolvencies in India. Earlier, it was a long process. Neither it was an economically viable arrangement, nor it was effectively dealing with the problem of NPA in India.
This code is intended to protect the interests of small investors and make the process of running a business less troublesome and problematic. All the 11 schedules and 255 sections of IBC are capable enough to tackle the bad loan problem, which is a pain in the neck for the banking system.
IBC has changed the relationship between creditors and debtors
The IBC process has successfully altered the basic debtor-creditor relationship, other than managing NPA in India. In the past few years, numerous cases have been resolved. And there are many that have arrived at the advanced stage of resolution. Since it offers a time-bound process for resolving the insolvency and default in repayment occurs, creditors gain control over the debtor’s assets.
Salient point of IBC
First thing is that companies are required to finish the entire insolvency exercise within 180 days. In IBC, the deadline can be extended only if the creditors do not raise objections against the extension. The annual turnover capping for small companies and startups is 1 Crore. The entire exercise has to be finished within 90 days and it cannot be extended beyond 45 days. Aliquidation process can be initiated if the debt resolution doesn’t happen.
The intention of launching IBC was to tackle the problem of bad loans and NPA in India that was affecting the banking system. Numerous cases have been resolved in the past few years, while some others are in the advanced stages of resolution.
IBC offers a time-bound process to resolve the problem of insolvency. In the default process of repayment, creditors have better control over the debtor’s assets. They need to make decisions to resolve insolvency. Under the IBC process, creditors, and debtors both can kick off the recovery proceedings against each other.
Under IBC, companies are supposed to complete the entire insolvency exercise within 180 days. The deadline can be extended if there is no objection raised by creditors for the extension.
RBI or Reserve Bank of India, which is the central regulating authority for all banks and financial institutions in India has issued a special scheme for settlement of NPA in the MSME sector. This is a non-discretionary One-Time Settlement Scheme for the recovery of NPAs under MSE Sector as a part of the Recovery Policy. It is an important step to control NPA in India.
As per the guidelines about compromise settlements, negotiated settlements where a borrower offers to pay, and the bank agrees to accept in full and final settlement of its dues an amount less than the total amount due to the bank under the particular loan contract.
The bank has to waive off or write off some amount of the loan. It will be called the sacrifice by the bank, which will be done on a one-time basis.
It is not possible to lay down precise guidelines that can be uniformly followed for all NPA contracts. It is because each account is unique as far as the circumstances necessitating its consideration as a recovery option is concerned. However, a broad framework can be decided.
The guidelines for the special settlement of NPA in the MSME sector will help in controlling NPA in India.
Time of Compromise
The opportunity cost of funds is an important aspect when we look into the NPA settlement. It is the fund that could come in handy at a later period. It should be calculated to establish the comparative benefit of “today” or “later”. When the value is assessed on the basis of NPV or Net Present Value, it will give a pragmatic dimension to the approach while recovering a Non-performing Asset.
The guidelines issued by the RBI are indicative and objective. They should be considered as a framework as mentioned above. The decision should be taken based on the intelligence and decision-making ability and expertise of the officials. Also, the decision should protect the interests of the bank.
The issuing bank should ensure compliance with the following guidelines
The special settlement process for the MSME sector is for the larger interest of industries in India. It is a step taken to control the growth of NPA. It is for the betterment of the overall economy.
No-performing Assets or NPA is a big issue in front of financial institutes and banks. It is estimated that the total value of such assets was more than 10 Lakh Crores at the end of the financial year 2018. And the total commercial credits were 54 Lakh Crores. It is estimated that the undeclared or undisclosed non-performing assets were 3 Lakh Crores further. It was a huge amount. Ineffective NPA management is the main reason behind it.
Though it is an inherent thing to have credit risks in the banking business. Banks do the task of financial intermediation is done by undertaking asset liability transformation and size and maturity transformation. Also, risk transformations is done by banks to safeguard the business. The result of this transformation is that the banking business has become a risky business.
The risks are many. Banks have credit risks, market risks such as interest rate, liquidity, share prices, and foreign exchange risk, equity price risk, and so on. As far as operational and general risks are concerned, they are many. NPA is not a desirable thing, and it aids in the losses of the financial company.
Credit risk is a major source of NPA. Due to weak or poor risk management, banks give more credit risks. When the credit and risk management policies are not proper or ineffective, banks crystalize more NPA. Improper NPA management added to it further. This way, it is a vicious circle.
Global financial crisis shows the ineffectiveness of credit management
If we look at the global financial crisis, then the main contributor to it is NPA. And the main reason behind NPA is ineffective credit management policies. In India, it is more visible in the public sector banks because they have a large demand for loans. And due to the pressure of increasing business, they tend to make the credit and risk management policies lenient.
When there is a big economic expansion and growth, banks have to augment their capital through increased participation in the domestic as well as capital market. Not just that, they have to retain earnings. When there is a recession period, banks find it further difficult to raise capital. It is because of the high cost of funds and lesser availability of capital funds.
Studies conducted on the NPA management of Public Sector Banks in India revealed that these banks followed quite liberal and loose credit policies. They had a high concentration of loans on specific borrowers or sectors. This resulted in huge exposure to a limited number of borrowers. For example, a few sectors like power, mining, steel, infrastructure, and telecom companies were big borrowers.
Since these banks could not manage their credit and risk policies firmly, they had more NPA than their counterparts. It was also revealed that the management in these banks was not efficient and strong in their performance. Therefore, the NPA and NPA ratios were very much increased in these banks.
So, liberal credit policies and loose terms and conditions were the prime reasons. They were further supported by deficiencies in credit sanctions and loan disbursement.
Moreover, these banks were not effectively regulated by the Reserve Bank of India, the central regulating authority. There are no penalties or incentives for the performance of banks. Neither there is any mechanism to measure their accountabilities and responsibilities.
Strong measures are to be taken to make NPA management effective. To control this, PSBs need to develop the required skills across all levels. Their working mechanism, policies, and procedures need to be modified to bring more stringent NPA management possible. The regulatory procedures should also be made more specific. Then only the situation can be controlled.
When you are in a financial crisis, you need money. Borrowing money from a bank or financial institute is the best and the easiest way. When you get a loan, there is a condition that you are supposed to repay it in equated monthly installments or EMI. The number of EMIs will be decided by the bank.
If you repay each EMI without any gap, then the loan gets settled within the predefined time limit. However, if you fail to repay it, then the loan turns into a Non-performing Asset or NPA. An NPA does not generate any business for the bank.
No bank or finance institute will like NPA. It is because NPA affects profitability. Hence, it tries npa account settlement.
What is NPA Account Settlement?
When the bank finds that the repayment of the loan is impossible, it offers the option of a one-time settlement. Typically, when the borrower fails to repay the EMI for six months and more, then the bank approaches the borrower for a one-time settlement.
This is an option of npa account settlement that is considered in selected situations.
For a borrower, this option gives an opportunity to settle the account. However, it affects the Credit Score of the borrower adversely.
When a bank goes for loan account settlement, the loan status becomes “settled”, and the CIBIL score of the borrower drops by at least 70 to100 points. It is a big reduction.
Impact of settlement on CIBIL
While settling down the loan, the bank informs the case CIBIL. It informs the same other legitimate and recognized rating agencies also. Indeed, there will be no financial transaction between the borrower and the bank after npa account settlement, it affects the CIBIL score negatively.
The word “Settlement” shows the inability of the borrower to repay, and therefore, it drops the CIBIL score. The credit rating will be marked by CIBIL and maintained for seven years.
The borrower will be unable to take any loan during thisperiod. Lenders will not give loans because they will suspect the repayment capacity.
Most borrowers do not know the impact of non-performing loan account settlement. Since the CIBIL score remains unchanged for a long time, it will cause an adverse impact on the market image and credibility of the borrowing individual or organization.
When you find it difficult to repay the loan, you should follow other repayment methods and not a one-time settlement.
Why do people take loans? It is a great way of helping your finance for various things. You may take a loan for completing your education, buying a new house, the wedding of your kids, to go abroad, or anything else.
If you are a company, then you will take a loan to diversify your business or launch a new project.
You make great planning and ensure that repayment of the loan is done in time. However, no matter how systematic your repayment plan may be, you cannot foresee all the possible bottlenecks. You may become a victim of unforeseen circumstances. There could be an unexpected loss in the business, or you lose your job due to an illness.
Such circumstances will seriously hamper the ability to repay your loan. You will miss the installment and get follow-up calls and reminders from the bank. It affects your credibility and market value.
When a bank or financial institution sanctions a loan, it expects that the loan will be repaid within the stipulated time. For a bank, a loan is an asset that generates income in the form of interest.
When the loan is not paid, it becomes an NPA or Non-Performing Asset. NPA is not desirable for any financial institution. When it goes beyond a threshold, it becomes a risk to the survival of the bank. Hence, it requires concrete npa management methods.
When a bank fails to recover the loan, it approaches the borrower with options like a one-time loan settlement. Though it looks like a simple offer, it may ruin the credit score of the borrower.
What is a One-Time Loan Settlement?
It is part of the overall npa management policy of a bank or financial institution. In this process, the bank or financial institute agrees to accept a smaller amount instead of the entire due amount. When it does so, the bank waives off the rest of the amount and makes repayment easier for the borrower. The option may be offered by the bank after six months of non-repayment.
The bank takes various measures to investigate the case before arriving at the conclusion. It will allow them to validate the reason for not paying the loan.
How Does the process of one-time settlement carry out?
First, the bank should believe that the reason for non-payment is legitimate. The bank offers a moratorium period. The option is for those borrowers who want to pay the amount in one go. After an agreement, the bank will waive off a part of the outstanding loan amount to make the repayment easy.
How much amount will be written off will depend on the gravity of the financial condition and the ability of the borrower to repay the loan. Since the borrower is agreed to settle the loan, its repayment status will be recorded as “settled” and not “closed”. The credit score of the borrower will be affected by the difference.
One-time settlement is considered an important tool of npa management policy.
It is quite obvious that opting for a one-time settlement is not advisable unless it is necessary. There are some other alternates to it.
The borrower should liquidate the savings instead of applying for a loan. Also, it should negotiate with the bank to request an extension for the repayment term. Or, it should ask for a restructured repayment plan.
The borrower can request the bank to hold off the interest rate or reduce it for some time.
One-time settlement is the last resort. For a bank also, it is not a profitable proposition. Therefore, it will use it only when there is no other solution.
There have been fresh regulations announced by The Reserve Bank of India (RBI) recently for large non-banking financial companies (NBFCs). It is about alerting provisioning norms for standard assets that are normally risk-free. The norms are an effort to bridge the regulatory gap between non-banking financial companies and banks.
These latest provisioning norms from the RBI will reduce liquidity in the short term. There will be an effect on the interest rate. It should also be noted by the financial institutions that this move may have an implication on the compliance requirements. They will increase further.
The Reserve Bank of India or RBI has given clear guidelines and asset classification norms for npa management in non-banking financial companies. It is to bring them comparable to banks.
There are two changes of rules for NBFCs.
According to the first rule, the classification of NPA should be done as of EOD or End Of Day, not EOM or End Of Month.
Secondly, if an account needs to be upgraded from an NPA account to standard, then all the arrears should be paid. It is not allowed to do part payment.
What is the reason behind these rules? It is for harmonization. It means the same set of rules should be applicable for both banks as well as Non-Banking Financial Companies.
Will it increase a one-time rise in GNPA for some NBFCs? Experts say that when firms apply the rule of “once an NPA is always NPA”, then upgrade shouldn’t be an issue. It is because the fundamental rule is the same as guided by the Reserve Bank of India.
There may be an impact on the daily admission of the NPA problem and npa management. However, it would be marginal.
The industry has complained in general
Why has the industry complained? It is because there is a difference. Take the example of securitized loans. When banks buy these loans from NBFCs, they are supposed to uncover some practices that are followed by NBFCs, but not by banks.
For instance, there is a quarter-end rule. It gives 180 days sometimes. Supposed a loan comes due in the first week of April, then from the end of June, they technically get 90 days.
But now it has been clarified that the 90-days period will be from the due date of the loan.
Similarly, there is an issue if the cheque gets bounced. When the cheque is presented, the person doesn’t have a balance towards the end of the quarter. So, the cheque gets bounced. But the bounce impact happens at the beginning of the next quarter. Technically, it is not an NPA. Such cases have been found in certain audits also.
The new rules will stop the misreporting of NPAs. Since the rule is applicable from March 2022, we will have to wait to see its impact till the next year.
According to financial analysts, it is a good measure by RBI but they do not find it a game-changer. It will have a one-time impact. It has been done when there is a phase of economic recovery and the time frame given to NBFCs to come around was March 2022. Thus, they think that it will have some impact on the industry and npa management.
The recent regulations are a step in the direction of regulating the financial sector in India. Since the regulatory framework is to bridge the gap between banks and NBFCs, it will certainly bring a change in the situation of NPA. At least, it will check the uncontrolled growth of multiple types of NBFCs that have mushroomed in India over the last few years.
The full form of NPA is Non Performing Assets. NPA is nothing but the loans given by banks to their customers and other operating financial institutions whose interest and the principal amount is in the state of overdue for a long time. When we say, “a long time”, it means more than 90 days.
Since banks and financial institutions are supposed to be profitable, such non-performing assets should be minimum. Therefore, NPA is not a desirable phenomenon in the banking system in India. It destroys the business performance and affects profitability adversely.
RBI or Reserve Bank Of India is the regulatory authority in India. It gives clear-cut guidelines and a framework for NPA and npa account settlement.
What is NPA according to RBI?
The first condition is that if the installment or interest of a principal remains overdue for a continuous period of more than 90 days in respect of a term loan, then it is called NPA.
Any account will be called “out of order” with respect to CC or OD (Cash, Credit, and Overdraft).
If a bill remains overdue for over 90 days.
If the installment is overdue (both principal or interest) for two crop seasons if the crop grows for a short period.
If the installation is overdue (both principal or interest) for one crop season if the crop season is long duration.
If the outstanding amount of liquidity is more than 90 days continuously.
Thus, RBI gives a comprehensive definition of NPA that covers every possible scenario. When a bank or financial institution has more numbers of NPA, then it cannot survive for a long time.
It is essential that the bank or financial institution follows methods of npa account settlement.
Types of NPA
RBI also gives guidelines about various types of NPA.
Provisioning norms for NPA
The Reserve Bank of India or RBI also sets the norms of provisioning. These norms are the same for all banks. There could be a variation to the extent as per the category of the NPA.
The norms are as follows:
Measures that are taken by RBI to prevent NPA
NPA or Non Performing Assets are not a good thing for the health of a financial institution. Therefore, RBI has issued guidelines for managing and recovering NPAs.
A viable, sustainable and strong banking system is crucial for the overall development of the economic structure of a country. The failure of an effective banking system may lead to adverse impacts in various spheres of the economy. Both the Public Sector Banks and the Private sector Banks in India have made considerable contributions in all economic aspects.
However, the amount of non-performing assets or NPA in the balance sheet can have a deep impact on the bank’s profitability. As per the directives of RBI, the accounts become non-performing when the loan account is overdue and the bank fails to recover the capital or interest from the capital for over a period of 90 days.
Plans to increase productivity
Over the past few years, there is a powerful drive going on in the nationalized banks to enhance their profitability. This implies that the PSBs also have to think of improving productivity, which is necessary to survive in the present economic state.
The future of the banks lies in the ability of the banks to build good quality assets consistently even in a competitive environment and minimize the NPAs. Competition and consolidation are the two prime factors that will impact the private and public sector banks in future. The effective methods of NPA account settlement can turn out to be the factors dominating the future of the banking system.
Every bank has to classify all the non-performing assets into three categories, depending on the time frame over which the asset has been in the non-performing stage and the realise-ability of the debts:
The detection of the NPAs and the able management of the debts will help the bank to enjoy more financial stability.
Impact of NPA on banking systems
The level of return on the assets is one of the most significant aspects of the bank’s efficiency. Its high tie for the banks to provide provisions for the NPAs from the present profit ratio. The NPAs can affect the return to the assets in the following ways:
It's high time to consult the NCLT lawyers Mumbai who can help the banks to regain economic stability.
Thorough research of the ten years’ data from the top Indian banks like Canara Bank and State Bank of India shows that the banks are making policies that try to contain NPA for improving the profitability and asset quality.
HDFC and PNB show superior NPA management systems if you compare them to the systems existing in SMI and ICICI or other private sector banks. The system even supersedes the system of the public sector banks too.
The positive trend in NPA control
Recent research studies on trends of the non-performing assets in the various private banks of India show that the level of NPAs in the public sector banks is alarming. But it also shows some improvement in the asset quality with a little decline in the NPA percentage. Thus, the studies show that the banks can maintain economic stability if they take timely action against the degradation of the good-performing assets instead of concentrating only on the NPAsAnalytical study
A thorough analytical study shows that the NPA of all the nationalized banks is showing an upward trend. Therefore, statistical records also pave the way for the banks to apply better
measures for NPA management.
It can be difficult sometimes from an outside perspective to gauge why a nationalized bank will need external consultants to identify and solve problems within the organization. But in the modern era of business, the consultants are not just going to take your watch and tell you the time.
If a company has been a defaulter for more than 90 days to pay the interest or principal against the loan to the bank, the account will be an NPA or nonperforming asset. This can affect the bank’s economic state to a great extent. With the help of efficient NPA management from the top NPA consultants, you can find the best solutions for restoring the financial strength of the bank.
Reason #1: Legal knowledge
You may get surprised initially to know that the big consultancy firms are earning as much as the top Indian CEOs by helping the companies in the insolvency proceedings. But once you get to know deeper about the NPA rules, you will realize that the legal knowledge of the consultants is valuable for profit of the bank.
Dealing with the complex layers of law is impossible unless you have professional experts at your service.
Reason #2: Stop loss and/or gain
When the banks are trying every means to collect the due loan from a company, the company is not in the position to pay it off, owing to numerous reasons. But it's not a simple task to manage the legal proceedings. Often, the banks may refrain from hiring the NPA consulting agencies thinking of the huge charges.
But if you consider the present scenario, you will realize that the consultancies can actually help you save or make more money than you have to pay them.
So consider this payment as an investment to reduce the loss and increase the profit ratio in the future.
Reason #3: Prompt response
When a company becomes a defaulter to the bank, the banks will always apply various tactics for retrieving the amount. The continuous calls and follow-ups will hinder other business management process. But the NPA consultants will take up the entire headache of communicating with the debtor.
The fate of the bank lies in the hands of the consultants. It's obvious that the consultancy firm will maintain transparent communications to notify even the smallest updates.
Reason #4: Access to the experts
When you appoint the top NPA consultancy firms, you are not only getting yourself some legal professionals but an entire team of experts from various verticals. The final advisory team will be able to plan the best restructuring procedure for the company and fix the turnaround time accurately.
The appropriate approach
The approach to debt settlement will depend on the nature of the debt and other factors involving the company. Employ the best consultancy to ensure that the team implements the appropriate approach.
Banks and financial institutions in India have been facing the problems of non-performing assets or NPA for a long time. Among several reasons behind this problem, irrational lending and process flaws are the prominent ones.
After 2008, banks started giving loans extensively to increase their business. However, in the endeavor of earning more profits, banks violated a few fundamental laws.
When the banks faced a big problem with NPA, there was a need felt to devise a mechanism for NPA account settlement.
Before we move further, it is important to understand the causes of NPA.
The economy has seen a slowdown in recent years. Various factors affected the earnings of corporates. Due to impacted profits, corporates were unable to repay the loans.
It is one of the prominent reasons behind higher NPA in India.
Relaxed lending norms
To increase earnings and show hefty balance sheets, banks and financial institutions followed a policy of relaxed lending norms. The financial status and credit ratings were not analyzed properly.
Banks were ready to accept higher leverage and reduced equity to promoters. Instead of analyzing the financial condition internally, banks accepted reports submitted by the promotor banks of lenders. Around half of the loans were made to companies that had an interest coverage ratio of less than one.
Banks also sold unsecured loans that resulted in NPA.
Public sector banks contributed to NPA
The major contributor to NPA were public sector banks because they gave the maximum chunk of credits to industries. NPA financial services offered loans to clients and unable to recover. The volume was quite high and it resulted in a big dent in the financial condition of banks and the economy.
Priority Sector Lending
Another important factor that resulted in higher NPA was the Priority Sector Lending or PSL. It has contributed a lot to NPA. This sector includes education, housing, MSME, and Agriculture. Around 20 percent of the NPA was contributed by them.
Credit default by promoters
Many cases of NPA were credit defaults by promoters. The process loopholes were used to divert funds to over-invoiced imports, promoto-owned subsidiaries, and exports to shell companies.
These all factors added to the overall NPA in India.
Various remedies were followed by the government to control NPA.
Non-performing Asset or NPA has been a widely discussed topic in the past few decades in India. It has become a widespread issue in the economy.
Since the magnitude of NPA in India is quite high, the government has to take stringent steps to keep it under control. What is NPA?
Well, as far as the financial definition is concerned, an NPA is an asset or account of the borrower that has been classified as a doubtful or sub-standard or lost asset by a financial institution.
In other words, it is an advance or loan for which the bank has not received the principal amount for 90 days or more.
The unpaid amount is classified as a non-performing asset. It is because it does not generate any income for the bank because the borrower is not paying interest.
As per the definition given by the RBI, as an sasset (that includes leased asset) when it stops generating income is called NPA. It is an advance issued or loan given for which
NPA management is the way of handling the NPA in such a manner that it puts the least impact on the institution.
Impact of Non-Performing Assets
The measurement of the efficiency of a bank is not just its balance sheet. There is another important aspect and that is how well the bank manages the return of its assets.
When a bank shows an increase in the NPA, it means the bank is unable to keep control of its profitability. It is a negative impact on its credibility of it.
Increasing NPA in commercial banks erodes away its capital and destabilizes the confidence of its depositors. They withdraw their money, and it collapses the bank.
NPA funding in India has been done to control the problem. The government is taking the best possible measures to keep the figure of NPA under control. Regulations have been made strong so that there are lesser flaws in the system.
With the better methods of NPA management, there will be lesser chances of debts going unpaid, which further reduces the profit margin.
The great increase in the Non-performing Assets or NPA and wilful defaults have raised major concerns in the past two decades. This has resulted in various reforms and modifications in the field of asset management in banks and financial institutions.
Given the potential adverse impact of it, policies concerning NPA resolution have been modified. NPA financing services Mumbai look after the issues such as how to prevent the occurrence of non-performing assets at a large scale?
Also, measures have been derived to manage the accumulated NPA burden.
So far, the focus of RBI and other regulatory authorities was to manage the NPA. There was an emphasis on finding ways to reduce its magnitude.
Also, banks wanted to clean up and restore the balance sheet at the end of the financial year. Indeed, it is a good initiative from the point of view of maintaining the financial health of the bank or financial institution. But prevention of NPA is also equally important.
Role of regulator
The government and the regulator play significant role in NPA management. When an NPA finance Mumbai company grants a loan to a customer, it is very much important that all precautions are taken to check the eligibility and legitimacy of the borrower.
The role of the government has been very much important historically whenever there is a crisis or failure. The government intervenes either directly or through the regulator.
Since the government is the principal owner of the majority of the affected banks in India, its role becomes furthermore crucial.
A framework for preventive measures is needed
Two things are critical in setting an NPA management system for any NPA financing services Mumbai. First is evolving a framework to bring transparency in operation management.
And the second is strengthening the audit system in banks.
When these two steps are in place, it is possible to scrutiny each loan case in detail. These efforts will reduce the possibility of collusion potentially among the officials of the financial institutions and the borrowers.
“Bad bank” is a new concept. It is a publicly-funded asset management company that will deal with stressed assets.
It formulates a resolution mechanism to maximize recovery. Thus, the burden on a bank or NPA finance Mumbai company will reduce
The Bad Bank will have 100% government ownership. The government may partly finance it. The proposed bank will function professionally and be accountable to the government.
The role of the banking system is crucial in the financial sector. For a healthy economy, it is important that the banks function well and maintain their profitability.
However, in the past few decades, there has been a major impact on the credibility of banks and financial institutions due to a phenomenon known as “Non-Performing Assets” or NPA.
In fact, some major financial frauds and scams have been possible because of the poor management of NPA in India.
What is NPA? NPA is nothing but loans sanctioned to the customers but not repaid in the sanctioned duration. When Non-Performing Assets keep on increasing, the financial situation of the bank deteriorates.
Impact of NPA on banks
There has been a big impact on the health of banks, that resulted in the process for NPA account settlement and NPA management in India. Some of the major impacts are:
When the bank realizes that there is a liquidity crunch for a future business concern, it affects the position of the bank and creates a mismatch between its asset and liability. The bank is forced to raise resources at a higher rate.
Dent to the image
The big impact of NPA on a bank is a dent in its position and image in the market. When the profitability of a bank goes down, its image also shatters.
Impact on its funding
An increase in non-performing assets results in a scarcity of funding to other borrowers. The bank will not get money from its lenders. It will result in a liquidity crunch.
More cost of capital
It has been observed that NPA in India has resulted in an increased cost of capital. It is because banks are required to put aside more money for their smooth operations.
There is a high risk in business. The risk-bearing capacity of the bank is also gets affected.
Impact on profitability
When NPA goes beyond a limit, the bank is unable to create further assets because of a lower capital adequacy ratio and low capital ratio.
Such banks and financial institutions face difficulty with the growth and expansion plans. They face stagnation and negative growth. The net interest income goes down because they do not charge interests on the NPA accounts.
Servicing NPA will incur costs but there is no income generated. It means, the profitability further goes down.
So, there are severe impacts on the overall health and performance of banks due to NPA.
A commercial bank largely depends on its profit. The more profit it earns, the better business it can do. However, with the increase in loan failures, the share of non-Performing advances goes up. It adversely affects profitability.
Research has been done to examine a bank through bank-specific and macroeconomic predictors of profitability. And the research has clearly shown a correlation between NPA and the rate of profit.
With stringent procedures to give loans, and a better NPA account settlement process, a bank can improve its profitability ratio. It has to be done to reduce the NPA and operating cost, and thereby increase the profitability.
How does NPA affect profitability?
NPA in India has become a big problem. As banks face more cases of non-performing advances, they get worried about their financial health.
Not only an NPA makes an asset non-productive, but it results in the non-recovery of the principal capital as well.
Loss of interest puts a dent in the income. Loss of capital erodes the capital base. Both can potentially affect a bank and its stability.
When do we call an asset non-productive? According to the definition given by the RBI, an asset for which the principal or interest payment remains overdue for a period of 90 days, it is called NPA. There are three sub-categories of it: Substandard asset, Doubtful asset, and Loss Assets.
When an NPA remains in the same category for a period less than or equal to one year, it is called a substandard asset.
When it becomes NPA for more than 12 months, then it goes into the category of Doubtful Asset.
A Loss Asset is an NPA for which, the loss has been identified and the amount is not written off.
The total NPA of a financial institution is the combination of these three subcategories.
Due to the increase in the operating cost and drop in the interest amount, profitability goes down. The bank has to do provisioning out of their operating profit. It causes a dent in its profit margin.
Apart from generic aspects, every bank has some bank-specific determinants of profitability. They should be considered while deciding the NPA account settlement procedure.
Total bank assets, total deposits in the bank, the proportion of non-interest income are a few examples.
Looking at the higher impact of NPA in India on profitability, it is mandatory to keep it under control. It is the only way of recovery.
If you read the reports published by the Reserve Bank of India, the gross NPA or Non Performing Assets are valued at more than 1.5 US Billion dollars for Government-sector banks. It is 90 percent of the total NPA, including private banks.
The amount of NPA financial services is huge. That is the reason, it is a matter of concern.
What is NPA? As per the definition given by the RBI, if a loan is overdue for a period of more than 90 days, the interest amount or installment amount overdue on the loan is called a Non-performing asset.
The more will be the rise in NPA, the more harm it will do to the economy.
Reason for the increase in NPA
What could be the reason behind the phenomenal increase in NPA financing services Mumbai?
One reason is that Indian banks are following the recognition standards that are being followed by the banks. These standards were imposed after RBI highlighted them in the AQR-Asset Quality Review.
And there are some supporting reasons also, such as not having significant growth in the financial health of the financial companies.
Up to the year 2008, the economy in India was flourishing. Therefore, financial institutions gave extensive loans.
After the crisis in 2009, the profits declined and even the government banned a few projects. Environmental causes put a further load on it. The infrastructure sector got a major hit.
Also, the lending norms were relaxed for big corporates. Therefore, a lot of burdens was there.
As the NPA increases in the financial sector, it puts an adverse impact on their performance. It squeezes the earnings and brings down the profitability. Also, as the number of financial institutions reporting losses goes up, it reduces the overall credibility of the financial institutions in the market.
Therefore, it becomes mandatory to bring down the NPA ratio in the interest of the overall economy.
What are the measures to tackle NPA?
First, the RBI has pushed for IBC-Insolvency and Bankruptcy Code. It increases the hopes for faster resolution. It will make a change in the provision requirement; it means a higher portion of the provision will be there to make the condition of books better.
Second, the Credit Risk Management process is strengthened to increase sensitivity among the banks.
There has been amendment done in the banking laws to make the RBI more powerful.
Stricter NPA recovery process reduces the gap between NPA and recovery.
National Company Law Appellate Tribunal (NCLAT) is a miscellany body that acts as an advantageous and expeditious alternative to the court. This tribunal has been recently established to regulate and resolve disputes between civil corporations.
Surprisingly, there has been little awareness and knowledge about the use and importance of NCLT and its twin NCLAT.
Difference between NCLAT and NCLT:
There are two tribunals, NCLT and NCLAT. There is a little difference between these two.
NCLAT has been established as per section 410 of the Companies Act, 2013. On the other side, NCLT is established as per section 408.
NCLT holds jurisdiction primarily on cases of insolvency and bankruptcy, whereas NCLAT is primarily for holding appellate jurisdiction over the cases that are judged by NCLT
NCLT analyses and accepts all evidence from debtors and creditors. On the other hand, NCLAT analyses and accepts the decisions made by NCLT.
In short, we can understand that NCLT is for the primary collection of evidence and facts. NCLAT is one step forward. It analyses the input received from NCLT.
The appellate authority for Industrial and Financial Reconstruction (AAIFR) and the power related to reconstruction and winding up lies with the high court.
There are several benefits of NCLAT.
Disputing parties can present a party in a proceeding or appeal. They can represent themselves or appoint an authorized person to represent them.
Typically, the representative can be Company Secretaries, Chartered Accountants, Legal Practitioners, Cost Accountants, or an officer of the company.
The government of India has constituted 15 tribunal benches in various major cities such as Metro cities, Tier 1 and Tier 2 cities. There is one appellate tribunal bench is in New Delhi.
The age limit for the appointment as a member of the tribunal is 50 years. The member might retain his lien with his existing ministry or cadre or department. Holding office as such for a period not more than one year.
The NCLT is a specialized court only for Indian corporations. It is a simple tribunal for corporate members in India which helps to reduce the number of legal battles before different courts and forums and NCLT can deliver justice at a quicker pace.
What is the core of the economy of a country? It is nothing but the banking system. It is the powerhouse that keeps the machinery running by pumping money.
To keep the money rotating, banks give loans to those who want to build their business. Banks earn by charging interest against the loans and advances they provided for the smooth running of the business and that's how the banking system flourishes.
But what if people take loans from banks and do not repay? Such unrecoverable loans will cost the loss of plenty of resources.
Banks do not earn interest from such loans. They are unable to recover the base amount also from defaulters.
Such assets are called Non-Performing Assets or NPA.
NPA Definition: Non-performing assets (NPA) are loans or advances for which the principal or interest has not been paid for 90 days.
Banks and financial institutes must take measures to control NPAs as it is not good for their health.
What is NPA Management?
NPA management is the process of managing and recovering NPA.
The problem can be handled by managing and recovering NPAs if they invest in the right solutions. Banks use proficient recovery tools that are responsible for data collection from all the possible sources.
They undergo a predictive analysis so that lending decisions can be supported based on the following aspects:
Repayment capacity of the clien
Willingness to payback
Banks integrate with controlling organizations such as CIBIL. It gives an idea of the financial condition, history, and payment behavior of the client
How do banks get benefited from NPA management?
When banks and financial institutions initiate NPA management and evaluate the credit rating of a client, they get fairly clear warning signals.
Thus, banks can get a timely alert. It becomes easy for them to find out and recover amounts in a better manner.
To support banks, the government of India has introduced regulatory bodies such as SARFAESI Act 2002, Lok Adalat, and Debt Recovery Tribunals (DRTs).
NPA automation has been initiated to evaluate credit rating and early warning signals. Therefore, it has become possible to take necessary actions easily, e.g., follow-up, scheduling meetings, filing legal cases, and so on.
Companies are offering automated NPA Management tools to cater to the problem of NPA in banks. These comprehensive solutions can be plugged-in to the existing CBS (Core Banking Solution) of the bank and customer data can be analyzed better.
These tools provide analytical tools to know the issues and causes. Banks can take corrective actions also these tools define the communication process and recovery framework.
Modern NPA management improves the financial health of banks and financial institutions.
Debt restructuring is basically a medium to reduce the debt of a person or a business which includes negotiating and agreeing with its lendors to reduce the debt or to revise the repayment plan with an ultimate aim to enable the borrower to meet his revised payment obligations. With a debt restructuring the organization’s chances of paying back its obligations and staying in business greatly improves.
But today the lending institutions are restructuring debt by converting the amount overdue payable into WCTL (Working capital term Loan ).
In such cases, most of the time the rate of interest under WCTL is higher than the initial rate of interest which the bank was levying upon the borrower. Under such circumstances, the payout ratio of the borrowers is increasing for example, if a Borrower has borrowed original loan of Rs.100 and if he is paying Rs.10 interest, after restructuring it will increase to Rs.11 or Rs.12. The question here is that if he is not able to pay Rs.10 how could he serve Rs.11 or Rs.12 ? So, borrowers are shying away from restructuring.
At the time of restructuring banks demand 10% to 20% as additional promoter’s contribution which MSMEs are unable to contribute.
The lending institutions not only ask for additional contribution but also ask for additional security. This further acts as a hurdle in the way of borrowers and MSMEs are unable to accept or fulfill the requirements set by their lenders.
The borrower needs hassle free restructuring, haircut & sufficient gestation period after restructuring but unfortunately, they do not get any of these.
There is no haircut in the restructuring process, which means that a portion of the outstanding interest payment does not get written off.
How Bank can Improve Their Restructuring Process ?
The Bank should actually do the reevaluation of the repayment capacity of the borrower and accordingly decide the restructuring and repayment schedule.
They can work out a ballooning repayment schedule or it could be a combination of reasonable gestation period along with ballooning repayment schedule.
The Bank should look at the recovery of the restructured debt in 2 ways:
a) Offer short gestation period for recovery of principal debt recoverable over longer period of time either with EMI or ballooning pattern.
b) Offer longer gestation period for recovery of overdue interest amount recoverable in 3 to 5 years. It has to be noted that the Break Even Point is kept reasonably low whereby the MSME should be able to service the loan and also earn profit for themselves and should not become unpaid slaves of the lending institutions or the Banks. Alternately certain portion of the restructured debt may be converted into Equity with personal obligation of MSME promoter to buy back after certain period.
The Bottom line is survival of business, serviceability of the loan and enriching the MSME promoter, making him capable to buy back such equity at a specified return on investment to the Lender/ Financial Institution.
Bank has to do real restructuring by
1. Considering the viability of the project.
2. Considering the actual repayment capacity of the project.
3. Avoid asking for an additional contribution.
4. Avoid asking for additional collateral securities.
5. Offer long term repayment period of 10-15 years as offered in case of housing loans which will bring down their BEP.
If these little aspects are thought upon and implemented, perhaps restructuring can be successfully worked out in the interest of the lending institutions as well as for the borrowers.
If bankers are only looking from their recovery point of view and not from the survival and revival point of the borrower, then banks will definitely succeed in window dressing its books by offering and sanctioning non-workable restructuring of loan to borrowers who try to accept such sanction under despair and with hope of borrow the time, to avoid harassment, and not being classified as Non-Performing Asset.
More than 90% of restructured plans have eventually failed within the span of 1 year because the restructuring plans were never practical and never pragmatic.
Remember, if the bank has better restructuring propostions, it will work better for MSMEs
DR. VISSWAS PAANSE
NPA CONSULTANTS PVT LTD
Reserve Bank of India introduced the concept of willful defaulter in pursuant of the instructions of Central Vigilance Commission during the year 1999 and subsequently modified as per the recommendations of the Working Group constituted by RBI in consultation with the Government in the year 2002 and subsequent modifications have been announced through their circulars. As per their circular DBR. No. CID.BC.22/20.16.003/2015-16 dated July 1, 2015, “2.1.3 Wilful Default: A ‘wilful default’ would be deemed to have occurred if any of the following events is noted:
(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender”.
But the most important part of the circular states, “The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as wilful must be intentional, deliberate and calculated”. The aforesaid circular is a very important aspect of customer behaviour and conduct of account in the matter of recovery of debts which if followed diligently would result in speedy recover of debts due from such borrowers. But the most unfortunately the banks use the circular as an easy way to surmount the various directions of Reserve Bank of India and cumbersome procedures of restructuring, repeated rehabilitations and other directions of RBI to take advantage of the penal measures envisaged under the said circular of RBI on wilful defaulter. As per the penal measures, the wilful defaulter is not entitled to any remedy under any Act or relief under any norms of RBI and can be charged under criminal law.
RBI directions clearly indicate as to how to identify the wilful defaulter while narrating the norms under which the borrower can be considered as wilful defaulter. Banks/FIs should take the following measures in identifying and reporting instances of wilful default:
(i) With a view to imparting more objectivity in identifying cases of wilful default, decisions to classify the borrower as wilful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/ DGMs as decided by the Board of the concerned bank/FI.(ii) The decision taken on classification of wilful defaulters should be well documented and supported by requisite evidence. The decision should clearly spell out the reasons for which the borrower has been declared as wilful defaulter vis-à-vis RBI guidelines.
(iii) The borrower should thereafter be suitably advised about the proposal to classify him as wilful defaulter along with the reasons therefore. The concerned borrower should be provided reasonable time (say 15 days) for making representation against such decision, if he so desires, to a Committee headed by the Chairman and Managing Director.
(iv) A final declaration as ‘wilful defaulter’ should be made after a view is taken by the Committee on the representation and the borrower should be suitably advised”. In practice the issue of notice to the borrower narrating the circumstances and furnishing the evidences under which the borrower being branded as wilful defaulter is being undertaken as a ritual without satisfactorily proving the following facts.
(i) The capacity of the borrower to repay the loan is to be proved with evidences and based on the periodical reviews made by the bank as part of credit monitoring.(ii) Proof of diversion of funds for other purposes other than for the purpose for which the finance was made is to be established by way of banking transactions made date wise through the accounts maintained with the bank. (iii) Siphoning of the funds should be proved by the transactions made in the account date wise through relevant entries in the account.
RBI through their circular DBOD No. DL.BC.12928/20.16.003/2007-08 dated July 2, 2007 made it clear to the banks and financial institutions, “The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/ incidents. The default to be categorised as wilful must be intentional, deliberate and calculated”.
Many times, it is found that a borrower of many years of standing is branded as a wilful defaulter all of a sudden when his account is classified as Non-Performing Asset (NPA) based on the transactions conducted much before the classification of the account as NPA. The bank is subjected to many audits via internal audit, statutory audit, RBI audit, Special audit, periodical inspection by officers of the bank, periodical review of account etc. Some of the bigger branches have concurrent audit also. What is the purpose of having so many audits, inspection and reviews if they cannot identify such activities attributing to wilful defaulter at the right time? In this connection RBI states, “With a view to monitoring the end-use of funds, if the lenders desire a specific certification from the borrowers’ auditors regarding diversion / siphoning of funds by the borrower, the lender should award a separate mandate to the auditors for the purpose. To facilitate such certification by the auditors, the banks and FIs will also need to ensure that appropriate covenants in the loan agreements are incorporated to enable award of such a mandate by the lenders to the borrowers / auditors.
In addition to the above, banks are advised that with a view to ensuring proper end-use of funds and preventing diversion / siphoning of funds by the borrowers, lenders could consider engaging their own auditors for such specific certification purpose without relying on certification given by borrower’s auditors. However, this cannot substitute a bank’s basic minimum own diligence in the matter”. Besides, “Role of Internal Audit / Inspection: The aspect of diversion of funds by the borrowers should be adequately looked into while conducting internal audit / inspection of their offices / branches and periodical reviews on cases of wilful defaults should be submitted to the Audit Committee of the bank”. Whether such reporting is being done and follow up actions are being undertaken are speculations because if such actions are undertaken at the right time, it would have prevented the defaulter syndrome much early and would have saved the situations of NPA creations.
Indian management system, from experience, is found to adopt the method of fixing responsibility and punishing rather than analyzing the problem and solving it. In our banking system all too often our bankers shrink from their responsibilities and choose to do what is officially expedient.The concept of wilful defaulter is very essential but to make it effective, the implementation should be on a proven basis not on the basis of speculations and as a policy of expediency. It should follow the legal dictum “Let hundred culprits escape but not one innocent be punished”.
This makes me conclude that a “Blind is investigating a Blind” and there is need for complete revamp from the change in definition of Wilful Defaulter itself. The present mechanism is completely arbitary, unilateral and against the basic and fore most principle of Natural Justice.
Non Performing Asset or NPA is an asset on which the installment of interest or principal, or both remain overdue for a period of 90 days or more. Or, we can say that these assets have stopped performing.
NPA is a burden, not only for a bank or financial institution but for the whole country and the economy. Therefore, every government is concerned about it. All measures are taken to keep it under control.
In India, the situation was quite bad earlier because of the nonexistence of regulations and control. Banks used to distribute huge amounts of loans without cross-checking the validity or paying capacity of borrowers.
There were no structured measures to report, audit, or complain about NPA. In recent years, there have been several measures taken to keep the NPA under control.
Recent developments on NPA
Asset Reconstruction Companies
There have been 14 new ARCs given licenses by RBI. It was done after the amendment of the SARFAESI Act 2002. These companies will unlock value from stressed loans. Earlier, it was carried out by the judiciary path, which was time-consuming and tedious.
Corporate Debt Restructuring
This step is taken to reduce the burden of the debts on the company by reducing the paid rates and by extending the time to pay the obligation back.
<Joint Lenders Forum
The creation of JLF was done to include all public sector banks that have been stressed due to NPA. The purpose of it is to avoid loans to the same person or company from multiple banks. Thus, the chances of fraud reduced.
This is perhaps the most significant reform effort undertaken after 1970 when the banks were nationalized.
Establishment of IBC
Insolvency and Bankruptcy Code or IBC has been pushed by the Reserve Bank Of India. This process expects to make the resolution process fast. Plus, it puts more control on the asset quality.
Credit Risk Management
When stringent processes are applied to perform the Credit Risk Management, better appraisal and accountability can be ensured. Various analysis on profit and loss account are performed. Not just that, banks are supposed to perform a sensitivity analysis on the PLA (Profit and Loss account) as well. It is done with the intention of safeguarding the banks against external forces.
These developments will help in keeping the NPA under control. It is better for the overall economic health of the country.
Many people apply for MSME loans, but not all get it. It is because the loans are sanctioned if the applicant meets certain eligibility criteria. These loans are called unsecured loans, and they are given to business enterprises that need financial support.
What is an MAME? It stands for Micro, Small, and Medium Enterprises. These are industries that are normally startups and small entrepreneurs.
The interest rates and repayment structure vary from lender to lender. They depend on the applicant’s profile, business history, and stability.
If you are interested in applying for a MAME loan, then read the steps carefully.
When you apply for the MSME loan, you should keep the following documents ready.
MSME loans are being offered by banks. You can check online and choose any one bank of your choice.
What is the turnover limit?
The turnover limits for MSME have been revised recently. You should check the official sources for that. Enterprises that have an investment of up to 1 crore and a turnover of up to 5 crores are defined as Micro enterprises.
Enterprises that have an investment of up to 10 crores and a turnover of up to 50 crores are defined as small enterprises.
Enterprises that have investment up to 50 crores and a turnover of up to 250 crores are defined as medium enterprises.
You should classify your business accordingly and apply for the loan. The process has been made quite simple and transparent.
Apply for it and take your business up to new heights. These loans are given to give a boost to the economy and encourage entrepreneurship.
A Non-performing Asset or NPA is an advance or loan that the borrower is unable to pay within the stipulated and extended period of time. This could be voluntary or involuntary.
In the case of voluntary, the borrower is actually capable of repaying, but does not do it intentionally.
In the case of involuntary NPA, the circumstances force the borrower to do that.
Regardless of the reason, the loan does not yield any income to the lender in the form of the principal amount or interest amount. And the loan eventually falls in the category of problematic assets.
When a property becomes non-performing, the owner has to sell it. Buyers look at it as an opportunity because they get a chance to invest in something that otherwise might have been beyond their budget.
It is the reality, but you should never forget that the property is beneficial for the buyer when there are no pending dues from your side.
Being an honest seller, you should never hide any dues when you sell an NPA property.
When does a property go for sell under NPA?
There is a procedure for selling a property under NPA. Before the seizure, the defaulter has to get a notice period of 60 days under the SARFAESI Act, i.e., Security and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
Once it is seized, the bank starts the process of auctioning the same, so that the amount can be recovered. The property valuation and estimation are carried out by a panel of experts.
They consider several factors such as the location and area of the house, and its construction quality. The reserve price is informed to those who are interested in bidding. In case the amount received by the bank is higher than the default loan, then the excess amount is returned to the borrower.
Some points to remember when you sell NPA property
Buyers visit the property before bidding. They also carry out an inspection to reveal crucial details that are significant to them. It is your duty to inform them of the reality.
Depending on the problems associated with your property, banks may offer a discounted rate of 10 to 20 percent to the buyer.
There should not be any unpaid dues. If you are the sole owner, then clear all municipal and tax records. In case the property had multiple owners in the past, then you must obtain the mutation deed.
From the seller’s perspective, you should not have any hidden liabilities or facts associated with the property.
When you want to start a new business in India, it is possible to raise funds by applying for low-interest loans. The rate of interest varies depending on the loan amount and the repayment tenure.
The government of India is committed helping entrepreneurs by providing them loans at affordable interest rates. It is because the MSME (Micro, Small, and Medium Enterprise -MSME) has limited access to formal credit. It is the reason; the government has decided to launch startup business loan schemes.
SIDBI(Small Industries Development Bank Of India) gives loans to MSMEs and startups directly. It has lower interest than other banks.
Bank Credit Facilitation
It is the loan scheme by NSIC to meet the needs of MSME units. National Small Industries Corporation partners with several banks. The repayment tenure is five to seven years, extendable up to 11 years in special circumstances.
Pradhan Mantri Mudra Yojana was launched in 2015. This scheme is headed by the Micro Units Development and Refinance Agency (MUDRA). It gives loans to trading, manufacturing, and service sector companies. The loan amount ranges between Rs 50000 and Rs 10 Lakh. All types of artisans, shopkeepers, machine operators, vendors, repair shops, etc. can avail the Mudra loans./p>
The Credit Guarantee Scheme or CGS gives loans to new and existing MSME companies that operate in the service and manufacturing sector, but it excludes agriculture, retail trade, self-help groups or educational institutions.
This scheme was launched in the year 2016. It gives loans to manufacturing companies, trading companies, service industries. Loans ranging from 10 Lakh to 1 Crore can be availed under this scheme. The repayment tenure is seven years. The maximum moratorium period is 18 months.
Line of Credit
A line of credit works just like a Credit Card. This card is linked to a business instead of an individual. For the first 9 to 15 months, the borrower does not have any obligation to pay interest on the borrowed sum. Thus, an entrepreneur gets sufficient time to get the business to a good start.
In this scheme, the equipment bought to launch the business is pledged as collateral. Therefore, the borrower has to pay a comparatively lower interest rate, but the risk is higher. The borrower has to repay the amount as revenues are generated from the business.
It is essential to know the possibilities of getting loans from several sources. Make a comparison study and choose the most suitable source.
NPA securitization rebooting has many opportunities and advantages. We know that NPA is caused because of a short-term crunch of cash flow. If you can commit a sizeable quantity of funds, then NPA can become a quality asset.
What are the benefits of asset securitization? Well, they are many hidden advantages. Let’s understand them one by one.
Some benefits of NPA securitization
When the stock market is volatile and puts relatively large market risk, non-performing loan securitization can bring new investment products. It opens new investment channels and broadens the choices of products.
Such products can satisfy the risk appetite of investors and ever-diversifying investment needs. The use costs are low, usually lower than bank loans.
Thus, we cannot say that NPA is always a curse for the business. There could be unique benefits of it.
There was a global turmoil in the socio-economic environment from the beginning of the financial year 2020-21 due to COVID-19. Everything got impacted due to that, and the banking industry is not an exception. However, one more reason that made economists more worried was the increase in NPA or Non-Performing Asset.
Due to the reduction of interest, profitability and shareholder value damaged the viability of banks. It forced creditors, borrowers, industrialists, and the entire economy on the backfoot. Banks decided to play safe by investing in government or similar risk-free securities.
However, there has been a silver lining around the dark cloud. Due to technical advancement and bitterly enforced npa management methodology, there was an improvement in the situation.
Early detection and better analytical ability
Whether it is NPA assessment or npa loan takeover, technology became more instrumental in everything. The advanced risk management process suggested that lending institutions should do risk identification, monitoring, and curtailment.
By using predictive tools, it was possible to interpret and analyze huge data in real time using AI-based tools.
It gave necessary indications to banks on loan servicing and production.
Banks started doing inhouse-led credit profiling instead of depending on external agencies. Also, they enabled an improved verification process for loan documents.
Income documents were validated more effectively.
Moreover, banks performed a proper market valuation of an asset that is to be mortgaged or pledged. Clean transfer of mortgaged assets was ensured.
The most important help of advanced analytics is to get real-time tracking of micro and macroeconomics risk indicators. Inclusion of diverse risk indicators in analysis resulted in better npa management.
Experts say that COVID-19 crisis wiped out trillions of dollars from the global economy. All countries, including India, got affected by it. When the whole world is struggling, it is all the more important to take proactive steps to save the losses. It includes cutting down loan production, lowering credit disbursement, and extending the payback period of borrowers. It is to ensure that fewer assets fall in the category of Non-Performing Asset.
When the asset goes into NPA category, financial institutions check the probability and percentage of the recovery. Automated algorithms can be implemented to warn against depreciating asset quality. Remedial measures can be taken to control the situation.
It reduces human intervention and frauds. When system-generated reports and segmented analysis give an insight on NPA, the actions of writing-off, recovery, or compromise become easy.
The scenario of Non-Performing Assets or NPA is certainly not good. According to the report published by the RBI, the gross NPA of the banking sector may increase up to 15 percent by the end of this financial year. It is a 20-years high.
No wonder, the government is enforcing more stringent mechanisms to handle npa account settlement. It has been well aware of the problem. The IBC (Insolvency and Bankruptcy Code) has been modified and interpreted to respond to the needs of sick companies.
The npa debt settlement process will be further strengthened to handle the situation.
It needs multiple efforts to resolve the issue
Is the resolution of bad debt the only remedy? No, the problem has multiple layers, and the resolution has to be multilayered.
A large proportion of bad debt is contributed by big-ticket companies. It is a messy business to resolve the claims of creditors of such companies. It requires high expertise in legal and commercial matters. A regular offtake of NPA in smaller amounts would be the best idea.
To help in faster npa account settlement, there have been ARCs created. These Asset Reconstruction Companies are considered a prime vehicle to scrutinize the debt. They are allowed to buy NPA in the form of cash and securities.
The percentage of securities used to pay the bank represents the share of the risk borne by the bank even after it sells the NPA.
As of now, the assets under ARC are around 1.5 Trillion, which is more than 14 percent of the stock of NPA. The growth rate of assets managed by ARS has reduced in 2019. Also, the investors added after 2018-19 are foreign portfolio investors. They are capable of raising funds overseas at the lower interest rates.
There was a suggestion to form a“bad bank” to deal with the problem. Still, the definition of a bad bank is not clear. However, it looks that it will be an ARC for which the capital will be given by the government. It will be aligned to commercial considerations. Additional capital within the boundaries of fiscal properties is welcome.
For the success of a bad bank, it is a necessary precondition that private capital operates at reasonable risk.
To allow it to happen, banks will have to take on certain levels of risk. They cannot transfer everything to the buyer. Also, new sources of domestic capital must be encouraged to participate.
The problem of Non-Performing Assets or NPA not just eats away the “good money” but also impacts the bank many times.
Why is this phenomenon has put the whole banking world in a state of jeopardy? Why has it been termed as the killer of the economy?
When a loan or advance ceases to generate income for the bank and where the interest and /or installment of the principal amount remain overdue for more than 90 days, it is termed as NPA or Non-Performing Asset.
Identification of NPA and initialization of npa account settlement is considered the steps towards cleaning of balance sheets.
The overall impact of NPA is adverse
A bank has many borrowers including corporates, micro, small, medium, and large industries, traders, and exporters. All these generate wealth and increase the GDP of the country. Not just that, they provide employment to more than 200 million people in the country.
Hence, GDP growth and per capita income are dependent on that.
When banks fail to secure the lending by tangible and intangible securities and guarantees, the problem of NPA arises. Unsettled and disputed cases are referred to national company law appellate tribunal, where they are handled by experts.
Ever since the inception of present NPA norms, it has put ill effects and cast a shadow on all stakeholders, i.e., Banks, exporters, companies, and MSMEs.
Banks are the worst sufferers because the big chunk of their lending portfolio had been classified as NPA. It forces them to make provisions for loss, that results in the erosion of net worth and capital.
The governments have to shed huge funds to recapitalize the banks.
The burden comes on the public
The burden of NPA comes to the public. Thus, everybody is a sufferer, the bank, the business, and the public. Not just that, the economic condition and the country also suffer. Due to the fear of NPA, and the hassles of npa account settlement, banks become conservative in lending to new projects.
Banks cannot predict future cash flows, which is a vital element for servicing debt installments and interest liabilities.
The fear of NPA kills the new idea with a high potential for growth. They become less entrepreneurial so that the risk is avoided.
Bankers can ensure proper due diligence of loan proposals and they can adhere to lending norms, but it is impossible to monitor the business operation of their lenders. Therefore, cases referred to national company law appellate tribunal are eroding their business and viability.
Banking is the core and fundamental strength of an economy. It decides the financial direction of a nation. It can make a critical commitment in wiping the issues like joblessness or destitution. Hence, it is essential that the banking system in a country is always in a healthy state.
According to RBI Norms, an asset will be termed as NPA or Non-Performing when its payment of principal or interest is due for more than 90 days. It is considered non-performing if an asset fails to make income on the due date. The growth of NPA is always a matter of concern and npa management is necessary to maintain the good health of banks.
How does NPA make a bank unhealthy?
Challenges in front of Indian banks
Indian banks are dealing with the problem of NPA and its impact on profitability. The rise of NPA reduces the bank rates and hits the customers directly. As a result, the inflow for investment goes down. Cash reserve ratio and liquidity ratio also get affected by NPA. It brings down the confidence of shareholders.
Larger borrowers not paying the interest and principal on time result in the rise of NPA and downfall or profitability. These loans get converted into bad loans ultimately.
When large numbers of npa debt settlement cases are there, banks have to spend heavily, and it impacts the bottom lines.
Research shows that NPA kills the profitability
The research shows that NPA kills the profitability of Indian banks. Hence, banks should review their existing credit appraisal and monitoring policy. If any loopholes are found in the existing system, then they should be bridged.
A recovery system has to be in place. All disputed cases need to be forwarded to the tribunal. An effective npa management process can be implemented by strengthening loan recovery methods.
An inadequate recovery process will not be able to control the situation. Studies have found that banks that handle the management of NPA better could control the situation fast.
Factors such as industrial sickness, frequently changing government policies, poor credit assessment system, and managerial deficiencies were the major contributing factors.
Since the impact is severe, it is essential to control the increase in the NPA. This problem must be taken seriously or else it will hit the overall performance of banks heavily. The decrease in the profitability of banks has a direct impact on the economic wellbeing of our country.
The Indian government looks determined to do every possible move to the complete cleanup exercise so that npa in india comes under control.
In an important decision, the government declares to transfer corporate loans worth more than 1.5 Lakh crore to the ARC (Asset Reconstruction Company). This new entity is planned for NPA management and control.
The recent pandemic situation has added fuel to the fire. Experts say that there has been a big surge in the NPA figures, but they are still not known. It is because the true level of damage caused by Covid 19 is still not calculated.
Ballpark figures say that there are NPAs worth more than 2.5 Lakh Crore in 70 large accounts that banks do not have any power to recover. It is quite a large sum.
According to npa account settlement experts, all of them are not stressed assets. With the help of the ARC-AMC model, it will be possible to aggregate these assets from various banks and convert them into one entity.
Thus, experts can maximize its value in a market-led manner. The basis of the asset transfer will be the net book value.
IBA asks lenders to give data In another move, the Indian Bank’s Association or IBA has asked lenders to give data related to stressed accounts with
principal outstanding amounts more than 500 crores. It will help in measuring the total capital requirement to run the proposed bad bank.
Both IBA and the Department of Financial Services are working jointly to design the structure of ARC. Since the objective of creating ARC is to extract the money stuck in the secure loans. Thus, banks can focus on their fundamental work of credit management.
The work of npa account settlement, thus, becomes structured.
The process of buying loans by ARC has been formulated. It is said that the ARC will offer 15 percent of the loans in cash. The remaining 85 percent will be in the form of security receipts against bad debts. The banks will get a return in line with the recovered amount.
There will be no direct support by the central government to the ARC, but it will offer a sovereign guarantees to meet the regulatory requirement.
Figures say that the overall gross NPA ratio will increase. The time will prove that the steps being taken by the government to control npa in india will give some result or not.
The task of npa management is a top-priority item for the government. It is reflected in the steps being taken by the finance ministry. In the recent move, it is said that two public sector banks will be privatized along with Life Insurance Corporation of India and a common insurance company.
These two banks will be different from the fleet of banks that consolidated in the recent past. Hiving off the NPA burden and reducing the fiscal deficit are the main reasons for this move. NPA experts and nclt lawyers Mumbai have welcomed the move.
This decision is not for making the issues of consolidation further complex. There are several integration points there. The task of consolidation will have to be carried out in multiple phases.
Efforts have been started by the government since 2019 when the merger of 10 public sectors into 4 bigger ones. Thus, the nationwide count of public sector banks will come down to 12.
Movement of staff is also on the agenda
There are several facets of the action plan.
One step is to include shifting some people to various lenders and engaging them for customers. The purpose of all banks is to clean the balance sheet as much as possible to get better valuation. It is possible when the NPA situation improves. Employee movement is an important npa management strategy.
It will be a joint effort of the finance ministry and the Neeti Ayog. Both will brainstorm and find out the best candidates for privatization. The RBI is also searching for different options under the legal framework. Though some finance experts rebuke some of the steps or ideas of the recent consolidation/privatization move, it is not possible to assess it today.
After a few years, we will be able to evaluate whether they made a revolutionary change in the financial condition or failed.
The government will safeguard the interest of banks
The finance minister has assured that in spite of the hard steps taken by the government to control NPA, the utmost effort will be taken to protect the interests of the people working in these organizations. While negotiating with the bidders, it will be made clear that not a single employee should face adverse effects.
It is essential to reduce the burden of NPA. Hence, the effort taken by the government should be welcomed. It is important from the perspective of the financial health of the country.
The primary function of banks was to lend. It resulted in a gradual increase in the non-performing assets or NPA. Since the increase did not happen overnight, it was ignored by everyone.
In the past few years, banks and the government have realized the tremendous increase of NPA and its harmful effects on the economy. Now regulations have been established to identify and restrict NPA cases. Also, tribunals have been authorized to perform npa debt settlement.
What is the way forward? How to keep NPA under control? This blog explains some workable strategies.
Decision-making has to be multilayered
The fundamental reason for NPA is to make junior employee decision-makers. However, the real responsibility lies with the senior people. Therefore, it is important to make the structure such that multiple people are involved in the decision process.
No compromise on NPA recovery
The government has already started putting the focus on NPA recovery by making laws stringent. Now the banks are required to behave more responsibly. They should not give any concession to NPA and all the measures to be taken to recover the loan as early as possible.
The RBI has asked for additional powers under the Banking Regulation Act. Now it has the powers to remove and appoint CMDs and to supersede the Board of Directors.
RBI can make an application for winding up defaulter banks and enforce voluntary and involuntary amalgamation.
Banks are also required to work sincerely on npa management. It is a collective work of RBI and banks to keep the NPA under control.
Improved Credit Risk Management
Banks need to appraise the project well. They should check the trustworthiness and creditworthiness of the client. Banks need to carry out the skill and experience of the client. By establishing effective MIS, they can trigger early warning signals about the health of loans.
Other than these measures, banks are supposed to set up Asset Reconstruction Company to resolve stressed assets fast. It will reduce pressure on npa debt settlement as well.
Looking at the increasing pressure on banks, they must keep NPA under control to maintain better financial health.
According to a survey, the NPA of banks may increase by one and half times in the coming months. It is certainly a matter that everyone should be concerned about. Already the situation of npa in india is under tremendous stress and the return of COVID-19 is terrifying people with the possibility of lockdown.
We saw that the banking sector has seen a surge in bad loans last year. Still, there are thousands of npa legal matters pending in the tribunal. If we see such a massive number of fresh NPA cases in the coming two quarters, then the situation is going to be out of control.
The figures declared by the FICCI-IBA survey conducted between July and December 2020 are horrifying. The impact of the situation will be visible by the end of this year. It was quite a comprehensive survey that involved twenty banks from the private and public sectors. Some foreign banks that operate in India also took part in the survey.
And according to the responses submitted by some of the participants, there was no decline in the NPA cases during the last six months of 2020. It means that npa in india was consistently severe during and post-lockdown period. Though, some banks admitted that the second half of 2020 was “somewhat better” than the first half. It means, it was not consistent across all banks.
The decline of NPA in some cases may be due to some localized factors. All of the participants feel that the NPA will increase more than 10 percent in the first six months of 2021.
The looming bad loan crisis will hit hard
With such a sharp rise, NPA is going to hit the Indian economy hard, there is no doubt about it. And the heat can be felt in 2022. Under the baseline stress scenario, the gross NPA will cross the 13.5 percent mark by September this year. It is quite straightforward that npa legal matters will also increase in the same ratio.
And the bad news is that sectors that have already seen a bad time due to COVID-19 will be the sufferers, e.g., tourism and hospitality, aviation, restaurant, and MSME. There will be fewer opportunities of making money, but the operational expenses will go higher due to less turnover of customers.
Banks are receiving applications for one-time restructuring of loans after the announcement of the scheme by RBI.
Looking at all these aspects, npa in india is a serious matter. Collective efforts are required to overcome the situation.
Many people misinterpret the term loan settlement. It is not a loan closure.
When you pay all the installments of your loan regularly and the borrowed amount becomes zero, it is the closure of your loan account. When this happens, the bank issues a NOC or No Objection Certificate to you. The intimation of the loan closure is sent to the credit rating agencies as well. It gives a great positive impact on your credit rating if you repay the loan without fail.
However, the situation described above is an ideal one. Every time this does not happen. Had it happened all the time, then the number of npa in india would not have gone up.
Sometimes, the borrower cannot repay the loan amount. When installments stop, the financial company or bank starts chasing the borrower. It puts pressure on paying the installment regularly.
The reason behind the non-payment of installment could be anything. The business faces an unexpected loss. There is a change in the external environment that puts a negative impact on the business. If the business of the individual does not pay the loan, it becomes NPA or Non-Performing Asset.
There is no other choice than looking for a npa debt settlement.
The lender gives a one-time option to the borrower where he takes some time off and then settles the entire loan in one shot. The borrower gets some time for repayment. Hence, he accepts the offer readily.
When the borrower pays the loan, it goes into a ‘settled’ state. The credit rating agency also takes it into account and updates its records accordingly.
How does one-time Settlement happen?
When the lender is convinced with the legitimacy of the reason behind non-payment, it can consider offering a period of 180 days for non-payment of the installment.
However, it is only if the borrower is ready to settle the loan in one go.
A certain portion of the amount will be written-off so that it becomes easy for the borrower to repay the remaining amount. Since both parties sign the loan settlement agreement, the status of the loan will be “settled” after repaying the lowered amount. It will not be “closed” because the complete loan amount is not repaid, but the reduced amount.
Consultants who offer npa services can help borrowers in settling down the loan amount.
Impact of loan settlement on Credit Score
A borrower gets the services of npa consultant in india and successfully settles the loan amount, the information is passed to the CIBIL and other agencies that issue a credit rating.
You should not forget that though the transaction comes to an end after the settlement, it cannot be called ‘closure’
technically. The status is ‘settled’. It is reflected as a negative credit behavior. Therefore, the credit score drops. Since the information of loan settlement is stored for up to seven years, it hampers the repayment capability of the borrower. Even it is possible that the subsequent loan application may get rejected.
How can one deal with such a situation?
Some borrowers take loan settlement as an opportunity to pay less to the lender. However, they forget that this puts a negative impact on their credit rating. Hence, it is not a good idea to get swayed by that. The maximum effort should be made to pay the loan in full. One has to consider all other possible ways before considering a loan settlement. Put it as the last resort.
Try other ways such as extending the repayment tenure, revaluation of monthly installments, and so on. Going for a secured loan instead of an unsecured loan would be the appropriate way.
Non-performing asset or npa in india has been a pain in the neck for quite some time. While every sector is getting affected by this problem, the public trust in Indian banks has been shaken due to many failures.
The majority of these failures were contributed by misgovernance and corruption. It is needless to say that this impending catastrophe will put the economy under stress.
All these things keep the banking industry under a constant spotlight, but because of unflattering reasons. The risk has been aggravated by COVID-19 as several companies lost their businesses and failed to pay the loan installments. The government-mandated moratorium on interest payment and state-guaranteed loans put the system under tremendous threat.
It is not a crisis that has been ignored
The problem of NPA or npa management has not erupted overnight. Neither it is a problem that was not known. On the other hand, it was a known issue.
However, due to the improper policies and lack of ordinance, the problem became worst. It is estimated that the magnitude of NPA in the banking sector only will rise further.
It may go up to 11 percent of gross loans in the coming 12 to 18 months. It is estimated by global ratings recently. The financial institutions will face great difficulty in keeping the momentum under control. It is because the proportion of NPL (Non-performing loans) versus total loans disbursed has shown a great decline this year.
Moreover, there is a difficulty in identifying the real problem arising from the COVID-19 outbreak and others. Financial institutions have performed better than expected in the second quarter of the last financial year.
It increased the npa account settlement cases.
Six-month loan moratorium and the decision is given by the Supreme Court ruling barring from classifying borrowers as NPA were the reasons behind this situation.
All of these things will result in an increase in gross loans in the coming one to one-and-half years. From the current 8 percent levels, it will go to 10-11 percent.
There is an impact on the credit cost of the banking system as well. Experts fear it will go up to 3 percent this year and next year. The stress on banks for NPA will have to be reduced by taking special measures. Let’s understand the ways to limit it.
What can limit stress?
To limit the stress, a holistic approach will be required. The following three measures can be taken: • Government credit guarantee for businesses of small and medium magnitude • Resumption of economic activity • Resilient liquidity
Even if rigorous efforts are made by implementing npa loan takeover or other steps, it will take at least the fiscal year 2023 to materially recover the financial strength. Around three to eight percent of loans may get restructuring. Banks have built reserves and making extra provision for COVID. Like banks, collections have increased. It will benefit banks and reduce in risk premium. Such polarization will persist in the next one or one and a half years.
MSME or Micro Small and Medium Enterprises constitute a major part of the economy of India. The majority of businesses fall under this category with an estimated share of 8 percent. The sector gives more than 110 million employments and two and a half million jobs every year. The growth of MSME is vital for the economy.
It is quite obvious that npa in india is also contributed by the MSME sector the most. More MSMEs are facing the problem of the inability of paying their loans. In the most unfortunate scenario, they have to forfeit their businesses. Indeed, the banks have their limitations. They cannot afford to leave the defaulters as it is against the larger interest of the bank. However, it is essential to look into the matter from the larger perspective.
There is no need for hurriedly declaring the borrower as Non-Performing Asset or NPA and liquifying its assets. It will yield only 30 to 40 percent of the borrowed amount. Instead, the banks should work on a solution that will benefit the borrower, the bank, and the economy. It should be a win-win solution for all.
The npa debt settlement is one of the steps taken by the government to control the NPA situation.
Role of NPA consultant
When the macro, medium, or small enterprises default on their loans borrowed by banks, they have to face different consequences. Instead of deciding on the course of action on their own, enterprises should hire NPA consultants. They can assist the MSME to achieve a turnaround from the crisis with their npa services. The consultants can guide on the methods and ways to counter the situation.
What are the strategies obtained by the NPA consultant? These strategies are well within the periphery of the laws and regulations. They give a new life to the defaulters by restructuring the business. As per the definition of NPA, any organization that has defaulted the loan repayment for more than 90 days is called NPA. Banks or financial agencies can initiate the process of selling the mortgaged assets after the 90 day period.
There is an adverse impact of this. In an attempt to recover its money, the bank hampers the operations of the MSME. They paralyze the activities and put the MSME out of business sometimes. Entrepreneurs find themselves in a soup and remain at the mercy of the financial institute or bank.
A npa consultant in india can take the business out of trouble by following the right path. It can use the property as third-party security for the borrower. It develops a viable and workable solution so that both banks and borrowers can safeguard their interests. It makes sure that none of these parties should feel cheated.
NPA consultants after Covid-19 outbreak
The role of the NPA consultant becomes furthermore crucial after the COVID-19 crisis. As we know there has been a great dent in the economy after the lockdown, MEME is the most impacted sector. NPA consultant is not just an expert in npa debt settlement, but it knows how to select and structure the right distribution channel and do product positioning. It knows how to design the strategy for “push or pull” process. It knows the ways of managing working capital.
A consultant ascertains areas that add value by raising finance from different channel partners or by searching for sound business propositions instead of taking more money on interest.
The consultants can offer training to the people working in MSME. It can counsel the top management to promote strategic thinking. Consultants try to recover from the NPA situation by making their clients financially strong instead of projecting financial problems.
To give a resolution to stressed assets, the formation of the bad bank may help. Rather, it may play a key role in that, according to some experts. Analysts were assuming that the concept will kick off in the union budget and the finance minister did not disappoint them.
The move will help in realizing the stress of the management from recovering the stressed assets. It would bring transparency in the process. It will be the single entity that will derive decision-making as a lender.
It is needless to say that it will reduce the burden on national company law appellate tribunal as well.
What all can a bad bank do?
The bad bank will buy the stressed-out loans of banks owned by states. The volume of such loans is much higher than people think. Estimates say that it is in the magnitude of 4.5 lakh crores.
No wonder, the announcement of setting up a bad bank to deal with a high number of toxic loans was welcomed by everyone; bankers, finance experts, distressed asset managers, and even nclt lawyers Mumbai.
Still, the details are awaited, but it has raised expectations of a reduction in NPA for sure. When thing clears, it will make people further assured about it.
How much capital will be allocated to the new asset reconstruction company? How will be the process? What will be the modus operandi of the bad bank? Answers to such questions are still hidden.
Regardless of its nitty-gritty, the concept will definitely be going to reduce the headache of people handling npa legal matters.
Everyone felt that it is a step in the right direction. Surely it will reduce the time required to resolve NPA.
The establishment of bad banks will expedite the resolution of bad assets. When there will be bad loans taken over, it will enhance the ability of banks to lend to more productive sectors. It will spur growth and take the economy to new heights.
There has been a demand for the creation of a bad bank for many years. In the light of the economic turmoil after the Covid-19 outbreak, the demand was further aggravated. Since the spike in NPA was high, it was expected that the budget will have some announcements about the bad bank. And the government did not disappoint people.
Establishment of Asset Reconstruction Company will take over the existing stressed debt from banks and consolidate them to other potential investors as well as AIF or Alternate Investment Fund.
According to the government, there are plans to establish a holding company where banks can transfer the stressed loans. These loans can be sold at the price determined by the market.
According to the experts in bad debts and NPA, the step of setting up a bad bank will bring down the provisioning pressure. Public sector banks can clean up their books.
Everyone is looking for a better impact of the concept of Bad Bank, despite the fact that the details are still to be revealed. Further information is awaited.
The lockdown situation post-March 2020 has impacted every sector. The short-term impact everybody has seen, but economists say that the long-term effects will be far more severe than expected.
It has been observed that almost half of the outstanding bank loan accounts opted for a moratorium, the relief measure declared after a lockdown in India.
It is estimated that despite that NPA in india will show a surge in the coming years. The gross NPA ratio of all commercial banks will rise up to 12.5 percent by the end of the financial year. It means, there will be strong measures required to improve npa management.
RBI draws a further gloomy picture by speculating the NPA ratio reaching up to 15 percent.
What could happen in the future?
The actual impact of the moratorium is still unrated. It is uncertain and evolving. How it will affect ultimately is unknown. However, one thing is sure that banks need to strengthen the npa recovery process further to minimize the impact.
Experts believe that the pandemic has the capacity of amplifying the financial vulnerability much higher than expected earlier. If major economic contraction happens, then corporate and household debt burdens may increase further.
The impact is global and not limited to specific sectors. From the service sector to the retail loan sector, construction, retail, or gems and jewelry; everything will see a downfall.
Increasing disputes will result in more cases getting registered with nclt lawyers Mumbai.
It is certain that npa financial services will have to work hard to keep the situation under control. The efforts will have to be from both sides. At one side, it is important that liquidity increases in the market. On the other side, efforts will be needed to encourage the borrowers to repay the loan without fail.
It is easier said than done because fiscal revenues will see a hit due to lockdown and other disruptions. Also, expenditures will be under strain. There will be a tendency to delay the expenses.
With other things, bank credits will also get weakened further in the second and third quarters despite unlocking phases one, two and further.
With the increased cases of NPA and NPA-related disputes, DRT lawyers will have to deal with more disputes.
In short, the downfall will be far severer than estimated earlier. Several hidden impacts will come out subsequently. It is important that strong and effective steps are taken to tackle the problem.
What is an MSME (Micro, Small, and Medium Enterprises) loan? As the name suggests, it is a loan offered to small businesses or startups.
Since the objective of the loan is to promote new businesses, the payment terms are quite flexible. The repayment tenure changes from the case to case basis. Despite stringent measures, NPA in india is showing an increasing trend. Hence, financial institutes are keen to scrutinize the applications thoroughly.
To support the already stressed MSME after Covid-19 situation, the government has declared credit guarantee of 3 lac crores. It is going to bring a significant improvement in the situation.
The scheme will fund MSME and interested MUDRA loan borrowers with this money.
Under this scheme, the National Credit Guarantee Trustee Company Limited (NCGTC) will offer a 100% guarantee coverage for another 4 lakh crore to eligible loan seekers. The guarantee will be given in the form of GECL Facility (Guaranteed Emergency Credit Line).
On 1st August, the government widened the scope of this 3 Trillian scheme by making the upper ceiling of loan outstanding double. It also included loans given to professionals such as chartered accountants, lawyers, and doctors under its ambit.
The interest rates are offered based on the amount borrowed. It also depends on the profile of the applicant and the payment history.
The loan amount is sanctioned by banks and NBFCs after validating the eligibility criteria. The loans are unsecured loans.
As per the definition given by the Reserve Bank of India, MSME loans are loans given to business enterprises to offer support for finance, infrastructure, and other areas.
As mentioned earlier, the loan amount is sanctioned only if the enterprise fulfills loan eligibility criteria. It is important to know about the criteria in detail. Strict adherence to the process reduces the unnecessary burden of npa management later.
Also, there more than 200 thousand MSMEs, which have either NPA account or stressed accounts. To help such enterprises, the government has kept aside a reserve of another 20 thousand crores as subordinated debts.
It is guaranteed that all these steps will help MSME to overcome the situation and come out of NPA condition.
MSME loan eligibility criteria
Financial institutions and banks offer easy-to-meet MSME loan eligibility criteria to the borrowers. The loan induces additional capital to the business and gives it a boost. The loan can help entrepreneurs in meeting the big-ticket requirement to improve and scale-up the business.
The fund can be used in several ways:
To minimize the possibility of npa financial services need a long list of documents while processing the loan.
The loan can be given to the following categories:
The applicant should be an Indian resident between 25 and 66 years. The business should be in operations for three or more years.
Sales tax and municipal tax document
The Indian economy has seen the worst lean period because of the lockdown situation followed by the worldwide Coronavirus pandemic.
All sectors of industries have seen a stop in manufacturing. After the step-by-step unlock, industries are struggling with a shortage of labors and raw material.
No wonder it will hamper the npa account settlement process as well. Experts recommend the need for restructuring of loans to combat the situation. Surely nclt lawyers india will have to deal with an increased number of NPA cases in the future.
When the borrower is unable to repay the loan despite all efforts, he can approach the bank for restructuring. It happens only if the bank is convinced that the restructuring will address the existing stress of the loan.
Restructuring is a loan settlement process that entertains genuine borrowers, who are unable to repay the loan regularly because of the financial crisis. When a borrower defaults, his credit rating score affects adversely. Restructuring of the loan helps to remove the overdue amount and improves the credit score.
When the loan payment schedule is restructured, it matches the operational cash flow. Agencies that manage the funding for npa accounts observed that the cashflow shrinks for a certain period. However, it comes to the earlier levels after some time.
Real operational issues tide over by rescheduling of the loan.
It is another method of loan restructuring. At times, it happens that banks issue loans at a higher rate than the ideal rate. The reason for it could be several. Higher interest rates are not recommended, and they create the worst impact when the situations are adverse.
Borrowers may approach the financial institution for the reduction of the interest rate so that the loan can be repaid without any difficulty.
Rate reduction puts a positive impact on the project cost. IT makes the loan viable again.
When banks impose charge penalties or extra interest on the unpaid amount, it adds to the project cost. In extreme situations, banks waive off the excess interest as part of the restructuring of the loan.
NPA management has been always a matter of concern. Every economist and financial expert has different views about recovery and account settlement. Why is it such an important issue?
Well, it is because a non-performing asset is not just bad for the financial institute or bank that issues the loan, but also for the economy. It has been observed that the recovery of the NPA has worsened in the past decade.
There was an estimate that the NPA rate will reduce as the economy will improve. However, the pandemic situation has impacted the economy badly. Hence, there is no scope of improving the NPA soon.
In this situation, rigorous efforts should be made to recover non-performing assets so that banks and financial institutes can improve their condition.
Indeed, banks have been heavily relying on this code for the recovery and npa account settlement. Experts assume that banks will be able to release more than 25000 crores in the next five years. The overall NPA recovery rate will sustain at 33% or more, which is a healthy figure.
However, it is equally essential to strengthen the npa recovery process as well. Without that, the desired results will not be achieved.
The recovery tools can be Lok Adalat, legal proceeding under the SARFAESI act, and DRT (Debt Recovery Tribunal). Whatever method is used, the aim is to recover the amount as much as possible.
Both NPA recovery and debt settlement are important for the right functioning and financial well-being of a bank. Unless the loan amount is not recovered, it cannot be reinvested. Thus, the circulation of money does not happen.
A npa consultant in india helps in speeding up the recovery process. By recovering the outstanding amount, a bank strengthens its working capital. It achieves higher efficiency and capitalizes on the net profit. It is the reason, npa in india is the most concerning issue today. It is not just about unrecovered money but has various dimensions to it.
Though the process of unlocking has been initiated in different phases, corporates see a bigger challenge in the coming months. The biggest problem is liquidity and solvency. And another challenge is to make a budget for the next financial year. The costs will remain the same whereas revenues will be greatly stressed. Of course, it will put stress on npa management as well.
Businesses have been attacked from three fronts- the demand fallen, the supply chain got hampered and liquidity vanished. Though some measures were taken by the government to improve liquidity by infusing the same through the banking system. The main aim was to avoid job loss and eventual financial crisis.
The true effect of liquidity transmission will be visible only when the Micro Small and Medium Enterprises (MSME’s) will get benefited. So far, only large business houses are getting the fruits of the efforts. Also, banks are giving limited credit risk in the pandemic situation. So, there is no major positive effect as such. Experts suspect a surge in npa in india.
Large corporates will have a direct impact if they will not get demand from MSME as it is the essential element of the supply chain. Hence, liquidity flow has to be there up to the MSME.
MSME will have to rework the payment terms because their customers present less credit risk and can refinance the loans. Large corporates will have to do reverse factoring arrangements. Thus, MSME can monetize their receivables and control the situation in a better way.
It is important that a credit guarantee scheme is announced by the government. It will avoid the NPA crisis. Measures like wage subsidy can provide better liquidity reach. Most importantly, there should be efforts made to build more resilient enterprises so that they can sustain further episodes of pandemics.
So, what is the takeaway? It is preserving liquidity. Also, the government has to prioritize customers and products based on cashflow. The focus has to be moved from CAPEX to OPEX. It can be a gamechanger in boosting the economy and keeping the npa recovery process in control.
It is a revolutionary step by RBI to allow MSMEs to restructure their existing loans that have defaulted but not fall in the NPA category as on 1st January 2019.
Since MSME is more vulnerable to disruptive changes after the Covid-19 outbreak, this step will provide great help to them. It is being appreciated by not only the sector but across all businesses. Looking at the situation of npa in india, this step will support the economy.
The key elements of this guideline about loan restructuring are:
Since the policy does not entertain businesses that are already NPA, there is no adverse impact on the npa recovry process. Similarly, there is no adverse impact on the economy as well.
The move will not add any the burden on nclt lawyers Mumbai and the tribunal as it considers only non-NPA cases. This exercise will revive stressed businesses. It is a policy support for loan restructuring, which is a good thing for sure.
This move is quite good for the MSME sector. Now, the government runs an awareness program for banks and other lenders so that they make restructuring a part of lending program for MSME. Thus, it will come into the mainstream.
The severely impacted MSME sector will have some relief by this step at least.
There has been a lot of debate and discussion happened about npa in india.The standing committee of financehas raised serious concerns about the capacity of Indian banks to lend due to increasing NPA percentage. There has been another committee appointed to evaluate the performance of public sector banks about NPA and loan recovery.
RBI has also released guidelines for the timely resolution of the stressed assets. Regarding this context, the blog examines some underlying issues about the NPA and npa management.
Banks give advances and loans to the borrowers. A loan can be termed as a standard asset that is a loan where the borrower is making regular payments, and an NPA or Non-Performing Asset where the borrower stops paying the installments. A loan is considered NPA when the interest of principal repayment becomes overdue for 90 days or more.
In the last few years, there has been a phenomenal increase in the gross NPA from 2.3 percent to 9.3 percent. It means a large proportion of the bank’s asset is not generating any income. It means the profitability gets lowered and its ability to gain further credit diminishes.
Increasing NPA means a bank has to make larger provisions for loss. The bank has to keep aside extra money for paying anticipated future loss and npa account settlement.
The parameter of the bank’s profitability is its ROA or Return on Investment. ROA is the ratio of the net profit of the bank to its net assets.
Two types of measures are taken to address the problem of NPA. First, imposing regulatory means to resolve NPA per various laws, e.g., bankruptcy code and insolvency. Secondly, banks need to prescribe remedial measures regulated by the RBI for managing the NPA process in India.
In 2016 May, the IBC (Insolvency and Bankruptcy Code) was enforced to provide a time-bound 180-day npa recovery process. If a timely decision is not taken, then the procedure is adjudicated by nclt court.
Non-performing assets or NPA has shown a drastic increase in the past few decades, and it is considered a big threat to the economic growth in India. Post Covid-19, the situation seems to be getting worse.
In view of the various npa management policies being followed by the government to keep it under control, OTS or One Time Settlement is a prime one.
In OTS, the borrower proposes to settle all the dues at one shot and the bank agrees to accept a lesser amount if the payment is made in a single transaction. When banks do the npa account settlement in this way, they have to compromise on a portion of profits.
Still, One Time Settlement is considered better than the other methods of management of Non-performing assets.
The negotiations and settlement are done by the bank under a written policy document for loan recovery. However, it should not be missed that the OTS is not for every NPA account. It is the discretion of the bank to decide whether it should be chosen or not. Obviously, it is not applicable for deliberate defaulters.
Whenever a bank goes through the OTS path, there is a dent to the productivity. Hence, it is not an answer to the fundamental problem of NPA.
As far as the benefits of OTS are concerned, then the biggest benefit is the speedy recovery of loans and advances. It increases the liquidity of the bank and an easy flow of funds encourages banks to keep on the lending process.
When NPAs get settled through npa recovery process, the banks, financial institutes maintain good financial health. It further makes the whole economy healthy.
To reduce the npa in india, the government is encouraging One Time Settlement. Big, medium, and small units are benefitting of it. In case of the account not settling through the OTS path, banks or financial institutes are required to involve the legal process. To help this, there are several qualified nclt lawyers india who help the clients. Call an expert npa consultant in india to understand the finer points.
Buying a property is everyone’s dream. When one wants to buy a property that is under auction, you can save as much as 30 percent on the market value. The saving is substantial indeed. Looking at the increasing cases of npa in india, there are various opportunities for buying NPA properties. However, it is important that you tread with utmost care while doing that.
What should you expect from it? Well, you should always remember that it is a repossessed property that belongs to a default mortgage borrower. It has been taken over by the financial institution or bank under the npa recovery process. You can legally own it at a discounted value. But you must be aware of the risks associated to it such as:
Thus, the final amount that you pay may be more than the final bid.
Take the following steps to buy a property that has been auctioned under npa account settlement.
It is not a difficult thing to buy a NPA property, the only thing is you need some preparation. As the npa management becomes stringent in India, more such properties will be available for buyers. It will be a golden opportunity for those who want to own a property at a reduced price.
Finance Minister Nirmala Sitharaman in Budget 2020 has proposed to launch a scheme for giving subordinate debt to MSMEs stressing on the working capital challenge faced by them. The scheme is useful with respect to npa management and recovery.
Subordinated debt (also known as a subordinated debenture) is an unsecured loan or bond that ranks below other more senior loans or securities with respect to claims on assets or earnings. Subordinated debentures are thus also known as junior securities. In the case of borrower default, creditors who own subordinated debt will not be paid out until after senior bondholders are paid in full. Certainly, it will control npa in india up to some extent.
The government has asked the Reserve Bank of India to extend the debt restructuring window for micro, small and medium enterprises by a year to March 31, 2021, in measures aimed at imparting thrust to the MSME sector. It is proposed to introduce a scheme to provide subordinate debt for entrepreneurs of MSMEs. This subordinate debt to be provided by banks would count as quasi-equity and would be fully guaranteed through the Credit Guarantee Trust for the Medium and Small Entrepreneurs (CGTMSE).
This move is beneficial and will boost the financial health of MSMEs. Compared to other alternatives the subordinate debt will be less expensive. Also, it will aid to faster npa recovery process. So surely this is a welcome move and will enhance the economic and financial sustainability of MSMEs. However, the success of the model will hinge on the quality of the due diligence done prior to the lending. Even within the MSME sector, albeit it is crucial, the quality of the borrower will have to be maintained for this to be a long term model which can be supported by lenders notwithstanding the government of India’s support.
"An app-based invoice financing loans product will be launched. This will obviate the problem of delayed payments and consequential cash flow mismatches for the MSMEs".
Necessary amendments will be made to the Factor Regulation Act 2011 to enable non-banking financial companies (NBFCs) to extend invoice financing to the MSMEs through TReDS thereby enhancing the economic and financial sustainability
The MSME borrower should have less than Rs 25 crore outstanding as on 29.02.2020 Turnover of Rs 100 crore.
The tenure of the loan would be 4-years with 12-months moratorium on Principal repayment.
MSMEs require more liquid funds than large corporates, but banks and NBFCs are often unwilling to extend them the requisite line of credit due to scepticism around the MSME sector in general, and the added fear of bad loans.
Subordinate debt, though it carries a higher rate of interest, is listed as a long-term liability on the company books – it gives them more liquid capital to invest in their growth in the present. In case of any defaults, the entrepreneur is required to first clear the senior loans (known as unsubordinated loans) before the subordinate debt.
For lending institutions, subordinate debt fetches higher interest rates but is a bigger risk in the case of defaults. However, according to the Budget proposal, the subordinate financing will count as quasi-equity and will furthermore be guaranteed by the CGTMSE. The Trust’s funds will be augmented for this very purpose. Therefore, in the face of a government guarantee, the banks will not find it as risky to extend subordinate financing to the MSME sector. It will reduce the burden on nclt lawyers Mumbai.
The Indian government has decided to provide some financial relief to the MSME sector in the form of the “Fund of Funds (FoF) Scheme.” This scheme was announced by Nirmala Sitharaman, the Finance Minister of India, on 13th May 2020. As per the announcement, the aim of the FoF scheme is to infuse ?50,000 equity into MSMEs.
The scheme will cater to around 25 lakhs MSMEs spread across India. The corpus that this scheme has been set up with is around ?10,000 crores. It is a welcome move in the background of high npa in india.
Indian micro, small and medium enterprises that have an ‘AAA’ rating. The triple-A rating is indicative of high credit-worthiness. It is the highest possible rating that is assigned by a major credit rating company?—?like Crisil?—?to an issuer’s bonds. It shows that the issuer (MSME company) has a good track record of meeting their financial obligations and also has the lowest risk of default.
The Fund of Funds scheme is intended to primarily approach the issue of shortage in equity (growth capital) as well as revenue for MSMEs. The scheme will primarily aid those businesses who are in their nascent and initial stages, where there are almost no prospects to raise funds through the help of professional corporations or venture capitalists. The scheme proposes to buy upto 15% growth capital in high credit MSMEs. Better health of MSME will help in making the economy strong and strengthening the npa management.
In terms of structure, the Fund of Funds scheme will be managed by a ‘Mother Fund’ in addition to a few ‘daughter funds.’ It has been stated that FoF may be operated by the ‘National Small Industries Corporation’ or another governmental body. The scheme’s structure will aid in leveraging ?50,000 crores at the levels of daughter-funds. In tandem, these funds will enable MSMEs to grow in capacity and size. The Fund of Funds scheme will also encourage MSMEs to list themselves on the central board of Indian stock exchanges.
Within the next two years, India’s MSME Ministry has been striving to grow the average rate of turnover of India’s village industry to ?5 lakh crores from its current ?88 thousand crores. According to Gadkari, the FoF scheme offered by the government for MSMEs is going to aid in achieving this target in a huge way. MSME village industries include India’s khadi sector who is expected to play a big role in aiding this goal as it is entering the arena of exports.Agencies offering DRT legal solutions and nclt lawyers Mumbai are preparations to handle the additional demand to manage NPA disputes if any.
Don’t worry about funding of NPA accounts, get the best NPA services from NPA Consultants, Reach out to us today.
Unveiling the first tranche of economic stimulus to help businesses during the Covid-19 pandemic, Finance Minister Nirmala Sitharaman on May 13 announced collateral-free loans up to Rs 3 lakh crore backed by government guarantee. Meant to help businesses suffering from a severe cash crunch, the Government has since the announcement come out with the guidelines on how the scheme will operate key details of the scheme. This move will surely reduce the possibility of npa in india.
The 100% collateral-free MSME loan is being called the Emergency Credit Line Guarantee Scheme (ECLGS), which is being provided by the National Credit Guarantee Trustee Company (NCGTC) to banks, NBFCs and Financial Institutions (FIs).
According this scheme, every eligible MSME or business enterprise, gets a pre-approved sanction limit of up to 20% of loan outstanding as on 29th February, 2020. This is in the form of additional working capital term loan facility (in case of banks and Financial Institutions), and additional term loan facility (in case of NBFCs). This is a special scheme to help small businesses battling the economic impact of Covid-19 and includes Pradhan Mantri MUDRA Yojana (PMMY) borrowers. It will help in bringing down the pressure on of npa recovery process.
All business enterprises or MSMEs that have a combined outstanding loan across different banks, NBFCs and FIs up to Rs. 25 crores as on 29.2.2020, and when the annual turnover of the firm is up to Rs. 100 crores for FY 2019-20 is eligible for the Scheme. Proprietorship, partnership, registered company, trusts and Limited Liability Partnerships (LLPs) are all eligible under the Scheme, but only the loans taken for the business is being covered. Any loan taken by a promoter or director in his personal capacity will not be covered under the scheme.
What is important to note is that the Scheme is valid for existing customers of a bank, NBFC or FI. This means this scheme is not for new borrowers. Also, the loan account should be less than or equal to 60 days past due as on 29th February, 2020 and the borrower has not been classified as SMA 2 or NPA by any of the lender as on 29th February, 2020. A borrower must also be registered under GST, unless the business is not required or exempted from having a GST registration.
It is essential to consult nclt lawyers Mumbai to know exact terms and conditions.
The maximum amount eligible under this scheme either in the form of additional working capital term loan facility (in case of banks and Financial Institutions), and additional term loan facility (in case of NBFCs) is set at 20% of the total outstanding loans up to Rs 25 crore as on 29th February, 2020. To arrive at the total outstanding, only on-balance sheet exposure like an outstanding amount in working capital loan, term loa.
To ensure that the scheme is beneficial to the borrowers and the cost of borrowing is kept low; Banks and FIs link their lending rate to one of the external benchmark rates prescribed by RBI plus 1% subject to a maximum of 9.25% per annum. Similarly, NBFCs cannot charge more than 14% as interest for the loans under this scheme
This facility is available for borrower from May 23, 2020 to 31st October, 2020, or till an amount of Rs. 3 lakh crores have been sanctioned, whichever is earlier.
The loan under this scheme is extended for a period of four year from the date of disbursement and there will be no pre-payment charge if a borrower wants to repay early. There will also be no processing fee for such loans.
What is important to note is that a there will be a moratorium of one year on the principal repayment, but interest payment will continue during this period. The principal repayment will then be converted into equated instalments spread across the remaining period, ..
NPA consultant in Mumbai is single window solution for Npa in India. Do not let the non performing assets be a nightmare for you.
Non-performing Assets or NPA has been pain n the neck for quite some time in our country. Because of various loopholes in the system, companies and individual lenders used to get huge loans that were eventually turning into npa. As per new regulations, banks can now sell the stressed assets to other lenders, financial institutions, or non-banking financial companies.
Npa recovery process is a move that will speed up the resolution process and help banks in recovering huge money. Banks have been asked to frame clear policies and guidelines to sell stressed assets. It is assumed that this process will clear up the balance sheets and remove trillions of rupees marked as a non-performing asset.
Top management of banks has been told to review and find out assets for sale at the beginning of the financial year. The early it is identified, the better the price a bank gets. Some people think that banks should not be in the business of resolving or buying stressed non-performing assets. However, it came out to be a useful and effective idea.
In the year 2014, a framework was released to liberalize the rules and norms for selling and buying non-performing assets. For example, buyouts leveraged for specialized entities. Also, other steps were taken to improve the functioning of NPA recovery with the help of nclt lawyers mumbai.
Studies indicate that the process of selling and buying of the asset has brought a big change in the situation. Amongst other important steps are the establishment of national company law appellate tribunal, and DRT or Debt Recovery Tribunal.
RBI has asked banks to draft and outline clear policies on deciding the policies of valuing their assets that are required to be sold and to seek for DRT legal solutions. For exposure of more than 50 crores, RBI directs banks to maintain two external valuation reports.
Reduction in the gross npa of banks is the amount that was written off and ultimately debited to profit and loss accounts. RBI or The Reserve Bank of India submits the reports to the government on the trends and progress of banking in India.
This report analyses the trends and progress of the banking sector. There are separate captions in this report, such as perspectives, policy environment, performance, and operations of commercial banks and development of various banking and non-banking financial institutions. Banks and financial institutions have been taking the help of nclt lawyers Mumbai to resolve the cases.
There has been a great impulse in the credit demand because of the slowdown in the domestic as well as global market. Let’s look into some common issues. Banks have improved after a long, stressful time of economic stress. But the challenge is not limited to banks only. There are challenges for non-banking companies and cooperative banks as well.
According to experts, issues such as the resolution of stressed assets, frauds, and weak corporate governance also need to be addressed. Then only, it will be possible to reaffirm the robust financial sector in our country. Establishment of national company law appellate tribunal has given forum to the banks where they can raise disputes and get resolution.
These are some ways of minimizing systematic risks by seeking the help of DRT legal solutions. So far, performance indicators for banks are considered capital adequacy, liquidity standards, fund and recoveries, and of course, non-performing assets as well. The Gross NPA ratio of commercial scheduled banks has dropped after 2019 after a consistent increase for a few years. The credit goes to the recognition of npa recovery process and the effective ways of resolving it. Studies show that the problem of NPA has been tackled better by understanding the issues better.
India faces a massive and rising challenge in order to create decent employment opportunities for its citizens, especially the youth. The unemployment rate was 7.20% in January and rural areas had a 9.7% unemployment rate while urban areas had 5.97%. The adoption of a pragmatic approach has become rather essential to tackle the increasing unemployment. A major concern currently is the NPAs in MSMEs. These MSMEs are responsible for employing millions and contributing over 28% of the GDP of the India economy.
Thus, closing down of these corporates gives a hard blow on unemployment. There has been an unexpected increase in NPA numbers due to the change in classification of NPAs. The current NPA norms need to be revised and employment generation schemes need to be adopted. In fact, the CSC (Common Service Centre) is promoting schemes implemented by the Ministry of MSME which aims to help independent and growing entrepreneurs.
Moreover, another scheme includes MSMEs inviting applications from start-ups, technocrats, students, and MSMEs from all over India. Those who get selected will be offered funds up to Rs. to Rs 15 lakh per approved idea. In addition, there is also ECL Finance Ltd which has signed up for priority sector lending to MSME customers. It will permit banks and NBFCs to co-lend to a broader set of enterprise owners. Most importantly, in the Union Budget 2020, our Finance Minister stated the importance of this sector and how it keeps the wheels of Indian economy moving, thereby allotting Rs 900 Crore debt-funding for MSMEs.
Thus, these floating schemes for new start-ups and ventures will help in employment generation. In addition to that, it becomes rather essential to also work for the revival of existing stressed units to maintain employment much similar to creating new opportunities.
New ventures have helped greatly in creating new employment opportunities. In 2019 alone, there were more than 1,300 start-ups helping India maintain its rank of being the third-largest start-up ecosystem in the world. These start-ups helped create an estimate of 60,000 direct jobs and 1.3-1.8 lakh indirect jobs.
While employment generation won’t come easy, a pragmatic approach can solve it to a great extent. Killing NPA accounts to promote new ventures for employment generation will consume more time and efforts. In fact, if we worked to enhance the MSME NPA that has already generated employment, would prove to be more fruitful. With that being, a lot of norm revision and policy adoption will become crucial to deal with the current crisis of rising unemployment.
NCLT or National Company Law Tribunal is a quasi-judicial authority which was created under the Companies Act 2013. The purpose of it is to handle corporate civil disputes.
NCLT has equal powers as a court of law or judge, which objectively determines facts and decides cases with the principles of natural law and justice. It concludes in the form of orders. The orders become a remedy to a situation and correct incorrect legal penalties or costs. National Company Law Tribunal affects the duties, privileges, and legal rights of the affected parties.
Though strict judicial procedures and rules do not bind parties, it follows the principles of natural justice to decide the cases.
National Company Law Appellate Tribunal or NCLAT is an appellate tribunal. It is an authority which deals with appeals that arise out of the decisions of the tribunal. The purpose of it is to correct the errors made by the tribunal.
NCLAT is an intermediate appellate forum. According to the procedure book, it is possible to challenge the decisions of the appellate tribunal in the Supreme Court about loan settlement. Any party which is not satisfied with any order released by the NCLAT can file an appeal to contest the decision.
The appellate tribunal reviews the decision of the tribunal, and it has powers to modify, confirm, or set aside the same.
NCLT has primary jurisdiction, and NCLAT has appellate jurisdiction. NCLAT is a higher forum than NCLT.
NCLT Mumbai is presented with the witness and pieces of evidence to make the decision. NCLAT reviews the decisions taken by NCLT and examines it from the point of view of facts and law.
The primary task of NCLT is to find facts and collect pieces of evidence. NCLAT, on the other hand, decides cases based on witnesses and evidence already received by the tribunal.
The RBI has given an estimate that the asset value of banks will take a further bad shape by the end of September 2020. The gross NPA ratio for commercial banks may go as high as 9.9 percent from 9.3 percent at the beginning of the financial year. The reason is obviously the nationwide lockdown followed by an outbreak of Covid-19 pandemic. The next two quarters will be equally bad as the situation is not going to be under control by the end of 2020. The situation of npa in india is going to be worse than expected.
Of course, the reasons are beyond our control and driven by the global scenario also. However, the government is taking concrete actions for better npa management. This blog talks about some measures.
Other than that, various corrective measures are being taken to keep NPA under control. A few examples are, a lot of focus is on preventive methods such as considering CIBIL score before indulging in fresh lending, provide the benefit of the latest schemes announced by the Government to all eligible borrowers as soon as possible taking strict actions against NPA accounts who have intentionally defaulted, and so on.
The efforts will bring down the percentage of NPA and improve the economy.
It is said that justice is universal, and it doesn’t discriminate between the rich and the poor.
However, it is a fact that the process of getting justice is quite costly. Not everyone can bear the expenses incurred in legal procedures such as loan settlement.
Free legal aid, therefore, is considered the fundamental need in many countries.
In India, there is a possibility of getting free legal aid for people who belong to the category of Scheduled Caste and Scheduled Tribe.
Also, victims of human trafficking, women or children, people with disabilities, and people becoming victims of mass disaster or ethnic violence can demand free justice.
Other than these predefined criteria, it is possible to get free aid in very exceptional conditions or scenarios. Npa lawyers normally don’t fall under this category.
If a person qualifies the eligibility criteria of the LSA act, then he or she must contact the appropriate body constituted under the act.
Some of the forums where one can get free legal aid are:
Here, the application is made to the DRT after paying off the required fee. There are 33 DRTs in 22 locations such as drt mumbai. Under Section 19 of the RDDBFI Act, all prerequisites are mentioned.
The application has to be submitted to the DRT that falls under the same jurisdiction region where the bank or financial institution runs the business.
The legal service authorities in the districts are supposed to establish legal aid clinics in every village or cluster of villages as per the size of it.
It is all the more essential in areas where social, geographical, and other barriers exist.
Like medical colleges provide medical services to people, law colleges and universities provide legal aid to people.
It is part of legal education, and there are no charges incurred.
Several Non-government organizations offer free legal services to people and help them in getting justice in cases like npa account settlement.
Nowadays, it is possible to get legal advice to people through online services for npa management.
Recovery of bad loans has been a pain in the neck for financial institutions and banks for a long time. Due to the loopholes in the system and the absence of stringent laws, there was a massive increase in the percentage of loans turning into Non-Performing Assets or NPA.
Increasing cases of NPA became a cause for concern, and it leads to the formation of DRT or Debt Recovery Tribunal after passing the RDDBFI Act in 1993.
DRT handles loan disputes above 10 Lakh. It deals with the appeals against the order passed by DRT.
Application filing can be done in two ways.
Either you can do it directly to the DRT or through SARFAESI; there are two ways of applying.
Here, the application is made to the DRT after paying off the required fee. There are 33 DRTs in 22 locations such as drt mumbai. Under Section 19 of the RDDBFI Act, all prerequisites are mentioned.
The application has to be submitted to the DRT that falls under the same jurisdiction region where the bank or financial institution runs the business.
DRT has the power to pass an interim order against the defendant, restricting him from transferring or disposing of the property without the assent of the tribunal.
The term Bad Loan has been historically used in the banking and financial sector for ages. It is a loan account that is pending for repayment and overdue for a long time.
In India, after the implementation of Narsimhan Committee recommendations about npa management, the term NPA or Non-Performing Asset is being used.
We must understand one thing that all bad loans are NPA, but all NPA are not bad loans. There is a thin line of demarcation between the two.
As far as NPAs are concerned, there are two types of it-willful NPA and non-willful NPA.
Willful NPA is bad because it is a loan taken by people who have the capacity to pay but they do not pay.
Non-willful NPA is where the borrower becomes defaulter because of reasons beyond his control, e.g., business failure or natural calamity.
It is possible to nurse back the account to good health by additional financing. Exceptionally, non-willful NPA turns into a bad account if npa account settlement doesn’t happen.
An NPA is also a loan on which no payment has been made for a period of 90 days or more. The same holds true with a bad loan as well.
Hence, technically, they are the same things. However, there is a possibility of receiving money when the account is classified in the category of NPA.
Whether you call it NPA or Bad Loan, it is not at all a desirable thing. Efforts should be made to keep both of them at the minimal level.
With the new regulations and rules, it has become difficult for a borrower to become NPA. Lenders take necessary precautions by hiring npa lawyers to check the credit risk before lending the money.
It is not possible to get loans if the credit score is below a certain level.
When the economy of a country is going through a boom period, everything is considered fair. People don’t want to look into the aspects that may become a problem in the long run.
Loans were available on-demand, and there was not much attention towards the recovery of it. It caused poor recycling of funds and a deleterious effect on the deployment of credit.
Due to the lack of stringent processes and loopholes in the system, the non-recovery of loans became a major issue. Bad loan or npa in india affects not only the availability of credit but also the financial soundness of a bank or lender.
clt Mumbai to adhere to the service rules related to the appreciation of procedural law or evidence.
The detrimental impact of NPA is on the profitability of banks. On one hand, banks stop earning, and on the other hand, they also attract higher provisioning as compared to standard assets.
Statistics say that banks provide around 25 to 30 percent additional provision on incremental npa account settlement, which has a direct impact on the profitability.
NPA impacts the economy in many other ways.
NPA increases pressure on the recycling of funds. It reduces the lending ability of a bank. It contracts the money stock.
A bank is forced to lower the interest rate on deposits and levy higher interest on advances.
It causes a major setback to the business of banks.
A bank has to maintain adequate capital on its assets, which are risk weighted. It has to be done on an on-going basis.
When NPA increases, it adds to risk-weighted assets.
Increased NPA harms the bank business and profitability. Banks do not earn profits, and they are forced to curtail the dividends.
It reduces the confidence of the customers.
Thus, npa management is necessary to reduce the impact on the Indian economy.
Why was there a need for enforcing Indian Bankruptcy code in the year 2016? br>
Before 2015, the insolvency resolution in India used to take on an average of 4.3 years. It was much higher than other countries like the UK or the USA, 1 year and 1.5 years respectively.br>
The reason for the delay was due to the time taken by the legal processes and confusion because of the lack of clarity about the bankruptcy framework for npa account settlement.
The current code is applicable to individuals and companies both. It aims to provide a time-bound process to resolve insolvency cases.
The creditor or debtor may initiate the resolution process. It is administered by the insolvency professional.
The process lasts for 180 days, and it is prohibited to take any legal action against the debtor during the period.
The insolvency professional forms a committee of financial creditors that will make a decision about the future of the outstanding debt.
If the debtor goes into liquidation, the insolvency professional administers the process of liquidation.
The order of precedence is as follows:
It is more than 18 years, the National Company Law Tribunal or NCLT has been in existence. It was introduced under the framework of Companies Act 1956 but notified under Companies Act 2013.
NCLT is a quasi-judicial authority that deals with corporate disputes of civil nature. It works on the lines of the ordinary court of law. The orders formed by it can assist in rectifying something wrongly done by any corporate or resolving a situation or levying penalties.
It is not required for nclt Mumbai to adhere to the service rules related to the appreciation of procedural law or evidence.
NCLT is empowered in taking steps like canceling the registration of a company, dissolving a company, de-registering a company, and so on.
NCLT has been instrumental in resolving the case of npa in india.
NCLT is empowered to hear grievances of rejection of companies to transfer the securities or shares.
NCLT has been given the rights of provisions with respect to the deposits under the companies act.
Investigations about the disputes of npa funding in india for a company have been given to NCLT. The investigation ordered by NCT can be conducted within or outside India.
The provisions are drafted for offering or getting help from the court, other investigation agencies, or foreign agencies as the case may be.
NCLT can freeze the assets of a company so that it can be used when the company comes under scrutiny or investigation. It is also possible to order the investigation on the request of others.
To convert a public limited company into private limited company; it is required to have confirmation from NCLT.
It has the power under section 459 of the act for imposing specific restrictions or conditions and granting approvals to such conditions.
The banking sector has been hit badly due to the rising of Non-Performing Assets or NPA.
The problem is predominant in the public sector, but the private sector banks and financial institutes have also not been spared. It triggers the need for more effective npa account settlement across banks.
Here are some causes of the phenomenal rise in NPA.
The recovery tribunals have been established to control the non-performing assets. When they don’t work efficiently, banks suffer heavily. The profitability and liquidity of banks come down.
What does it mean? It means people who can repay their loans but do not repay intentionally.
These people should be identified, and adequate measures should be taken to bring down the defaulted amount as much as possible.
Giving the case to expert npa lawyers is the only solution.
How can natural disasters increase NPA? Well, it is easy to understand. When natural calamities hit, borrowers are unable to pay their loans,
Thus, banks are required to make large amounts of provisions and reduce profit margins for the management of npa funding in india.
When industrial projects are inappropriately handled, or there is a shortage of resources, industries incur big losses.
Hence, banks that finance such industries end up with a low recovery of outstanding loan settlement. It reduces liquidity and profits.
When banks do not follow the cardinal principles of lending, the loan is bound to be NPA.
By following these practices, it is possible to get rid of the problem of Non-Performing Loans.
Banks should have proper management information systems and technology in place to make real-time decisions. When these systems are not in place, there is a possibility of poor credit collection.
Every bank should analyze the strengths, weaknesses, opportunities, and threats to keep the NPA under control. Every project needs to be evaluated against parameters like profitability, long-term acceptability, and viability. These are some prominent causes of higher NPA.
Banks are essential in the economic development of any country. They mobilize savings and deploy funds to productive sectors.
Lending is the activity that finances the agricultural, commercial, and industrial sectors.
However, it is a known thing that when the banking system becomes fragile, it hampers the development of the economy and brings economic crisis if remedial actions are not taken.
In the Indian context, the banking system until the 90s was predominantly managed by the governments. Regulations and political interference were rampant, and the entry to the outside world was restricted.
The “closed” banking system was, however, “open” for those who had access to the system.
There were no standards established, and opaque balance sheets were used as tools to cover the deficiencies.
It resulted in the deterioration of the banking system for common people. The major points of concern were low profitability and the high percentage of Non-Performing Assets or npa in india.
• Banks are following a more transparent process to handle loans.
• They need to spell out the absolute figures of NPA and ratio on a quarterly basis.
• Banks introduce provisioning norms on the principle of conversion. It means a bank has to anticipate no profit but provide for the losses.
• There have been more strict norms to take security from borrowers against the money lent by them.
• The practice of ‘evergreening’ the bad loan by giving further advance to the borrower was the main reason for the high NPA ratio. The practice has been stopped after the new laws were enforced.
• Special tribunals and judiciary systems have been established to carry out npa account settlement on a fast track basis. It has brought down the delays in giving decisions for NPA disputes.
These measures help banks and financial institutions for npa management to keep it under the permissible limits.
Securitization is the process of connecting the capital markets and npa financial services markets by converting the financial assets into capital market commodities.
It reduces the intermediation and agency costs.
What is the benefit of securitization? Since it integrates two strong forces of the economy, the capital, and financial markets, the benefits are incredible.
It creates financial assets like mortgage financing companies or banks in the financial markets. These assets are conventionally refinanced on an on-balance sheet.
As mentioned earlier, its benefits are many. It converts loan relationships into capital market commodities. Hence, it increases the power of the capital market manifold.
Though some criticism has been there regarding stretched credit creation by securitization, It happens because of the shift to marketable assets from nonmarketable assets.
Some legal aid services feel that it results in borrowers sustaining longer in economic expansion. They are exposed to contractions more.
However, these impacts can be minimized by making necessary corrections and taking precautions.
Three reasons make securitization great for investors.
The impact of securitization on the cost of funding also.br>
The proposition is quite clear. To reduce the risk, the security rights of a creditor have to be strong. When securitization lowers the credit risks, it leads to lowering down the funding costs eventually. br>
It affects the npa funding in india positively.br>
Therefore, securitization plays a key role in channelizing money in the economy. It is more important to understand its importance and making the best use of it.
When you face issues with NPL or Non-performing loans, it is not just a regulatory issue, but a way to enhance profitability and keeping good health of the balance sheet.
When you manage non-performing loans, it means you will be replacing it with sound exposure Since lower earnings of NPL will substitute the rates charged on new business, the interest income will go up.
Some other benefits are lowering the capital requirement and funding costs which will be coming from the drop of NPL.
One can seek help from npa financial services for steps needed to face trouble with non-performing loans.
It would be best if you had a clear strategy to deal with the problem of Non-performing loans.
What is involved in the operational assessment? It includes the assessment of internal capabilities and resources within the bank to manage the issue.
You need assess the external environment as well to know if there are any solutions the bank has to deal with the balance sheet issues.
It would be best if you analyzed regulatory implications as well.
It is very much essential to derive a strategy for NPL so that short, medium, and long-term goals can be attained. You need to set qualitative and quantitative targets accordingly.
Consultants who offer npa funding in india can help in the assessment as well as considering the changes and other implications.
After completing the operational assessment, now it is the turn to implement the operational plan. To embed the strategy; it is required to have a proper governance structure within the bank. A structured management process enables regular reviews and independent monitoring.
Financial institutions where the percentage of NPL is more than 15% are considered to have high NPL problem. It is important to follow a clear process to achieve an optimal decision.
The solution can be a mix of ‘on-balance-sheet’ solution to an off-balance-sheet solution.
By following these practices, it is possible to get rid of the problem of Non-Performing Loans.
The Reserve Bank of India or RBI gives more flexibility and time to the banks to consider how they want to treat a defaulter account or NPA in India?
Now, the banks will have 30 days to declare an account as NPA and another six months to execute the recovery plan.
Banks that have sufficient capital to set aside can delay the implementation plan.
Lenders are required to enter into an Intercreditor Agreement or ICA within one month of the review period.
A bank can delay the resolution plan, but it has to incur steep provisioning for it. In case the window of 180 days is breached, the bank should keep additional provisioning of 20 percent of the outstanding.
In the situation of not implementing the plan within one year of the default, an additional 15 percent provision or 35 percent of outstanding is to be provided by the bank.
The revised NPA norm gives banks 30 days from default for npa recovery.
With the prudential framework for the resolution of NPA, the RBI gives enough operational freedom to banks for restructuring as per their wish. It is the freedom from the so-called ‘one-day default’ program.
Since it is sufficient to start the resolution process by lender representing 75 percent of value and 60 percent of lenders by number, the process becomes easy and straightforward.
Are you facing financial crunch and fearing to get labeled as NPA (Non-Performing Asset)? Well, there is no need to get into the pressure of banks or financial institutions.
There is no need to give them a complete walkover. There are several ways to sustain the pressures and get some time to correct the situation and bring back your business into action.
You are a defaulter and not a criminal. The bank must follow the proper process and give sufficient time to repay the dues.
Under the SARFAESI Act 2002, the bank classifies an account as NPA if the repayment is due for more than 90 days.
The lender is supposed to issue the 60-day notice to the defaulter. If the borrower doesn’t pay within the notice period, the bank may proceed for selling the asset.
Before auctioning the property to recover the dues, the bank has to issue one more notice. It specifies the fair value of the asset as assessed by internal valuers.
You have the right to object if you feel that the property is undervalued. It is also possible that you find a buyer who is ready to give a price that is higher than the value estimated by the internal valuer.
Eve during the notice period, you have the right to make the representation to the concerned officer to put forth the objection.
The officers need to reply within a week or so, with valid reasons of rejection.
As mentioned earlier, you are a financial defaulter and not a criminal. Hence, you have the right to get proper treatment.
First, you should get calls from the banks. The callers can’t humiliate, harass, or intimidate you in any case. Even there are norms for calling hours by the representative.
Violation of these rules will have severe implications if you launch a complaint against it.
Thus, there is no need to go under the pressure of banks. You have various ways of avoiding it.
Debt settlement or loan settlement programs are administered to enhance profitability. When you settle the debts, you pay less amount than what you owe.
When you begin the plan, you are already behind the debts. Therefore, the settlement company asks to save a particular amount. It also asks to stop the payments during the negotiation process.
You put yourself purposely in default. The objective of a loan settlement or debt settlement process is to save sufficient cash to pay the amount in full when the settlement amount is reached.
Once you make the payment, your account no longer remains a default account. It is considered satisfied.
Thus, it is clear that the process of debt and loan settlement is quite simple and easy. The only thing you need is to go in a structured and systematic manner.
f you study the report published by IMF in 2006, then it reveals that the public sector banks have settled around one-third of the NPA cases for which notices were issued under the SARFAESI Act 2002.
Around 33000+ cases where notices were issued by the subsidiaries of the State Bank of India and other 20 nationalized banks, around 10000+ cases were settled.
Though the success rate looks impressive in terms of the number of cases, it is not that impressive in value. The total amount recovered is 500 crore, which is quite less compared to the total outstanding amount of 12000 crore rupees.
The total recovery of SBI and its subsidiary banks was 80 crores as against the total loan outstanding amount of 4700 crores.
Punjab National Bank sent 3000 notices worth 700 crores and recovered around 40 crores.
Canara Bank issued 1000 notices for 350 crores rupees and recovered 35 crores.
Indeed, the success rate in value is not very significant; the long-term impacts of the act are there.
First is, banks have become confident that they will be able to recover the money in the future. Also, defaulters have realized that it will not be possible to defy the notices sent by banks in the future.
Thus, the act has undoubtedly brought a good impact on the NPA cases. It is sure that with the act becomes further stringent in the coming years, the amount of recovery will also increase proportionately.
What is NPA or Non-Performing Asset? As per the definition of RBI, assets on which the instalment of principle, interest or both remain overdue for more than 90 days are classified as NPA.
Banks and financial services get adversely affected if the number of NPA cases goes high. Sometimes, it becomes mandatory to use legal aid services to facilitate faster recovery.
When the fundamentals are not correct, the problem becomes chronic. It destabilizes the confidence of investors and depositors.
Higher NPA forces a bank to reduce the rate of interest so that it can increase the profit margin. Once a bank goes into losses, and it doesn’t take steps to correct the problem quickly, it is almost impossible to survive.
It is the reason NPA has to be kept under control, whether you are a bank or financial institution.
In the past few decades, the credit growth to the industrial sector in India was far higher than the GDP growth. It resulted in a higher proportion of the NPA in industrial sector as compared to other sectors.
Due to that, banks were reluctant to finance the industrial sector, which hampered the growth.
The credit to the MSME sector (Micro, Small, Medium Enterprise) was reduced considerably.
As other factors also hampered the growth, the overall impact was devastating. Though efforts were made to correct the situation by encouraging npa funding in india, the economy has got a setback due to a higher NPA percentage.
It is important that the banking sector remains strong if a country wants to remain economically healthy. In fact, it is a significant prerequisite.
When the NPA percentage goes high, first of all, the banking sector becomes fragile. Obviously, it is not a good sign.
In a country like India, the infrastructure sector accounted for the biggest share of NPA. Banks and financial institutions are not ready to fund it. Infrastructure projects got jeopardized without money. It caused further damage to economic stability.
Another sector that got a great hit was the food processing sector.
Since the impact is enormous, every economy should take proactive measures to reduce it.
Banks and financial institutions issue loans to clients with an expectation of receiving installments regularly.
It is good for both lenders and borrowers. However, at times, there are situations when lenders do not repay the loan. Either they pay intermittently or become defaulters
To facilitate the banks and financial institutions in dealing with such cases, the government of India established Debt Recovery Tribunal or DRT after the passing of the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI), 1993
These legal aid services have been quite helpful in the past. With the establishment of DRT, it became easy to recover loaned money from the customers.
The petitions against orders passed through DRT are presented before the DRAT or Debts Recovery Appellate Tribunal (DRAT).
Five such appellate tribunals and 32 debt recovery tribunals in 23 places exist all across the country.
The primary goal is, of course, to recover the money from borrowers, which they owe to the lenders.
The tribunal settles down the cases of recovery from NPA as confirmed by the lender under the guidelines of the RBI.
There is a recovery officer who guides to execute the recovery certificate passed through the presiding officers.
According to npa lawyers, the DRT must follow the legal process by emphasizing quick disposal of the cases and fast execution.
As far as the applicability of the act is concerned, it is applicable in the whole country.
Also, it is applicable where the due amount is below 10,00,000.
The act is applicable when the lender files the original application for recovery.
The central government can establish more than one tribunal to carry out the jurisdiction under this act. The government can also stipulate the area where the tribunal may carry out the jurisdiction.
When you run a business, chances are you would have borrowed money from banks or financial institutions.
When you have a loan, it is crucial not to default its repayment.
It is qualified as an NPA or Non-Performing Asset based on two delinquency norms- 90 days and 120 days.
If you are facing trouble in loan settlement, insolvency and bankruptcy code. Then, don’t worry! We have solution for npa management.
How will you avoid defaulting your business loan and going into the NPA category?
Why is there a signific increase in NPA during recent years?
Some of the driving forces were external such as the reduction in global commodity prices that resulted in a slower pace of exports. Some are intrinsic to the banking sector in our country.
The majority of the NPA loans were originated in the mid-2000s because the economy was flourishing, and the outlook about the business was very positive.
The loans were available effortlessly. Hence, business houses were more dependent on external borrowings instead of internal promoter equity. When the projects underperformed, borrowers lost their paying capability. On top of their defaulted loan, new loans were given to pay off the interest.
These loans were considered as Non-Performing Asset at a later date.
When the volume was small, there was no big problem. However, it became severe when it increased phenomenally.
If you are a business owner who has taken a business loan, then there should be some measures taken to avoid getting into the NPA category.
In the era of communication, it is unacceptable to miss a loan repayment date for the insufficient fund. Though it doesn’t take you directly into the defaulter category, if you miss it once, it eventually leads there when it becomes a recurring phenomenon.
The account should contain enough balance to make sure you don’t land into the defaulter category. If you don’t pay within 90 days of the due date, there is a risk of getting into that.
Hence, always maintain balance in the account if you have given the mandate for automatic deduction.
Let the lender know if you are missing a repayment date. Instead of not informing and hoping that you don’t default, it is better to inform the lender in advance.
You can reschedule the debt if possible.
By following these steps, one can save the loan from being defaulted.
Before going into the details of NPA impacting the economy in India, let’s understand the definition of NPA or Non-Performing Asset given by the Reserve Bank of India (RBI).
As per the definition, an asset that stops to generate income for the bank is marked as Non-Performing Asset.
As far as statistics are concerned, then the public sector banks have the non-performing assets valued at more than 400,000 crores or 61.5 Billion USD.
It is almost 90 percent of the total NPA in India. The private sector banks account for the remaining 10 percent.
The global and Indian economies were booming between 2004 and 2009.
Hence, Indian firms borrowed furiously to reap growth opportunities. Hence, commercial credit was almost doubled during this period.
The investment was made in every sector-telecommunication, power, steel, and aviation. Everyone speculated 9% or more growth. Banks were lending extensively, hoping to get good returns in terms of interests.
However, the financial crisis started in the year 2008. The profits dropped, and the government banned many projects.
Due to the excessive delay in environmental permits, the infrastructural sector got the most setback. It resulted in a shortage of supply and volatility in prices of raw material.
Npa consultant” a team of Npa activist has stated the post affects of the Nclt law. He states that the MSME's are not able to gain the benefits of the drt mumbai and nclt mumbai.
Thus, the damage is severe. It takes a lot of time for the economy to come out of the crisis. Not only the institutional borrowers, but individual borrowers, also feel insecure about it.
The negative impact is extensive.
There has been a lot of noise in India about the NPA crisis.
The reports of March 2018 say that the public sector banks accounted for around 86 percent of the total NPA, whereas the private sector banks shared the remaining chunk.
The ratio of the gross NPA to advance was 15% in public sector banks. Indeed, it is a crisis. Since the last ten years, the increase in the NPA has been staggering.
When did the problem start, and what were the triggering elements for it?
Economic experts put the responsibility of it partly on the credit boom that happened during the year 2004 to 2009.
Since the economy was on a rising track, nobody thought even for a second to give credits to the industries. Investments were being made, and all sectors were flourishing.
However, things began to go wrong in the early days of 2007-2008 when there were global financial crisis and further slowdown in the year 2011-12.
When the rupee depreciated, companies had to borrow higher amounts in foreign currency. Tightened banking norms in 2014-15 marked a watershed.
Npa consultant” a team of Npa activist has stated the post affects of the Nclt law. He states that the MSME's are not able to gain the benefits of the drt mumbai and nclt mumbai.
Public ownership of banks was not up to the mark. Incompetence and corruption are the two shortcomings that resulted in the poor appraisal of credit risk.
Incidentally, the Gross NPA/Gross Advance Ratio was almost similar across public and private sector banks. Thus, it was not the public sector banks the culprits.
The explanation lies elsewhere.
The iron and steel, mining, infrastructure, aviation, and textiles were the five sectors that have the maximum exposure.
For example, PSBs had higher exposure to the five most affected sectors — mining, iron and steel, textiles, infrastructure and aviation (30% advances and 53% of stressed advances).
Roughly, the 85 percent of advances accounted by PSBs were from these sectors. The financial crisis and land acquisition and environmental issues delayed the infrastructure projects.
Adverse court judgments paralyzed the telecom and mining sectors. The steel sector got the massive hit by the huge dumping from China.
Everyone needs money. From industrialist to builder and entrepreneur to farmer; the best and the simplest way to arrange money is lending it from financial institutions.
When the receiver and the lender enter into a transaction where the money is given with an agreement of paying it back along with interest, it is called a loan.
Organizations and people may adopt any method for this. They may take a loan from banks, credit societies, non-banking financial institutes, and even individuals to fulfill their business needs.
When two parties get into the contract, they are forced to comply with the rules and regulations that make it binding on them.
If the borrower fails to repay and becomes a defaulter, then the lender has the rights to use legal actions.
The blog talks about the legal actions the financial institution can take in case the debtor defaults in paying the loan amount.
Speedy recovery of loan is essential for health functioning of a financial institution.
Another important aspect that needs consideration is the NCLT or National Company Law Tribunal that came into existence in 2002 under the framework of Companies Act, 1956 in India. However, it took almost a decade to get the constitutional validity due to several reasons. Ultimately it got notified under the Companies Act 2013.
NCLT is a quasi-judicial authority incorporated so that the corporate disputes of civil nature can be dealt well. However, there is a difference in the functions and powers of it as compared to the Companies Act.
Though the Supreme Court preserved the constitutional validity of NCLT, it rendered specific provisions as violation of the constitutional principles. Just like the normal Court of Law, the NCLT also obliged to deal the things fairly and without any bias. Also, it has to determine the facts of each case in accordance with principles of natural justice.
It offers conclusions in the form of orders. It assists in resolving a scenario, rectifies something done wrongly, and levies penalties and costs. It may alter the rights, obligations, privileges and duties of the concerned parties.
Hence, it is important that the lenders keep a close watch on it and take necessary actions timely before the loan becomes an NPA. The lesser is the percentage of loans converting into NPA, the better it is for a financial institution.
Though the law gives various ways to recover the loan, it is better that the situation doesn’t occur. As they say, “prevention is better than cure.”
ndia has emerged as one of the strongest economies in the past three decades. The overall growth has been outstanding. The Micro, Small and Medium sector or MSME is amongst the top contributors in the economic development.
However, it is also a truth that the increased number of NPA (Nonperforming Assets) in the sector is quite high.
It is a reason to worry because it causes harm to not only the balance sheet of the finance company or lender, but also a negative thing to the economy.
To overcome the situation and to make the laws stringent, a comprehensive insolvency and bankruptcy code has been formulated by the government.
The code aims at giving powers to the creditor when the debtor does a default. At the same time, it ensures that the business is saved during the debt settlement process.
Thus, the lender doesn’t end up with a loss, and the business is also not compromised.
When a case gets escalated to the company law tribunal, it follows a time-bound and systematic procedure for insolvency resolution and liquidation.
Thus, there is a significant improvement in the debt recovery rate and the revival of industries.
When a bankruptcy lawyer takes the case of a business that has become NPA, he studies it in light of the new code.
The insolvency professional deals with the commercial aspects such as:
A resolution plan is prepared so that the burden on the judiciary process is reduced. Thus, the delay is avoided.
When the default happens, the control moves to the creditor. There are strict guidelines to complete the things in a time-bound manner.
Experts say that when the case is resolved in a finite timeframe, the chances of saving the business from liquidation increase.
Whether it is an NPA consultant or lawyer, everyone works towards protecting the company from liquidation. Enough time is given to resolve the problems.
When the NPA consultant takes the control, he proposes different options based on the specific scenario.
It depends on the decision of the business owner, which path to be followed. The rules and regulations, laws and provisions are balanced and unbiased.
By choosing the right path and strategy, the business can come out from the troublesome situation.
Everybody launches the business with great enthusiasm. The objective is to become a successful entrepreneur. However, situations don’t turn favorable always.
At times, it happens that the business doesn’t perform in the way it is expected to. The business owner can’t even pay interest on principal on loan and become an NPA (Non Performing Asset).
Well, it is not a situation that one should feel shameful about. You always run the business with the utmost sincerity. The circumstances become unfavorable; that’s it. The task of npa recovery is difficult for financial institutions and borrowing agencies; there is no doubt about it.
Is it the end of the business? Will the lender take serious actions and push you towards bankruptcy? Not always. When the borrower lends money, he knows that this situation may happen.
The lender takes several precautions where the money can be recovered without getting a hit.
For you also, there are many helping hands like NPA consultant. He knows the tricks of npa management.
He is a person who knows the ways of dealing with this troublesome situation. After reading about your case, he can come out with a few practical solutions.
Since the government is also concerned about the increasing cases of businesses turning into npa in india. NPAs, there have been several changes and improvements happened in the laws and regulations, and npa resolution.
In India, where micro, small and medium enterprises contribute 8 percent of the GDP, it is essential to control the NPA percentage as much as possible.
When a large number of MSME are unable to pay the loans and become NPA, it is a dent to the economy as well.
Instead of hurriedly liquifying the assets of the borrower, an NPA consultant finds an amicable and workable solution that benefits both the borrower and the bank. He assists you in achieving a turnaround from the financial crisis and guides on the methods and ways to counter the situation.
The methods adopted by the NPA consultant are well within the permissible laws. He can give a new lease of life to the NPA company by restructuring the business.
With the help of these well-articulated means, your business can sail through the turbulent time and make progress. Once the crisis is over, it can reach new heights of growth.
The problem of NPA or as acronym-ed Non performing asset is becoming a major loan settlement threat to Indian economy and it's mainly on the MSME side. When it comes to a situation relating to NPA; MSME owners get really petrified as in when compared to large corporates sector.
Here are a few possible solutions:
On September 28, 2018 our finance minister Mr. Arun Jaitley launched a new portal to fast-track the loan process. The loans can be approved within 59 minutes with an amount of 1 crore for the MSME sector. The business only needs to submit GST and income tax details without the entrepreneur have to visit the banking branch.
- Now most of the entrepreneurs have a common mindset that whenever bank grants loan to them. They have granted some favours on the MSME entrepreneurs without making
them realise the rate of interest charged on them is pretty much higher rate when compared to other corporate's. The amount of collateral's kept for providing loan is also pretty
With such a huge amount of loan the common MSME entrepreneur rather than focusing on the business keeps getting distracted by pressure inferred to them by the banks.
Forgetting the primitive ideology that the bank is for the business and not the other way round.
- This problem can be solved only when the entrepreneur will focus on his business, rather than focusing on the repayment of installment for the loan. There are many legal ways to buy time to delay and Dr. Viswaas Paanse has helped many MSME owners for the same. He says, “ Focus on the business and the leave the bank problems on the experts”.
- He is an Ex banker man holding a PH.D degree from United Kingdom (U.K) and many more degrees aside from that. Having 2 decades of experience in NPA. Dr. Paanse is a thorough professional when it comes into dealing with NPA and have helped in revival of many sick MSME with his experience and qualified team members.
We know how humiliating it is to get calls from recovery agencies. Yes, it is perhaps the most embarrassing and frustrating moment. Nobody understands that you did not take the loan to become a defaulter. Your intentions were pure and pious.
However, the financial institutions and recovery agencies don't work based on emotions. For them, the contract papers and your credit ratings are more important than your financial condition.
Hence, they try to disgust, pressurize and harass up to such extent that you start thinking negative about everything.
Don’t lose your patience and don’t take hasty steps that make the things further complicated.
We understand that the bankers and financial institutions survive on the interests earned by them; it doesn’t mean they should leave aside the basic business norms.
It is a fact that financial institutions are becoming more and more coercive. They don’t bother about anything.
As a result, we see thousands of small and large businesses putting down their shutters and being uprooted.
What is the reason? It is because they fail to pay their loans. Even if they default for a few months, recovery agencies take charge.
Don't let it happen to you. Don't pay until we call you. We will help you in planning the repayment and adjusting financial priorities. We give a comprehensive guidance on NPA finance and alternate finance.
We deal with the legal issues, DRT and SARFAESI issues. Our experts look the possibilities of saving assets mortgaged by the finance company. We derive amicable settlements.
Well, there is no fixed solution for it. Rather, it is a situation where one size doesn’t fit all. Our approach is to find out what went wrong and how to correct it as fast as possible?
Mumbai | National Company Law Tribunal (NCLT) established under the Insolvency and Bankruptcy Code 2016 (IBC), which was initiated by the Narendra Modi Government with the main object of “Doing business with ease” has hardly served MSME sector, as the proprietary concerns and partnership firms are still outside the purview of the NCLT. In fact, the NCLT was set up by the Union government under IBC to help the NPA accounts to resolve their problems and restructure the business while maintaining the employment. However, presently it is useful only to the corporates.
MSME sector which is mainly in the form of proprietary and partnership forms are being neglected, alleged Dr. Visswas Paanse, Ex-banker and NPA activist. Talking to reporters Dr. Visswas said the small and medium entrepreneurs other than corporates who are NPA’s were not getting any opportunity to revive their business under The Board for Industrial and Financial Reconstruction (BIFR) and now under IBC as well. Even at present the corporates which are applying to NCLT, either under section 7, 9, or 10 are not getting dates for 3-4 months. According to law they should get an opportunity to be heard within 15 days. The corporates are thus deprived of taking advantage of this new law and banks are getting undue upperhand for destroying the existing businesses. In fact, the IBC is meant for revival of business but such delay is helping banks unduly, use this time for coercive recoveries. The Process of resolution under IBC has to be completed within 6 months, from the date of admission which may be extended to another 3 months but presently even this 9 months are not enough and are always deferred for more than 9 months. Now it is interpreted as the time limits under IBC are directory and not mandatory.
This is not with the spirit of IBC, says Dr. Visswas As of now, NCLT is flooded with insolvency cases of big corporate houses including Essar Steels, Bhushan Steel and Bhushan Power and Uttam Galva etc and the existing infrastructures of NCLT are being overburdened. The NCLT also gives the priority to big and known corporates as big debt are involved in it and the small and medium entrepreneurs are being neglected without any reasons. The recent judgment of Supreme Court whereby personal properties mortgaged by the promoters to obtain the corporate loans have been kept outside the provisions of IBC is against the spirit of IBC. When the corporate loans are based on these collateral securities why should they be kept outside the purview of IBC, Government should take note of it and make the suitable amendment in the Code, demands Dr. Visswas. This is also detrimental for arriving at practical resolution of borrowers, as the physical possession of the personal mortgaged properties are taken by the bank and used exclusively for their own recovery purpose. About the appointment of the Resolution Professional (RP), Dr. Visswas argues that the banks and financial institutions appoints only their selected Panel members as RP and remove the IRPs appointed under section 7 or 9 by other creditors or by the borrowers under section 10. It shows the banks have no trust on the RPs or IRPs which are appointed by others. “Isn’t it against the basic framework of IBC and doubting the integrity of RP or IRP as professionals? “- questions Dr. Visswas. The provisions should be made unless there is a prima facie evidence that an IRP is behaving partially he should not be removed. Any empanelment of RPs or IRPs by the banks or institutions either officially or unofficially should be banned as they are supposed to be impartial
Well, for most of us now it is clear that the banks are there to recover their money at any cost pulling out different maneuvers. Small businessman's are really petrified with the chunk of loan they have on their shoulders. Their one of the biggest reasons to panic, as it is a matter of existence which may even lead to declaration of bankruptcy and ultimately liquidation of company.
MSME's are really under the impressions of the banks; not because that they are guilty but they are unaware of certain laws such as NCLT as acronymed (National Company Law Tribunal) and DRT (Debt recovery Tribunal) built to protect them. However, most of the experts do not stand by this laws as it requires a huge haircut which may even be at 90%. Which is nothing but a heavy pinch to pocket of the public.
However NCLT sheer focus is on the survival of the company. As it's a clear indication that the survival of the company will in turn pay off the debts as in such borrowed by them.
The law is not really old; as it was established during late 2016. However, it's effects clearly states that, since the law came into being 2434 fresh cases have been filed under NCLT and 2304 cases are for seeking winding up of companies have been shifted to High court. Out of these cases, 2750 cases have been disposed off and 1988 cases were under review during December, 2017. According to a revert at the Lok Sabha by minister of the state for finance, Shiv Pratap Shukla.
NPA consultants is a team of thorough professionals, under the leadership of Dr. Vishwas Paanse, an exquisite personality and experienced name in the market makes it sure that every client who enters through the doors must get properly enlightened about their rights and get the proper resolution for the malpractices regarding N.P.A procedures.
Who are the most significant contributors to the NPA for the loans issued by the banks? If you think they are the retail customers, then your assumption is wrong. The corporate and industry loans are the biggest defaulters.
Out of the total credit to the industry sector, corporate and industrial loans generate 75 percent of the total NPA whereas retail loans generate only 4 percent NPA.
In hard statistics, 4.70 lakh crore worth of NPA are there out of the gross 6.42 lakh crore belongs to corporate institutions.
It means out of 100 rupees given as a loan, 35 to 45 turned into NPA. The figures are terrifying.
The statistics reveal some interesting facts
Amongst the top Gross NPA ratio declared so far, Indian Overseas Bank and IDBI Bank show in the range of 40 to 45 percent whereas Allahabad Bank and Bank of Maharashtra closed in the range of 35 to 40 percent.
Large corporate accounts contribute to the bigger chunk of NPAs. In the two years 2015 to 2017, the gross NPA under the industry-large category of the scheduled commercial bank increased almost five times.
Banks like HDFC that predominantly focuses on retail lending shows the gross NPA in the range of 0.74 percent only whereas Yes Bank shows 3.28 percent. Yes Bank predominantly focuses on corporate customers.
Hence, a separate strategy is proposed to gear the smaller banks so that they lend primarily to retail. It will be done by swapping assets and curtailing the unprofitable branches.
Admittedly, all these steps will help in controlling the situation.
Reasons behind high NPA in corporate loans
What are several reasons behind the high ratio of corporate loans going in the category of NPA? Failure of business due to some reason, incorrect risk assumption are the reasons.
In the PSBs, the exposure of corporate loan is almost 50 percent whereas the retail exposure is 15 percent.
Several loan categories fall in the retail loans; personal loans, car loans, and home loans. Loan to the agriculture and car loan also fall into the category. The payment track record is good in these loans.
It is the reason; smaller banks have been instructed to reduce the corporate loan exposure to below 40 percent by the end of the fiscal year 2018-2019.
Also, the corporate loan exposure shouldn’t cross beyond 25 percent of the risk-weighted assets. The banks should focus more on retail lending than institutional lending.
The classification of an asset as a Non-Performing Asset or NPA is done in accordance with the guidelines issued by the Reserve Bank of India under the Banking Regulation Act 1949 or any specific guidelines of a financial sector regulator issued under some other law for a temporary duration.
At least one year has lapsed from the date of commencement of the corporate till the date of such classification of the insolvency resolution process of the corporate debtor.
When a person pays all the overdue amount along with interest and any other charges if applicable, he is eligible to submit a resolution plan. It is important that the payment should be made before submitting the resolution plan.
Nothing applies to the resolution applicant if he is a financial entity and not the corporate debtor.
The directors or promoters of the company are not eligible to submit a resolution plan when the debtor is classified as NPA and more than 12 months have been passed after the classification.
In the latest amendment, there is an exemption given for the clause c and h of section 29A of this code. It says that the code is inapplicable to the resolution applicant as far as the insolvency resolution process is concerned; regardless of it is micro. Small or medium enterprise.
The proposed Micro, Small and Medium Enterprises Development (Amendment) Bill, 2015 classifies the enterprises based on their annual turnover. It says that
Since the amendment hasn’t been approved by the Lok Sabha yet, as of now the extant classification and definition of the enterprise under the MSMED Act 2006 must be referred.
Experts say that for an enterprise that is engaged in the work of rendering or providing services, the classification based on cost is as follows:
The government of India has taken several steps to make the MSME sector exciting and vibrant. The policies are formulated to help the MSME units in launching the business successfully.
Not only that, the policies help the units to sustain in the long-term.
However, every business can’t run successfully for a long time. Due to distinct reasons, it stumbles and falls.
The units fall sick and sink ultimately. The reasons of sickness could be many.
Sometimes, it becomes sick because of internal causes such that planning, implementation, and production.
Sometimes, it happens because of uncontrollable external reasons such that infrastructural and financial bottlenecks, marketing constraints, etc.
A sick MSME unit affects not only the owners but puts a negative impact on national resources. It also becomes a cause of unrest sometimes.
Reviving a sick MSME It requires a detailed process to revive a sick MSME unit. Though it is quite a complex process, here is a list of important steps.
After that, an application is submitted to the CAP. It includes the following things:
When the committee receives an application for CAP from the lenders or bank, it should send a notification to the MSME.
The information that is needed from the MSME is:
The MSME should respond within two weeks of submission. If it is not done, then the committee takes one-sided decision.
The commit takes a decision to adopt under the CAP and tell the enterprise about it.
The implementation of the plan should be completed within the following timelines:It is a brief description of the procedure. Actual procedure may vary on a case to case basis.
If at all it is decided to recover CAP, the recovery measure is initiate as early as possible. The account is transferred to SAM team. It is a brief description of the procedure. Actual procedure may vary on a case to case basis.
Mr. V. Ramakrishnan had given personal guarantee to a corporate debtor with the Appellant-State Bank of India. He is considered as the personal guarantor by the State Bank of India under the subsection (22) of the section 5. As he is the personal guarantor the bank invoked its right to recover an amount of Rs. 61, 13, 28, 785.48/- under the Securitization and reconstruction of financial assets (SARFAESI ACT, 2002) and enforcement of security interest act, 2002 in 4th August, 2015. The corporate debtor challenged the note before the high court of Madras and was dismissed on 17th November. Possession note was issued by the State Bank of India on 18th November, 2016. The corporate debtor invoked I&B code and interim resolution professional was appointed by issuing Moratorium period. But the State Bank of India continued to take the essential measures under SARFAESI Act, 2002. The corporate debtor filed an application for stay at the Adjudicating Authority, Chennai and was successful to get the stay until the Moratorium period is completed. The I&B code of 2016 has been classified into three parts
The second point that is “Insolvency resolution and liquidation for corporate persons” states that the liquidation proceedings and insolvency resolution must be imposed only on corporate persons but not on any individual even if it is personal guarantor also the law is not applicable for him. Subsection 8 of the section 5 in the I&B code states that, even if the money wasn’t paid to the bank in time and has been disbursed making it a financial debt, the bank cannot impose any insolvency or liquidation proceeding against the personal guarantor as stated in the 2nd part of I&B code.
The part 3 of the I&B code gives a clear picture about the insolvency resolution and bankruptcy for the individuals and partnership firms. If a case has been filed against the corporate debtor and another case must be filed against the personal guarantor and make him involve in the case, then it is mandatory to file the same Adjudicating Authority hearing the insolvency resolution process or the liquidation process under the subsections 2 & 3 where the insolvency resolution process or bankruptcy process is proceeded for the personal guarantor. This gives a provision for the financial creditors like State Bank of India to proceed against the personal guarantor and invoke their right to claim the possessions of the personal guarantor. Approval of resolution plan which means the Adjudicating Authority is satisfied with the details provided by the corporate debtor, then the resolution act is imposed on the debtor, stakeholders, personal guarantors and the employees of the debtor. The Approval of resolution not only gives the Adjudicating Authority to impose the act on only debtors but it also states that the employees of the debtors are also considered. The “Moratorium” is for both corporate debtor and personal guarantor and thus the banks cannot interfere in the issue till 18th September, 2017.
The problem of NPA or Non Performing Assets becomes a major threat to the Indian economy. The way it sets an alarming precedent, the banks must find better and effective ways of recovery than relying on IBC or SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest).
If we look at the world ranking, then the situation in India is nothing less than terrible. The country ranks third amongst the big economies affected by bad loans.
The NPAs accumulated by Indian lenders is far higher than the top economies like the UK, the USA, Japan, and China.
Referring to the hard figures; the 2017 statistics indicate that the NPA of Indian banks was as high as 40 lakh crores.
In spite of the red flag issued by the RBI and the government and solutions like IBC implemented in 2016 (which was supposed to be a game-changer); the situation hasn’t changed much.
Faster recovery of bad loans is still a dream.
The government is reinstating section 396 with a hope of making the situation better. It is considered a superior recovery tool as compared to IBC and SARFAESI.
How will the situation change now?
Now, a defaulting company can be merged with other healthy company of the same group so that the assets can be used for settling down the debts.
Of course, the other company should be financially healthy to take this additional liability.
Experts say that this route is more effective and convenient as compared to IBC. There, the NCLT (National Company Law Tribunal) and DRT (Debts Recovery Tribunal) proceedings require a substantial haircut by the banks; which is, in turn a loss of the public money.
Voices against the concept
Not everyone is supporting the concepts. Some economists and finance lawyers feel that it is against the fundamental concept of an independent limited company.
Not everyone is supporting the concepts. Some economists and finance lawyers feel that it is against the fundamental concept of an independent limited company.
When two companies are merged just for the sake of recovering debts of the defaulter company, the rights of shareholders of the healthy company are not protected.
They have to take hit in spite of performing well which is not justified at all.
Experts feel that if it happens frequently, then people will hesitate in investing money.
The new reforms are getting implemented to improve the NPA ratio. However, it is essential to check all the aspects beforehand.
Against the decision taken by the government to bar the companies that failed to file the annual returns or financial statements in the MCA21 online registry for consecutive three years from accessing the online registry, several cases were filed before several courts.
As a result, a need has been arisen to give the defaulters another chance to make the default good. The government has introduced a new scheme called as Condonation of Delay Scheme, 2018 which will be active for three months duration starting from 1st January 2018 to 31st March 2018.
During this period, all defaulting companies will be given a chance to file the overdue documents that are due for filing up to the 30th June 2017.
The companies that have been removed from the list of defaulters under the section 248(5) of the act will be excluded from the list. The same is applicable to the companies that have been struck off from the list.
Procedure to be followed
According to the notification issued by the Government of India, the following procedure will be followed:
The Condonation of Delay Scheme 2018 brings a good opportunity the defaulter companies. As such, there is no declaration about the possibility of extending the same. Hence, nobody should miss it.
India had many reasons to celebrate recently. Other than the Moody’s rating, India demonstrated a sensational drift in the Ease of Business rating by jumping 30 spots to secure a seat amongst the top-100 nations.
It is the biggest leap so far by our country and a special achievement indeed. Not only because it is the first time we have done this but also because there have been many questions raised by the economists, politicians, and business community post demonetization and GST.
The report clarifies all the doubts about the international acceptance of these decisions. Since the rating is given by World Bank, there is absolutely no reason to question it.
The index uses 10 specific parameters to evaluate 190 countries. India has shown improvement in six out of ten indicators which is quite impressive.
From all standards; it is a remarkable achievement. No wonder it gets praise worldwide.
How is it significant for SMEs?
It is a big motivating factor indeed for those who want to launch a new business. Especially, Small and Medium Enterprises (SMEs) face more hurdles while getting necessary approvals to start the business.
Big corporate houses have a closer relationship with the political parties and bureaucracy as compared to SMEs. Hence, they get permits, no objection certificates or other approvals more easily.
However, when the Ease of Business ranking says that India has improved a lot, then we can assume that the path is smoother and clearer for small entrepreneurs.
The report says that India is one of the few economies that have improved because of the structural reforms.
We must remember that the rating doesn’t consider GST because it was not implemented when the data was gathered by World Bank.
Experts feel that the next year’s ranking may improve further because GST is amongst the best reforms that happened in India post-independence.
SME owners are more than happy to see the improvement
For those who own SME business or aspire to be a successful entrepreneur, it is an enthusiastic moment. After the initial setback and aftermaths of demonetization, SMEs can expect a great time now.
As the government assures that the reforms will continue in the coming years, India is certainly going to be a business-friendly country.
The rating is the result of efforts taken by the government in the past few years. It will stop the criticism and doubts about the economic reforms and changes.
Best NPA consultant in India
The NPA (Non Performing Assets) is a loan or advance given by the bank for which the interest or principal payment that remained overdue for a certain period. NPA (Non Performing Assets) is one of the most talked about topic and it is a major concern mainly for the banking industry. There have been a lot of measures taken and implemented in order to keep the control and reduce the increase in the number of the NPAs.
Carrying the non-performing assets on the balance sheet places a burden on lenders. The non-payment of the interest or principal amount reduces the cash flow, which can disturb the budget and decrease earnings of the lender. Also, to compensate the losses the banks may charge higher interest rates on some products. The NPA settlement challenging and it is a major problem for the banking sector. The rise in the NPA results from several factors that include-
The RBI (Reserve Bank of India) has restructured the standard provisioning and laid certain stringent regulations to control the further increase in the NPA in India. The financial industry professionals consider that these guidelines will to some extent will help manage help resolve the matters related to NPA effectively.
While the Banks and the Financial Institutions have been vested with the stringent powers for recovery of their dues the safeguard needs to be provided to the borrowers in order to protect their rights and wrongful use of such powers that vest the DRT with the authority. Apart for the large corporate, The SMEs are important for the economy. They not only help in generating employment but also are the major contributor to the economic growth. It is imperative to provide them support to help them flourish. When an SME falls to make payment and falls under the category of NPA the bank consider to resolve the matter in the fastest manner by going to the (DRT) Debt Recovery Tribunal and SARFAESI Act proceedings to recover the debt.
However, the banks must not take the undue advantage of such powers and take a visionless approach to deal with NPA. The unfair practice must not be encouraged and besides, they must follow a valid approach offering the borrowers a chance to reason as there are circumstances in business with leads to problems which cannot be resolved in a short duration of 90 days. A well considered complete opinion from professional might be of immense help in dealing with the complex NPA matters.
If there is any problem related to the NPA (Non Performing Assets) for any business then it is better to avail the service of a professional NPA consultant in India. These companies have the expertise and can help solve the intricate issues related to the NPA in a proficient manner. These companies have professionals who have vast experience in the financial industry and with their top-notch negotiation and expertise will help manage the NPA and will also add value to the business.
There are many companies that offer high-end solutions mainly related to NPA. These companies are committed to providing state-of-the-art solutions to our clients. They are backed by a team of professionals who are and seasoned financial professionals and experienced NPA Consultants having vast experience in the financial services. They are expert in the area of expertise and offer comprehensive solutions to their clients.
By browsing the web you may come across many companies offering the services in this area but only a few are competent to provide quality service and solutions. Therefore, before availing the service of any company randomly one must do a petite research and hire a reputed and experienced company.
Experience Financial Consultants in Mumbai
The stability in the banking Industry is imperative for the economy. One of the major problems that defy the stability of the banking system is the Non Performing Assets (NPAs). There has a lot of progression seen in the banking system but the NPA settlement remains the biggest challenges. The NPA is a loan or advance for which the payment has not been made for a period of 90 days.
It is a biggest risk to the banks when their customers stop making payments that badly affects the banks account books and reduce the cash flow for lenders which result to potential loss in their income, affects competitive position of the bank, result to increase in the interest rates, and as well reduce the available capital to provide subsequent loans to other customers.
With the increase in the levels of the non performing assets in the financial sectors, there are certain stringent rules and regulations laid down by the governing authority to have a control over the increase in the number of NPA in India.
The DRT (Debt Recovery Tribunals) and SARFAESI Act helps the banks and financial institutions to recover the dues after issuing the notice to the borrowers who fail to repay the interest or principal amount and appoint a person to manage the NPA concern.
However, there have been certain controversies related to the NPA recovery where banks have been alleged to be engaged in coercive practice for recovery. However, with the restructures provisions and regulations it has made the banks to reduce the chances of increase in NPA and recover the money from borrowers in a longer time period.
The SMEs are one of the major contributors to the growth of the Indian Economy. In case an SME falls under the category of NPA then the banks directly opt to recover the amount through the DRT or SARFAESI where the borrower may not be in a position to get any relief from the debt recovery. Sometimes the businesses face the problems that can be cured within a short span of time. However, there some business circumstances that affect the business efficiency and need more time for recovery and get the business back on the track. However, if the SMEs are not supported then it will kill them which ultimately will have the impact on the SMEs productivity levels and also will kill the employment opportunities. Taking a visionless approach towards NPA will hamper the SME industry growth. Therefore, there is the need to find the robust solution for dealing with the situation and giving a fair chance to help then stand the SMEs stand again and contribute to the economic growth.
There are many companies offer their services that make the every aspect of the NPA simple and help resolve the issues related to the NPAs effectively. These companies have proficient financial consultants in Mumbai who have vast experience in the finance industry and are aware of the dealing with the intricate NPA matters in a proficient manner. They analyze each and every aspect thoroughly and offer high-end solutions to help deal with NPA. They offer solutions by strictly following the regulations and also help in recovering NPA in a rightful manner.
By searching the web one can find many companies but there are only a few companies capable to provide reliable service. For that reason, before hiring any company randomly it is crucial to do a little research and hire an experienced company that has relevant experience in the industry and offers quality solutions.
We have heard a lot about the insolvency and bankruptcy code bill passed in the parliament, but very few people know about it at length. There is a lot of confusion and misunderstandings about it.
Some people feel that it is very much necessary and important whereas many people consider it just another code which has hardly any significance on the ground.
Well, one thing is pretty sure. The implementation of this code will ensure that the cases like Vijay Mallya will not be repeated in future if we implement the bankruptcy and insolvency act properly.
People will not have room to make huge frauds and simply fly away without paying a penny. They will be liable and responsible for the people they deal with and their money.
The government knows that the big fraudsters make use of the loop hole and fly away. Hence, the code tries to bridge all the gaps and make it foolproof.
It will save the banks from the so-called “bad loan crisis”
Though people feel that the banks are solely responsible for their own problems, it is not a right assumption. Banks are bound to the norms, rules, and regulations. If a person takes a loan by submitting all legal papers, then they have no reason to deny it.
Moreover, there are many limitations in recovering the default loan amounts. With the proposed code, many benefits are expected.
From speedy winding up of insolvent companies to the redeployment of capital productivity and the reduction in defaulters to lowering down npa in india; the list of benefits is pretty long.
What does bankruptcy mean?
Fundamentally, bankruptcy is the stage when a company is not able to repay its debts to the creditors. Because of the proposed law, a debtor will be called bankrupt when he will be adjudged by an adjudicating authority.
A bankruptcy order will be passed by the authority. Typically, it will be nclt Mumbai (National Company Law Tribunal Mumbai) for limited liability partnerships and listed companies.
For partnership firms and individuals, the authority will be drt Mumbai (Debt Recovery Tribunal).
IBC is the need of the day
We have seen many hiccups and shake-ups in the banking industry recently. It is not an exaggeration if we say that the banking industry is in a state of deep crisis.
Stressed assets are increasing at an alarming speed, and bad debts are piling up. In such situation, IBC proves to be a sigh of relief.
Is resolution under IBC is not very effective? Well, experts have multiple opinions about it. While some experts feel that existing management will continue to play a significant role even after giving control to resolution professionals, some feel that the introduction of the new code will effectively rectify the problems of non performing asset.
As far as the procedure is concerned, once the IBC process is initiated, the control shifts to insolvency professionals from the existing management. However, on all practical grounds, the day-to-day operations are in very much control of the management.
Since the resolution timelines are very strict, some companies may go in the state of liquidation, and there is a negative effect on the banks. It happens more prominently in cases where collateral is relatively lesser.
RBI announces plans to resolve troubled loans
RBI or The Reserve Bank of India recently took a bold step by announcing plans so that the troubled loan cases pending with company law tribunal and other courts can be resolved up to a large extent.
It is said that the 12 cases of large borrowers contribute to almost one-fourth of the non-performing assets or NPA.
Out of these accounts, the majority belong to the power, steel, and other infrastructure sectors. Engineering projects, construction projects, procurement companies are to name a few.
As there will be meaningful resolutions under the IBC plan, it will create a good rapport, and the load on national company law appellate tribunal will greatly reduce.
RBI has instructed the banks to review the cases well and do npa management properly. A timeline of six months has been given to the companies.
After the action plan announced by the RBI, the NPA ordinance was passed last month. According to it, the central bank gets a further authority to intervene in the existing clauses of NPA resolution.
Since the timeline is six months which can’t be extended beyond 90 days further, the resolution can be expected fast. The company will be liquidated after it, and the resolution process will help in recoveries of defaulted loans.
As the asset quality of lenders comes down day by day, RBI and other authorities are supposed to follow a new set of reforms to correct the situation.
A specialist, debit-relief consultancy firm, has the potential of offering an immediate relief to you and your company from the issues of personal or corporate debts. They can structure a specific tailor-made plan that suffices the needs of a particular business.
Consultancy firms work with a partnership approach and not just an external agency. Hence, appointing a seasoned nclt Mumbai means building a long-lasting relationship. They carry a rich experience of high-level debt negotiations.
Clients get value-addition and solutions that proven and effective from a result-oriented organization. Great results are guaranteed.
Whether your business is small, big or large, it is always beneficial hiring NPA consultant.
How does it help?
A non performing asset consultant offers a multi-specialty group of experts. They know all aspects of the subject and from individual loans to corporate debts, and from legal consultancy to national company law appellate tribunal; nothing is a challenging task for them.
Bringing a table of strategic solutions is not at all an issue for them. Your troubled business gets a positive thrust, and it comes out from bouncy terrains.
You get suggstions about the large debt values and the specialist external consultants help in understanding the CDRA (Corporate Debt Restructuring Arrangement).
When you are in the midst of stressed loan problem or your loan has been declared as NPA (Non Performing Asset) by the enterprise you borrowed from; it is always better seeking help from an expert.
Who are all there in the consultant team?
Usually, the team contains senior executives from private or public sector banks. There are chartered accountants and financial consultants. There are management and engineering graduates from the best business schools.
Not only financial advisors but there are legal consultants also who can help you in dealing with company law tribunal also.
Consultants assist you on several issues such as sticky and irregular accounts. They can also help in suit, filed accounts and bad loans. They can also tackle issues of card loans and NPA.
You get help in rescheduling and restructuring the accounts. The team of experts takes care of complex proposals and debt restructuring cases which involve banking, legal and financial expertise.
Approach a consultant before it is too late. When you meet a consultant in-time, there is a high probability of getting complete resolution from the problems of Non Performing Assets.
Timely intervention is always better when you are facing issues of NPA.
NCLT or National Company Lat Tribunal was the recent news headline sensation as the Reserve Bank of India or RBI listed several big Non Performing Assets or NPA accounts and started the insolvency procedure.
It is certainly an additional responsibility on the shoulders of NCLT, but with the increases in the infrastructure, it will be able to handle it without any difficulty.
Sticky debts or stressed accounts, whatever you call them; they are undoubtedly burden on the financial institutes. Though they are the reality of life, it is always better to keep the magnitude as low as possible.
NCLT speeds up the npa account settlement process and helps the bankers in managing the financial health better.
As far as this is concerned, financial institution has to file an application with the tribunal. It has to mention all the facts about the case.
After looking into the facts and getting fully satisfied with it, NCLT accepts and admits the case and appoints an interim insolvency professional.
As per the rule, there are 180 days required for completing corporate insolvency process. In the scenario of it not completing in the stipulated time, an extension of 90 days can be given.
No further extension is granted in any case.
Typically, in the case of loan settlement of more than 1 Lakh rupees, a debtor or creditor has to make an application to NCLT.
Every detail of the default has to be submitted, and appropriate evidence has to be given to the tribunal. On satisfaction of the evidence, the tribunal issues an application admission receipt.
The appointment of interim insolvency professional is for one month. Within the period of one month, the promoters of the company go out, and the board of the directors gets suspended.
The resolution professional takes over the company, and he becomes the de facto Managing Director of the company. It is his responsibility to announce the same to the public and invite their claims of recovery.
He also makes a list of all the claimants, and a COC (Committee of Creditors) is formed. The COC has all the authority of deciding about the continuation of the interim professional or to get a new one.
NCLT makes the recovery of sticky debts efficient and effective. Since all these tasks are supposed to be carried out within one month, the speed of npa loan takeover is incredibly fast.
There was a big round of applause and cheerful welcome to the insolvency and bankruptcy code passed by the parliament last year. Yes, it was seen as an effective tool to overhaul the existing system that deals with cases of an individual, corporate, partnership firm or big corporate house facing the problem of bankruptcy.
The recent code brings several useful and effective reforms that focus on resolving the creditor driven insolvency by paying attention to the right things.
As of now, there are several laws that deal with the cases of financial failure. Some of the clauses and sub-clauses clash with each other while resolving the insolvency cases of individuals and companies.
The current structure doesn’t help lenders in the effective and timely recovery of defaulted assets. It puts a tremendous load on the credit system as a whole. The existing setup doesn’t permit restructuring of the default assets either.
Hence, there was a need felt by financial experts to improve the insolvency and bankruptcy regime completely. It will not only improve the business environment but remove the distress in the credit markets.
It was the triggering point of introducing an improved and efficient version of bankruptcy and insolvency act.
It is still evolving
The newly implemented code takes care of liquidation process and streamlines the operational hassles. There have been several interpretations of the code and still lawyers and legal experts and in the process of deriving the inherent meaning of it. The aim is to make the interpretation comprehensive.
Some of the so-called ‘conflicting interpretations’ that may lead to a dispute have been identified by experts. Work is going on to correct the same. The fundamental objective is to make it simple to a bankruptcy lawyer while dealing with the disputes.
As there is further clarity comes about the several clauses and terms, it becomes more and more simple and clear.
What are the provisions?
The following conditions should be fulfilled:
The code empowers the tribunal to reject or accept the insolvency application raised by the creditor based on certain criteria.
Non performing asset (NPA) and bad loans are two major problems in front of the banking industry in India from ages. There have been several measures implemented to keep it under control, but hardly any effect has been visible.
Still, npa account settlement is a major bottleneck in the financial world. Recently, an ordinance was passed to amend the Banking Regulation Act so that RBI gets further empowerment to manage the same.
What are the new amendments?
As mentioned earlier, npa in india has been a pain point; experts always felt the need of having stringent regulations to control it.
In the latest amendment, the central bank gets entitlement to issue directions to a banking company to initiate the process of insolvency resolution if the default falls under the provisions of IBC (Insolvency and Bankruptcy Code).
Also, the central bank is supposed to issue guidelines and directions to the banking companies on a timely basis to resolve the stressed assets.
Experts feel that these guidelines will greatly help in npa management. Banks will be able to save money from going into bad debts.
NPA figures are dropping, but still a lot to be done
Though NPA statistics shows that the trend is declining, still a long way to go as far as complete npa resolution is concerned. It is still one of the major issues prevailing in the Indian Financial scenario.
If you are facing the problem of your business going in the state of NPA, then it is a high time to call the best npa consultant in Mumbai. Yes, it is a complex issue, and you can’t cope up with it unless there is somebody expert to help.
As banks are forced to take large haircuts in view of the increasing stressed assets, they look forward hiring seasoned financial consultants in Mumbai. These consultants know the ways and means of keeping the nonperforming assets within the permissible limits.
As bad debt and NPA brings down, banks and financial institutions can improve their financial strength. It is good from the perspective of client and banks both.
If you feel the need of assigning a seasoned NPA consultant, then make sure you hire the best. Experience makes a remarkable difference since it is a specialized niche.
A robust banking sector is the backbone of the economy, thus failure of the banking sector may result in an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. Higherthe level of NPAs, it suggests more likelihood of credit defaults that affect the productivity and net-worth of banks.
One of the main causes of NPAs into banking sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit (40%) to priority sectors.
There are several reasons for an account becoming NPA.
Hence providing loans to eligible borrowers, feasible economic activity, providing adequate finance and timely disbursement, utilization of funds for the right purpose, servicing the loans in time are absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs.
‘Verbal assurances means no commitment’, this applies to the way banks deal with borrowers. As a customer, you must have observed it many times, whenever we want to request bank to get something like postponing the installment date, restructuring the installment amount etc.; bank expects it in written format. However, while replying or reverting to the same, in spite of expressing it in written format; they make the verbal commitments, which cannot be considered under communication records for future usage. Lack of written records can land the borrower in trouble.
You should never blindly trust the bankers oral assurances as it cannot be used as a proof to justify your side. In lot of cases, SMEs got into the trap of NPA because of trusting on the verbal commitments of the Bank and following it blindly.
Dr Visswas advices to keep communication in writing & demand replies thereof in writing !!
The banking industry follows a traditional pattern of business, which majorly involves acceptance of deposits and channelizing these deposits into lending activities. The credit banks receive from the depositors, have to be repaid to them by the bank, which are called as ‘Liabilities’, whereas the loan given by the banks to the borrowers are to be taken back from them, which are termed as banks’ ‘Assets’. Hence, loans and advances given by the bank are banks’ assets.
According to the traditional banking business of lending finance using deposits of customers, banks hold the risk of default by the borrower in the repayment of either interest or principal amount. In banking terms, it is known as ‘Credit Risk’ and accounts where payments of interest or/and repayment of principal are not coming, are declared as ‘NON-PERFORMING ASSETS’. An asset means a leased asset that becomes non-performing when it stops to make revenue for the bank.
As per norms of Reserve Bank Of India, an account is classified as NPA, based on the retrieval of interest and installments on loans and advances and other aspects. The newly updated RBI norms to label the account as NPA follow RBI guidelines as mentioned below:
SMEs opt to take a loan from the bank to see their dream of creating a business come true, however, due to certain factors the business may not be in a healthy state thereby rendering difficulty in servicing the loan which eventually leads into Non-Performing Asset account.
However, being labeled as NPA doesn’t mean a full-stop to your business; it is just a temporary phase where your business is on the backfoot. NPA Consultants Pvt. Ltd supports the SMEs to come over the risk of being NPA and guides to develop the business thoughtfully!
We have discussed in our previous blog, about how Banks harass the NPAs for recovery, instead of extending them the required support to regain the lost position. Banks fail to understand that an NPA who is lending his/her residential property as collateral to them, is a genuine borrower & does not intend to cheat the bank.
Banks, instead of reciprocating the intention, try to make the NPAs homeless, diverting their intentions from regaining incurred losses in business. Banks are aware that a residential property is the pressing point for an NPA and will be the last straw on the already burdened NPA. Hence NPA will go to a great length to protect it!
Banks try to acquire the residential property & still charge the interest till it’s sold out. Considering the market value of the acquired property, banks don’t adjust the dues against the recovered amount & obtain credits in excess of the loan amount. There is still a blind eye towards this from the authorities and needs to be addressed on a priority. As a result, many NPA‘s are still facing the brunt.
Here, we suggest that Banks can come up with ‘’Symbolic Possession‘’ for NPA, i.e. making them tenants instead of seizing their property & recovering their credit advances. Nothing can be as appalling as being homeless.
The ‘’Symbolic Possession ‘’ will help the NPA and give a mental satisfaction that they have their last hope alive. Banks can keep them as tenants. The implementation will facilitate the NPAs to focus more on their businesses; will give them with an opportunity to repay their credits to the banks. This will create a Win Win situation for the bank and NPA.
Banks generally tend to think of NPAs as unworkable units and thus try to close the account permanently by taking terminal measures.
It’s high time for banks to shed their traditional mindset. They must realize that NPAs are not unworkable units & should consider a fair chance for them. NPA’s are certainly not willful defaulters & they most certainly want to run their business units & repay the credits to the banks. Banks undertaking extreme measures & compelling the NPA’s to liquidate their assets cannot be considered virtuous under any circumstances.
There are situations at times where NPA’s are required to put their residential properties as collateral to the Banks. Once an account is tagged as NPA, the properties are confiscated & are forcefully sold or auctioned to recover the dues. And the properties are sold as Distress Sell, though the real estate prices are always in an ascending manner. The NPA is thus made to suffer a financial loss. It would be right & just to state that Banks are brutally shaking the confidence of the NPA & making them victimized.
To throw some light on this, we will see an example of an NPA who has undergone a similar situation.
A company who was maintaining a healthy account with a bank for a considerable period of time & had taken a loan of a certain amount. It managed to repay more than 40% of it on a timely basis, but unfortunately faced a downturn in its business & was unable to do so for a certain period. The company owners had pledged their residential property as collateral to the bank where the bank tried to confiscate the property & recover the credits. We made a move by filing a case against the bank & succeeded in having a stay against the bank from executing such an action.
The above example in itself testifies that Banks should reconsider the extreme actions & support the NPA’s with Rehabilitation Banks & Management Agreement Contracts as mentioned in the previous blogs. NPA Consultants help in NPA Recovery and loan settlement. Contact us for more details
In the last blog, we disused the remedies for easing the plight of NPAs by proposing rehabilitation banks. In this blog, we will discuss another solution ’ Management Agreement Contracts’.
Management Agreement Contracts will enable NPAs to turn around and bring them in a sound position, enable them to repay the credit advances & take charge of their business.
Through this, large companies who don’t have any conflicting product lines with NPA, but have businesses that complement each other, can enter into a management agreement contract with NPAs. In such a case, NPAs will be reasonably guarded against the bank action subject to certain precautions to be taken.
This arrangement will arrest the deterioration of NPAs, who contribute significantly in the economic growth of the country. The banks in such case will be unable to take any actions in terms of compelling the NPA to shut their units or liquidate their assets to repay the credits. It’s time that we boost the SME sector in a real sense & assure them a win win situation by avoiding their downfall.
In a previous blog, we discussed about the reasons behind the upsurge in the numbers of SMEs getting the tag of ‘Non-Performing Asset’ by the banks. A lot of enthusiastic and passionate young entrepreneur start living up their dream of building a SME business; however, unfortunately it breaks down due to varied reasons and takes one into the darkness of depression. A washout of a business not only stresses the aspiring entrepreneur, but it also diminishes the opportunities of a developing nation to form a strong economic power. A vision of an entrepreneur is the future of a nation, hence, it is a need of an hour that financial sector should standup to support and encourage the prospective entrepreneur.
While, providing economical backup to SMEs, banks keep a sharp eye on the borrower’s accounts. They take preventive and corrective measures to avoid the possibilities of prospective accounts turning into NPAs. Majority of banks follow some strategic plans to control and tackle these cases. Banks may allocate a time limit for overdue accounts to payback the outstanding due - well before the borrower’s account becomes NPA. Banks take into account below mentioned descriptive aspects, while observing borrower’s accounts, even though the accounts are functioning well. So, let’s take a look, on what basis banks judge the potency of accounts and how SMEs can deal with it by keeping their accounts operational & healthy.
These and many other parameters decide the future approach of bankers towards the accounts. In the upcoming series of blogs, we will discuss further about, on what grounds banks term an account as ‘NON-PERFORMING ASSET’! So keep following us and keep your entrepreneurial spirit on!
Bank Is Not The Only Way To Finance Your Capital Requirements!
“To become a successful Entrepreneur, stop bothering about being NPA”
NPA is a tag that highlights you as a default borrower in the crowd of thousands of bank account holders. Trust us; you can surely get rid of this tag just by focusing on the growth of your business. A strong business will never trouble you with external risks; it will actually help you to deal with them.
No account becomes NPA overnight, a constant sickness of an account leads to being an NPA. In our last blog “How A Bank Terms An Account Non-Performing Asset (NPA)” we focused on various aspects which banks consider, while observing the flow of money in the account and accordingly take steps to avoid the possibilities of having a default account. There are some more insights that need to be taken care of by assertive SMEs like you, who wish to skip the tag of NPA. So, let’s go through it –
Decline in sales, net losses, erosion of net worth. In short, bad financial performance
The money cycle of an account shows the real picture of a business. Therefore, if there is a decline in sales, erosion in net worth, net losses that means your business is incapable to repay the money. Hence, it is advisable that the borrower should try to maintain the flow of money and work towards the growth of business.
Incomplete documentations in terms of registration of charge/creation/mortgage etc.
Incomplete documentations might push banks to take your account under scrutiny and raise questions about it. While dealing with a bank or any other financial institution, it is mandatory to do necessary documentation and keep a track of it.
Timeliness and competence of response
Delay in the response might force banks to be a bit suspicious about your account. Stay in contact with bank officials, this will help to build the trust of a banker on the account holder. Hence, instead of hiding from the bank, respond them adequately and represent your business in a positive manner.
These are some of the aspects, which indicate banks about the probabilities of an account becoming NPA. Unfortunately, even after following banking rules, due to bad time in business, a lot of SMEs can’t pay the dues because of which they end up being NPA. Such SMEs are pressurized to pay the repay the loan, without bothering about SME’s plight of survival .
Hence, it’s a strong advice from NPA Consultants that “SMEs should not work for the bank to pay back their dues, but they should work for their business to develop and increase their revenue in order to service the loan”
In an old era, there were a handful of companies in India, which used to manufacture goods, daily use products, clothes, toys etc., for Indian consumers. However, foreign products entered and created a space in Indian Market with the support of British troop and captured it. As a result, Indian product manufacturing companies lost their grip from the market and got vanished from the market.
However, in the 21st century, the governance of Modi Sarkar came up with a motivational campaign called “Make In India’ to wake up those Indian manufacturing companies and started encouraging them to manufacture products in India. This new revolutionary step has spread positive waves in the Indian economical sector. It has shown a new hope for Indian entrepreneurs to rise.
Along with well-established businesses, this new initiative of ‘Make In India’ is also proving supportive to enthusiastic SMEs to come up with their unique business ideas and strengthen economic share of our country. Making India is a manufacturing hub for MNCs; thereby it is creating more opportunities for Indian SMEs.
Overall, MSMEs has played a major role in the throughout success of ‘Make In India and it has been profoundly described by Dr. Visswas Panse, NPA Consultant in their recent interview with a newspaper.
Check out the enlightening views of Dr. Visswas in the below newspaper cut out –
Making India a manufacturing hub for MNCs, thereby creating more opportunities for Indian SMEs
While approaching to banks or financial institutions for a loan, the borrower first gets introduced to the loan payment rules and regulations. Whenever, it comes to any financial or money deal, organizations put a list of rules and regulations to be followed to avoid future slip-up. However, while expecting from borrower to follow loan payment rules, Banks completely ignore the rules to be followed by them. Due to which ultimately, the borrower comes under the pressure of loan payment rules and become NPA.
Reserve Bank Of India has set some national loan recovery rules for Indian Banks & Financial Institutes, which they have to follow while dealing with borrowers for loan recovery. However, it seems in a hurry of getting due loans recovered, the banks are completely overlooking the basic rules of the whole loan game.
For example, if you are an entrepreneur of your respective business, you have taken a loan from a bank, due to some financial trouble; you couldn’t pay the bank since last three months as a result under SARFAESI act bank has put you into the defaulter list and sent you recovery notice. In such situations, due to lack of knowledge about the banking rules and act, majority of entrepreneurs get scared or come under the pressure of repayment. However, the way banks can send you recovery notice under SARFAESI act and ask for immediate payment, under the same act you as a borrower can raise objections to the recovery notice and it is mandatory for banks to respond to these objections in 14 days. In majority of cases, banks don’t convey this rule to borrowers to save their side.
While dealing with borrowers, banks just overlook the rules allocated to them and pressurize the SMEs to pay back the loan amount in restricted duration. Hence, NPA Consultant Pvt. Ltd suggests SMEs to have knowledge about banking acts and rules issued by RBI and make sure banks are following them. Don’t get misguided by banks, be informed and save your business.
“NPA Consultants Pvt. Ltd. –You’re Guide In Crisis”
In our last post ‘The Role of MSMEs in the Success Of ‘MAKE IN INDIA’, we discussed about the importance of MSMEs in the success of ‘Make In India’ scheme. However, it seems that Modi Government’s Make in India is going to fail due to the negligence of Government and RBI towards SMEs and NPA issue. The Industrial experts have forecasted that if Modi government will not be able to resolve the NPA issue of MSMEs, their Make in India campaign will surely fail.
With the pan India campaign ‘Make In India’ Government has tried to create an impression of building up India by encouraging Indian people to start up their own business and be an entrepreneur. However, while being encouraging, the Government is overlooking the hurdles faced by the existing SMEs, who are feeling helpless due to the lack of support from RBI and Government. According to Dr. Visswas, the ex-banker and advisor at NPA Consultancy, Government and RBI could not find a satisfactory solution on the issue of Non-performing asset, which is ultimately damaging national economy. Due to lack of support from banks, investment companies and corporates, a lot of SMEs are unwillingly shutting down their businesses.
The sickness of market, unavailability of bank loans, lack of machinery, inefficient market moves and many more…SMEs are going through a lot of difficulties while building up their businesses. At a recent seminar Dr. Visswas said, while doing hurry in recovering the loans, banks are completely ignoring the basic rules and principles set by RBI. He added, because of the lack of awareness about the RBI rules and regulations, lot of SMEs are going through the unbearable recovery pressure of banks. He suggests, banks should give SMEs extra time to build up their lost confidence and come up with strongly built up business.
‘MAKE IN INDIA’ campaign, after reading out the name, it seems like it’s a campaign about building up India by encouraging home-ground businesses. However, unfortunately the real picture in different. Even though the campaign is about India, small and medium scale industries has not been considered. The flagship program doesn’t have a place for country’s own establishments, due to which the SMEs are feeling left out. In a recent coverage done by renowned business publication stated that “Make in India program did not highlight the contribution of small & medium enterprises in building the country’s manufacturing ability.”
Even after contributing the most in country’s total GDP, SMEs has been kept away from the flagship campaign, initiated for the development of India. A lot of issues of SME sector are lost in the noise of government. In spite of being a backbone of the country’s economy, still small and medium scale enterprises did not find sufficient weightage in the Government’s big-ticket schemes. Government often comes up with some or other schemes, but not all the SMEs can take a benefit of it due to the eligibility criteria or unsuitable scheme structure.
The way SMEs are dependent on Banks for Financial support; similarly they are dependent on Government for strong and encouraging home ground support. With Make In India, if the Indian Government desires to transform India into a global manufacturing hub, first they need to focus on the hurdles SMEs are facing while running their business, offer fruitful opportunities to grow, and increase employment. Because when Indian Industrial sector will flourish, stand out as a strong sector, and attract International industries, it will automatically become a global manufacturing target.
SME’s have been the neglected arm of the Indian economy, an economy obsessed with the industrial giants tends to overlook the contributing aspects of the SME’s. When it comes to the Indian context, SMEs generate more than 55% of industrial value added year on year and 90% of total establishments of India, but we never see this sector in any of the glitzy magazines or the financial sections of any of the newspapers.
SME the growth engine
Large companies tend to outsource their requirements to SMEs as it is cheaper, efficient and quick. Most SMEs are specialized for some goods or services that the large companies are looking for. Growth of large industries depends on how SMEs do successfully in the trade and business.
SMEs & Make in India vision
The Make in India vision serves for the challenges faced by the Indian economy. In this scenario, SME’s play a pivotal role. They have been recognized as an important strategic sector for generating economic growth and an innovative mechanism leading to reduce the unemployment, inequality and poverty. With the rapid migration happening of people moving from country side to metro cities SMEs are the major employment generating tool having prime potential to absorb new workforce.
Thus, for the Make In India vision to reach the destination of accomplishment, we cannot afford to ignore the potential of SME’s with their evident productive contributions. Government needs to wake up to this reality and facilitate creation of even policy and business environment for SMEs.