NPA’S UNDER SARFAESI ACT

1. INTRODUCTION
All advances given by banks are termed “assets”, as they generate income for
the bank by way of interest or installments. Banks give loans and advances to
borrowers which may be categorized as: (i) standard asset (any loan which has
not defaulted in repayment) or (ii) non- performing asset (NPA), based on their
performance. However, a loan turns bad if the interest or instalment remains
unpaid even after the due date and turns into a nonperforming asset, or NPA, if
it remains unpaid for a period of more than 90 days. NPAs are loans and
advances given by banks, on which the borrower has ceased to pay interest
and principal repayment. NPAs are serious issues for the banks and the
financial institutions as they depend on these interest payments for income.
The banking sector has been facing the serious problems of the rising NPAs. But
the problem of NPAs is more in public sector banks when compared to private
sector banks and foreign banks. The NPAs are growing due to external
(Ineffective Recovery Tribunals, Natural Calamities) as well as internal factors
(defective lending processes, improper SWOT Analysis). Presently , More than
Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India.
This is a huge amount. The figure roughly translates to near 10% of all the loans
given.
2. WHAT ARE NPA’S?
NPA is type of debt obligation where the borrower has not paid any previously
agreed upon interest or principal repayments to the designated lender for an
extended period of time.
NPA can be defined as that form of a credit facility in respect of which the
interest or the principal is remained ‘past due’ for a specified period of time.
in terms of Agriculture / Farm Loans; the NPA is defined as under: For short
duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan
(instalment / interest) is not paid for 2 crop seasons, it would be termed as a
NPA. For Long Duration Crops, the above would be 1 Crop season from the due
date. In India, the definition of non-performing assets has changed over time.
According to the Narasimham Committee Report (1991), those assets
(advances, bills discounted, overdrafts, cash credit etc.) for which the interest
remains due for a period of four quarters (180 days) should be considered as
non-performing assets. Subsequently, this period was reduced, and from
March 1995 onwards the assets for which the interest has remained unpaid for
90 days were considered as non-performing assets.
According to Section 2(o) of the SARFAESI Act, 2002, a "non-performing asset"
means an asset or account of a borrower, which has been classified by a bank
or financial institution as sub-standard, doubtful or loss asset,--
(a) in case such bank or financial institution is administered or regulated by any
authority or body established, constituted or appointed by any law for the time
being in force, in accordance with the directions or guidelines relating to assets
classifications issued by such authority or body;
(b) in any other case, in accordance with the directions or guidelines relating to
assets classifications issued by the Reserve Bank.
The Master Circular issued by the Reserve Bank of India further defines the
term ‘non- performing assets’. According to ¶ 2.1., an asset, including a leased
asset, becomes non- performing when it ceases to generate income for the
bank. It further states that a non- performing asset is a loan or an advance
where;
 interest and/ or instalment of principal remain overdue for a period of
more than 90 days in respect of a term loan,
 the account remains ‘out of order’, in respect of an Overdraft/Cash Credit
(OD/CC),
 the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
 the instalment of principal or interest there on remains overdue for two crop
seasons for short duration crops,
 the instalment of principal or interest there on remains overdue for one crop
season for long duration crops,
 the amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitisation transaction undertaken in terms of guidelines on
securitisation dated February 1, 2006.
 in respect of derivative transactions, the overdue receivables representing
positive mark-to-market value of a derivative contract, if these remain unpaid
for a period of 90 days from the specified
Thus, NPA is used by banks and financial institutions that refer to the loan that
are in jeopardy of default. If the borrower of the loan fails in the payment of
the principal amount or the interest for 90 days, the loan is considered to be a
non- performing asset.
3. CONSTITUTIONAL VALIDITY OF NPA U/ SARFAESI
In Keshavlal Khemchand and Sons Pvt Ltd & Ors v. Union of India & Ors,
the Supreme Court decided on the writ petitions and has upheld the
constitutionality of the amended definition of NPA under the SARFAESI
Act. According to Supreme Court, Parliament is only stipulating that the
expression "NPA" must be understood by all the Creditors in the same
sense in which such expression is understood by the expert body i.e., the
RBI or other Regulators which are in turn is subject to the supervision of
the RBI. Supreme Court held that the amended definition of NPA is not
bad on account of excessive delegation of essential legislative function.
Supreme Court held that as all the creditors do not form a
uniform/homogenous class, and therefore by prescribing different norms
for the identification of a NPA with reference to different creditors does
not amount to unreasonable classification and hence not violative of
Article 14 of the constitution.

4. CLASSIFICATION OF NPA’S
Non-Performing Assets: Banks are required to classify non-performing
assets further into the following three categories based on the period for
which the asset has remained non- performing and the realisability of
the dues:
a. Sub-standard Assets: With effect from 31 March 2005, a substandard
asset would be one, which has remained NPA for a period less than or
equal to 12 months. In such cases, the current net worth of the
borrower/ guarantor or the current market value of the security charged
is not enough to ensure recovery of the dues to the banks in full. In other
words, such an asset will have well defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the
distinct possibility that the banks will sustain some loss, if deficiencies
are not corrected.
b. Doubtful Assets: With effect from March 31, 2005, an asset would be
classified as doubtful if it has remained in the substandard category for a
period of 12 months. A loan classified as doubtful has all the weaknesses
 inherent in assets that were classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full,
– on the basis of currently known facts, conditions and values – highly
questionable and improbable.
c. Loss Assets: A loss asset is one where loss has been identified by the
bank or internal or external auditors or the RBI inspection but the
amount has not been written off wholly. In other words, such an asset is
considered non collectable and of such little value that its continuance as
a bankable asset is not warranted although there may be some salvage
or Recovery value.

5. MODES OF RECOVERY OF NPA’S

So far, 2 modes of recovery of NPA’S have been provided through
legislative means;
a. Establishment of DRT u/ RBD ACT
b. SARFAESI ACT
- Recovery of Debts Due to Banks and Financial Institutions (DRT)
Act provides setting up of Debt Recovery Tribunals (DRTs) and
Debt Recovery Appellate Tribunals (DRATs) for expeditious and
exclusive disposal of suits filed by banks / Financial Institutions for
recovery of their dues in NPA accounts with outstanding amount
of Rs. 10 lac and above. Government has, so far, set up 33 DRTs
and 5 DRATs all over the country.
- SARFAESI Act The Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 –
The Act empowers Banks / Financial Institutions to recover their
non-performing assets without the intervention of the Court,
through acquiring and disposing of the secured assets in NPA
accounts with outstanding amount of Rs. 1 lakh and above. The
banks have to first issue a notice. Then, on the borrower’s failure
to repay, they can:  Take possession of security and/or  Take over
the management of the borrowing concern.  Appoint a person to
manage the concern.
- Government has advised the public sector banks to utilize the
system of Lok Adalat’s (u/s 89 CP) mechanism to its fullest
potential for recovery in Non-performing Assets (NPAs)
PREVENTION/ REDUCTION
Banks and other financial institutions shall take a number of measures
so that the number of non-performing assets does not increase.
Following are some prudential measures which a bank or financial
institution ought to follow.
1. Early Recognition of the Problem: Invariably, by the time banks start
their efforts to get involved in a revival process, it too late to retrieve the
situation- both in terms of rehabilitation of the project and recovery of
banks dues.
2. Identifying Borrowers with genuine intent: Identifying borrowers with
genuine intent from those who are non- serious with no commitment or
stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones
who have intelligent inputs with regard to promoters sincerity, and
capability to achieve turnaround. "Special Investigation" In this regard
banks may consider having of all financial transaction or business
transaction, books of account in order to ascertain real factors that
contributed to sickness of the borrower. Banks may have penal of
technical experts with proven expertise and track record of preparing
techno-economic study of the project of the borrowers.
3. Timeliness & Adequacy of response: Longer the delay in response,
grater the injury to the account and the asset. Time is a crucial element
in any restructuring or rehabilitation activity. The response decided on
the basis of techno-economic study and promoter s commitment, has to
be adequate in terms of extend of additional funding and relaxations etc.
Under the restructuring exercise. The package of assistance may be
flexible and bank may look at the exit option.
4. Focus on Cash flows: While financing, at the time of restructuring the
banks may not be guided by the conventional fund flow analysis only,
which could yield a potentially misleading picture. Appraisal for fresh
credit requirements may be done by analyzing funds flow in conjunction
with the Cash Flow rather than only on the basis of Funds Flow.
Management Effectiveness: The general perception among borrower is
that it is lack of finance that leads to sickness and NPAs. But this may not
be the case all the time. Management effectiveness in tackling adverse
business conditions is a very important aspect that affects a borrowing
unit s fortunes. A bank may commit additional finance to.
angling unit only after basic viability of the enterprise also in the context
of quality of management is examined and confirmed.
5. Multiple Financing: During the exercise for assessment of viability
and restructuring, a Pragmatic and unified approach by all the lending
banks / FIs as also sharing of all relevant information on the borrower
would go a long way toward overall success of rehabilitation exercise,
given the probability of success/failure.
7. Improving Processes: The credit sanctioning process of banks needs to
go much more beyond the traditional analysis of financial statements
and analysing the history of promoters. For example, banks rely more on
the information given by credit bureaus. However, it is often noticed that
several defaults by some corporate are not registered in their credit
history.
8. Relying less on restructuring the loans: Instead of sitting and waiting
for a loan to turn to a bad loan, and then restructure it, the banks may
officially start to work to recover such a loan. This will obviate the need
to restructure a loan and several issues associated with it. One estimate
says that by 2013 there will be Rs 2 trillion worth of restructured loans.
9. Expanding and diversifying consumer base by innovative business
models: Contrary to popular perceptions, the NPA in non-corporate
sector is less than that in the corporate sector. Hence, there is a need to
reach out to people in remote areas lacking connectivity and
accessibility. More and more poor people in rural pockets should be
brought under the banking system by adopting new technologies and
electronic means. Innovative business models will play a crucial role
here. Otherwise, the NPAs may increase instead of decreasing.
CONCLUSION: One of the significant challenges for banking system in
India is to deal with the NPA issue. NPA has great impact on the
productivity of banks and curtailing the future lending options for banks
especially for long-term purposes. The NPAs have always created a big
menance in Indian banking industry. It is not just problem for the banks
but the country's economy too. Profitability of banks affected due to
growth in non-performing assets. The study shows that Lok Adalat and
DRT have not shown considerable success in the recovery of NPA.
SARFAESI Act proved to be the most effective tool in the recovery of Non
performing assets.