• How to Resolve NPA Problem

    Worldwide, the common and successful approach towards NPA management is the establishment of Asset Management Companies (AMC). These companies use public or bank funds to remove NPAs from the bank books.

    Now, there are several proactive measures that are being implemented. Few of them are:

    • Corporate Governance
    • Better credit information to cut down on fresh NPAs
    • Prudential Supervision
    • Efficient, capable management
    • Well developed capital markets that can offer the mechanism and liquidity required to write off bad loans
    • Securitization

    The detailed level Solutions to resolve NPA problems are:

    1. One time settlement / compromise scheme (OTS)

    • It is an option which is provided to the borrowers who have defaulted while repaying back their loans to the banks or financial intermediaries.
    • This might be because of the losses or damages incurred by the borrowers in their business.
    • There is no set of rules which will be applicable to all the borrowers; it in turn varies from person to person and business to business.
    • Here, it not only considers the debt paying ability of the borrower but also considers the collateral provided by the borrower to strengthen the credit quality.
    • If the borrower has 100 per cent security, the bank will not consider the OTS.
    • In such cases, an investigation will be conducted to know where the funds have gone and for which purpose they have been used up.
    • The borrower should be co-operative to make the repayments
    • The restructuring option is not applicable to those businesses which are already closed. In that case, the banks will file a suit against the borrower in compliance with the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002.According to this act, the bank will take the custody of the physical properties of the borrowers and will sell it in the market.

    OTS is used mainly for small and medium enterprises that have taken loans from banks and are under the category of NPAs.

    2. Debt Recovery Tribunals

    • The Debts Recovery Tribunal has been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. It was constituted for receiving claim applications from the banks against the borrowers who have defaulted.
    • Initially, these tribunals were able to recover huge parts of NPAs but it was the case for small borrowers.
    • For the large corporate borrowers, even debt recovery tribunals cannot recover the loans effectively. This was due to the fact that cases against the big borrowers were pending in the civil courts without any result. This created big problems for the lenders (banks) which led to the enactment of a more stringent act called as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, also called as SRFAESI Act.
    • According to this strict act, the lenders can take the possession of the assets of the defaulting borrowers without giving any notice and without the need to go through rigors of a Court procedure.

    3. Asset Reconstruction Companies

    The term asset means acquisition by a reconstruction company of any right or interest of any bank or financial intermediary in any financial assistance for the purpose of realization of such financial assistance.

    According to the guidelines framed by Reserve Bank of India, the functions of an Asset reconstruction company are:

    • Managing the business of the borrower properly.
    • Selling or leasing a part of the business of the borrower
    • Rescheduling the debts which need to be paid by the borrower to the lender.
    • Settling all the dues which need to be paid by the borrower.
    • Taking possession of the secured assets.

    4. Securitization of assets 

    • It is defined as the process of packaging of the illiquid assets of the banks and converting them into marketable securities which can be sold to the investors. The investors can in turn get ownership for it.
    • In case there is a probability of occurrence of NPAs in banks, the banks will transfer the collateral, provided by the borrower at the time of taking the loan to SPV and in return take cash so as to avoid the situation of Non-performing assets.
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