MANAGING NPA & SECURITIZATION ACT
A Perspective by
Mr. Sandeep Vrat, COO Reliance ARC
And
CA Sameer Kakar
B. Com. (Hons.), L.L.B., FCA
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CONTENTS
NPA Generally
Options available to borrowers post NPA
CDR
Securitization Act
ARC
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MAGNITUDE OF NPA
As per RBI publication amounts blocked in NPA as on 31.3.12 were close to
Rs. 1.37 lakh crore
In June, 2013 ICRA has estimated that due to economic slow down and recent
changes by RBI in Prudential Norms Gross NPA may reach 5.5% to 6.5% by Mar. 15,
NPA are bye products which are generated by banks in banking business
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DEFINITION OF NPA
As per RBI Circular no. DBOD.No.BP.BC.9 /21.04.048/2012-13 dated July 2, 2012 (master circular)
:An asset, including a leased asset, becomes nonperforming when it ceases to generate income
for the bank.
A non performing asset (NPA) 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 thereon remains overdue for two crop seasons
for short duration crops,
 the instalment of principal or interest thereon 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 due date for payment.
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OUT OF ORDER
If the outstanding balance remains continuously in excess of the
sanctioned limit/drawing power. In cases where the outstanding
balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 90
days as on the date of Balance Sheet or credits are not enough to
cover the interest debited during the same period, these accounts
should be treated as 'out of order'.
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DEFINITION CONTD….
Projects under implementation which have passed their Date of
Commencement of Commercial Operations (DCCO)
For Infrastructure Projects
 If financial closure achieved & documented a period not exceeding 2 years
from the date of completion envisaged at the time of financial closure.
 If financial closure not achieved, 2 years from the date of completion
envisaged at the time of sanction.
 In case of PPP projects shift in appointed date not to be considered as
restructuring in certain cases.
Other Projects
 One Year from the date of completion envisaged at the time of financial
closure but within 2 years of the original DCCO.
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NPA DEFINED UNDER SARFEASI ACT
As per sec 2 (o) "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;
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WHAT ARE COVERED UNDER NPA
Working
Capital
Term Debt
Crop Loans
Other facilities
• Cash Credit Limits.
• Letters of Credit/Guarantee
• Bills Discounted & Purchased
• Industrial Term Loans
• Infrastructure Term Loans
• Short Term
• Long Term
• Derivative Transactions
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WHAT ARE NOT COVERED
 Reference made to BIFR where the borrower is making regular
payments
 Consortium Advances where one of the bank has classified the
account as NPA and the account is standard with other banks
 Same for accounts under Multiple Banking
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CATEGORIES OF NPA
Category
Period from NPA date
Provisioning
requirement
Substandard
12 months
15% if secured. 25% if
unsecured.
Doubtful
> 12 months
1 Yr. 25%
1 to 3 Yr. 40%
> 3 Yr. 100%
Loss
Uncollectable
100%
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GENERAL PROVISIONING ON NPA
 Present guidelines provide for provisioning @ 2.75% in case of
restructured accounts.
 As per recent circular of RBI such provisioning is required to be
enhanced to 5% in phased manner as per table below :Effective date
31/03/2014 (spread over 4 quarters of 13-14)
Provisioning %
3.5
31/03/2015 (spread over 4 quarters of 14-15)
4.25
31/03/2016 (spread over 4 quarters of 15-16)
5.00
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RECENT CHANGES IN SPECIFIED PERIOD
FOR UP-GRADATION OF ACCOUNT
 Vide circular No. DBOD.BP.BC.No.99/ 21.04.132/2012-13 dated May
30, 2013 RBI has changed certain norms regarding specified period.
 All restructured accounts which have been classified as NPA and which
have been restructured, are eligible for up-gradation to the ‘standard’
category after observing satisfactory performance during the specified
period.
 Specified period in this regard hitherto meant a period of one year
from the date when the first payment of interest or instalment of
principal falls due under the terms of restructuring package.
 As per the latest circular of RBI “Specified period” is now redefined as
a period of one year from the commencement of the first payment of
interest or principal, whichever is later, on the credit facility with
‘longest period of moratorium under the terms of restructuring
package’.
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SOME REASONS FOR SICKNESS
Short Term
Medium Term
Long Term
Force majure
Business Cycle
Locational
Judgement
errors
Technological
Shift
Obsolescence
Government
Policies
Incompetence
Financial
mismanagement
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CURATIVE MEASURES
“My money is out, I have no control over the money any more, only
security- I have to have a pragmatic & practical approach……..Head of
Recovery & Legal of a well known Bank
 Tweaking the limits - mainly WC to Supply Bill, Margin reduction,
conversion to LAP, Term Loan etc…….
 Resolution of operational difficulties ASAP
 Outside support – talking to creditors/debtors, competitors,
suppliers, agents, technology suppliers etc….
 Close watch on banking operations
 Merger/acquisitions – leads given to close advisors
 Regular review of portfolio for identification of potential NPA and
follow up
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OPTIONS AVAILABLE POST NPA
“Doing business without Debt is like fish without water”
“The first step for solving a problem is to realize that there is a problem”
Borrower
Lender
Restructuring
Restructuring
One Time
Settlement
One Time
Settlement
Reference
to BIFR
Sale/Assignm
ent to ARC
Deferring
the Decision
Recovery
through DRT
Enforcement
under
SARFEASI
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RESTRUCTURING – AVAILABLE MEANS
Restructuring is “Novation” u/s 62 of the Indian Contract Act - new terms are
substituted for the old.
Bilateral
• Borrower & Lender agree to certain terms
• New terms substitute old terms
CDR
• A forum of lenders under aegis of RBI
• Highly effective
• Suitable where multiple lenders are involved
BIFR
• Under provisions of SICA
• Order has binding powers
Court
• U/s 391-compromise and arrangement
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CDR
 CDR – a forum at the aegis of RBI
 Debtor Creditor agreement (DCA) and Inter Creditor Agreement (ICA)
are legal basis
 Various committees like Core Group, Standing Committee,
Empowered Group, Monitoring Comm. etc
 CDR Cell
 Multiple banks necessary
 Minimum amount Rs. 20 Cr.
 Super majority is basis for decision i.e. 75% in value and 60% in
number
 Decision binding on minority (less than 25%)
 Reference generally by leader, other cases any other lender with min.
20% of total exposure
 Highly effective –debt restructured Rs. 2.29 lakh Crore in 401 cases
upto 31.03.13
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PROCESS AT CDR
Borrower facing
financial
difficulty
• Board to take
cognizance
• Preparation of
preliminary plan
• Presentation to
Lead Bank
Lead Bank
• To discuss the
plan with the
borrower.
• Take approval
from sanctioning
authority (stand
note)
• Reference is
made to CDR
(Flash)
CDR Flash
• CDR Cell
analyzes the
Flash.
• Circulation is
made to all
lenders
• Flash is
deliberated at
the CDR EG
• Put to vote, in
case proposal
is approved
with super
majority, next
step
CDR Final
• Final report is
prepared by
Lead Bank.
• Presented to CDR
Cell for comments.
• Circulation
amongst lenders.
• Discussion at CDR
EG,
• Voteapproval/modific
ation/rejection.
• Issue of sanction
by CDR Cell on
borrower.
• All banks to
provide individual
sanction to
borrower.
• Monitoring
Mechanism
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SOME SPECIAL TERMS IN CDR
 Right to Recompense
 Interest Reset
 Milestone for
repayment/release of security
 Escrow account and water fall
mechanism for payments
 Appointment of key personal
such as CEO, CFO
 Accelerated payments in case
of improved financial health
 Appointment of Lenders
Engineer
 Concurrent Auditor
 Calling auditors for discussions
 Board Representation
 Appointment of lenders Council
 Flash Report
 Final Report
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CDR PROS & CONS
Pros
Cons
Time Bound
Oppression
Minority
Collective
Lack of Teeth
CDR Cell counseling
Stand Still Clause
Non Recognition by BIFR
Legal approval
Decision by Majority
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WHEN CAN A ACCOUNT BE RESTRUCTURED
Restructuring could take place in the following stages :
o before commencement of commercial production/operation;
o after commencement of commercial production/operation but
before the asset has been classified as ‘sub-standard’;
o after commencement of commercial production/operation and
the asset has been classified as ‘sub-standard’ or ‘doubtful’.
Terms of Restructuring will be different based on the classification of the
account in bankers books
Any of the above mode can be adopted
Not a matter of right for the borrower
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HEADS OF A PLAN
 Background of the company
 Background of the promoters
 Business overview covering
manufacturing facilities, product,
client base etc.
 Past financial performance
 Debt Profile
 Shareholding pattern
 Problems faced by the company
 Operational restructuring
 Financial Restructuring plan
envisaged




Projected Profitability statement
Projected Balance Sheet
Projected Cash Flow
Ratio Analysis this may cover ratio
such as
 Yearly DSCR , Average DSCR:,
Adjusted DSCR
 ROCE
 IRR
 Cost of Funds
 FACR
 Break Even Point
 Cash Break Even Point
 Current Ratio
 TOL/TNW
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BENCHMARKS ON VIABILITY PARAMETERS
RBI Circular of May, 2013 specifies the following viability parameters for restructuring
Return on capital employed should be at least equivalent to 5 year Government
security yield plus 2 per cent.
The DSCR should be greater than 1.25 within the 5 years period in which the unit
should become viable and on year to year basis the ratio should be above 1. Normal
DSCR for 10 years repayment period should be around 1.33.
 Benchmark gap between IRR and cost of capital should be at least 1 per cent.
Operating and cash break even points should be worked out and they should be
comparable with the industry norms.
Trends of the company based on historical data and future projections should be
comparable with the industry. Thus behaviour of past and future EBIDTA should be
studied and compared with industry average.
Loan life ratio (LLR), as defined below should be 1.4, which would give a cushion of
40% to the amount of loan to be serviced.
LLR =Present value of total available cash flow (ACF) during the loan life period
(including interest and principal)/Maximum amount of loan
 Viability period 8 years for infrastructure projects and 5 years for non infra projects.
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SACRIFICE CALCULATION
A. Existing
Sl.
No
Date
Cumm.
Repay Repay
ment ment 0/s
B. Proposed
Cumm.
Repay Repay
Days Interest Total ment ment 0/s
Days Interest Total
Present
Value
discounted
at Base
Rate + Risk
Premium+
Credit Risk
Premium
Difference between Total of A and B is Sacrifice, 20% of which borrower has to bring in
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RESTRUCTURING- BORROWERS PREPARATION
Bifurcate the borrowings from Banks/FI’s into different blocks viz.
 Term Loan
 Working Capital
 Unpaid Interest
 Unsecured/Loans for which no security created
Prepare a not too aggressive business plan
Arrive at a reasonable EBIDTA – does not means too low!! Threat
Unviable !!
Calculate serviceable and unserviceable debt
Closely analyze the security, defects and put a value to security held by
each lender
Date of account turning NPA important
Factor repayment
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ESSENTIALS WHILE DRAWING A PLAN
Repayment period normally 10 years for industrial borrowers and 15 years for
infrastructure projects
Principal Moratorium – Yes, interest – generally no
Interest Ballooning– Yes, with yield protection
Funding of past interest – yes, conversion to non interest bearing instruments
on case matrix
Retrospective restructuring - No
Early Exit option – can be envisaged with cap
Conversion to Equity – listed companies – yes, unlisted no
Unserviceable portion – non interest bearing instruments/waiver
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ESSENTIALS WHILE DRAWING A PLAN
CONTD..
Promoters Contribution
 Minimum 20% of sacrifices by lenders or 2% of loan amount which ever is
higher
 50% upfront
 Balance within one year, in most cases insistence by lenders to bring
upfront.
 Failure to bring in will result into lenders foregoing asset classification
benefits
 Means of PC- De-rating of equity, Fresh infusion of Equity/preference
share, USL
TEV Study
Valuation of Assets
Search Report ROC
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LENDERS CRITERIA FOR RESTRUCTURING
 Economic Scenario
 Market Conditions
 Product
 Promoters background & resources at disposal
 Status Group Companies
 Financial Prudence or Mismanagement
 Seize of advance & its effect on Lenders Balance Sheet
 Socio Economic Benefits
 Share in overall exposure
 Government Compulsions
 Status of Industrial Unit –running/closed, capacity utilization
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ONE TIME SETTLEMENT - OTS
 No fixed formula
 Every Bank has internal guidelines for OTS
 OTS amount is arrived taking into consideration followings :Nature of security – immovable/movable, value thereof &
proportion
 Time since account was classified NPA
 Earnings before OTS
 Value of security
 Net worth of guarantors
 Status of business of entity – running/closed
 Payment program
 Stress which both parties have undergone in their relationship
 Status of BIFR/Securitization action/legal action
 Promoter background
 Generations in business, Technocrats, State where unit located, difficultly in
realization of security, resources at disposal, how emotional !!
 State where unit located AP, TN & Kerala – OTS preferred
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OTS – DETERMINATION OF AMOUNT
No fixed laid down formula, discounting of amount
receivable by the lender from various securities held at
base rate - a good theory
Security
Yr1
Yr2
Yr3
Total
1
2
3
Total
Less Expenses
Net Realization
NPV @ base rate
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TOP 5 MYTH - BORROWERS
We have never declared loss
We will correct it is just a passing face
Beg, Borrow, Steal or do whatever but never default
NPA !! it is the end of road for me
ARC - baap re ! I Vultures, Hyenas ! I will be nowhere
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SICA
Enacted in 1986
Object preventing, remedial and enforcement measures pertaining to
industrial sickness
Applicable to companies
Two levels – Board and Appellate Authority
Sick undertaking – whose net worth negative
Reference post negative net worth is mandatory as per the Act.
Audited accounts and boards opinion two main ingredients
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PROCESS
Completion of
Audit
• Board to
approve
results.
• Form opinion
on sickness
Reference
• Form A to be
prepared
and filed
with
Annexures
before
Hon'ble BIFR
Inquiry, opinion
of Bench
• Declaration
of Sickness;
or
• Decline the
reference
• Appointment
of OA
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PROCESS CONTD….
Preparation of
Scheme
• to be
approved
by all
secured
lenders and
unsecured
lenders
Approval of
Scheme
• No creditor
can be
forced to
accept the
scheme
Positive Net
Worth
• Company
out of BIFR
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PROTECTION
Contained in S 22 of the SICA
Non-obstinate clause “notwithstanding anything-----“, the provisions of SICA
overrides other Acts.
no proceedings for the winding up of the industrial company or for execution,
distress or the like against any of the properties of the industrial company or for
the appointment of a receiver in respect thereof and no suit for the recovery of
money or for the enforcement of any security against the industrial company or of
any guarantee in respect of any loans or advance granted to the industrial
company] shall lie or be proceeded with further, except with the consent of the
Board or, as the case may be, the Appellate Authority.
Commonly referred to as “Shelter”
Commences when Form ‘A’ is admitted
Protection continues till inquiry pending, scheme operational, appeal pending
Protection available only against Civil Cases – criminal cases & 138 NI Act cases
excluded.
Covers action by Lenders, Creditors, Revenue, Contractual, Workers and
Shareholders
Protection available to guarantors too
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RELEVANCE OF SICA POST SARFEASI ACT
In number of decisions it has been held that SARFEASI being later special Act overrides
provisions of SICA.
As such sick companies have lost protection from lenders.
Provisions of SARFEASI only available to Secured Lenders
Pressure from other creditors too much on a Sick company
Good strategy for borrower to still apply and have protection from others
Though Parliament passed Sick Industrial Companies (Special Provisions) Repeal Act,2003.
The constitutionality of the provisions in the Companies (Second Amendment) Act, 2002
creating the NCLT / NCLAT were challenged on the ground of excessive judicial delegation, in
a petition the Supreme Court recommended changes such as appointment criteria to such
bodies and various other provisions in the Companies (Second Amendment) Act, 2002. The
SICA (Special Provisions) Repeal Act, 2003, were not notified, and therefore not brought into
effect by the Government through publication in the Official Gazette.
Result SICA still prevails.
Post Companies Bill, 2012 – SICA to be repealed
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MEANING OF SECURITY INTERESTS UNDER SECURITIZATION
ACT (SARFAESI ACT)
Security interest under the law has 4 elements:




secured debt/ financial assistance
security interest
secured creditor
borrower
Sec 2 (1) (zf) - right title and interest of any kind whatsoever, including mortgage,
charge, hypothecation, assignment
right title or interest - obviously meaning those created for security
Mortgage - sec 58 of TP Act is limited to immovable property. Generally, conferring
any right to a lender to sell property on default
Hypothecation - sec. 2 (1) (n) - all charges except a pledge
Charge - by itself, does not mean anything but security interest. Sec 100 of TP Act - a
security interest not being a mortgage.
Assignment - assignment by way of security, and not assignment by way of transfer
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FINANCIAL ASSISTANCE
Relationship of borrower and secured lender necessary
Loan or advance granted
debentures or bonds subscribed
guarantees given or letter of credit established
any other credit facility - makes it an inclusive definition; other similar
facilities to be included
Are these included?






Discounting of bills of exchange
any purchase or sale of securities
any lease or hire purchase transaction
factoring transaction amounting to purchase of factored debt
securitisation investments
purchase of commercial paper
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SECURED CREDITOR - SEC 2 (1) (ZD)
Bank
financial institution:
 Includes power to notify financial companies
In case of debentures:
 unsecured debentures do not seem to be
covered
 secured debentures - rights exercisable by
trustees
debenture trustee
securitisation company and reconstruction
company
any other trustee holding securities on behalf
of a bank
"secured creditor" means
any
bank
or
financial
institution or any consortium
or group of banks or
financial institutions and
includes•
Debenture
trustee
appointed by any bank or
financial institution; or
•
.securitisation company
or
reconstruction
company; or
•
any other trustee holding
securities on behalf on a
bank or financial institution,
in whose favour security
interest is created for due
repayment by any borrower
of any financial assistance;
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BORROWER
Key word is “financial assistance”
Any person who has availed of financial assistance
guarantor:
 guarantee as defined in sec.126 of Contracts Act
 consent of the principal debtor important
 issue: can rights under the law be enforced against the guarantor as principal obligorapparently yes
provider of security
 only mortgage and pledge included here
 usually security provider will also be a guarantor
borrower of securitization company
makes no distinction between corporate and non-corporate borrower
Continued relation between lender and borrower important - after
assignment, lender cannot enforce provisions of SARFEASI against the
borrower
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SECURED ASSET
Meaning is important, as the rights under the law exercisable
against secured assets
Sec 2 (1) (zc) - assets over which security interest created
Requisites:
 the security interest must be specific to the asset
 the interest must be in the nature of security interest
Floating charges: interest does not become specific until
receivership/ winding up action/default
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PROCESS UNDER SARFEASI
1. Account of
borrower turning NPA
2. Issue of demand
notice to borrwer and
all guarantors by the
lender u/s 13 (2)
3. Borrower to reply
to the notice or pay
before 60 days from
receipt of the notice
4. Lender to reply to
the objections of
borrower
5. Borrower fails to
pay, notice u/s 13 (4)
and procedure to be
completed by the
lender
6. Possession of the
Secured Asset by the
Lender
7. Auction/Tender or
Private Treaty Notice
8. Sale/Recovery of
money
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ROLE OF ARCS

What are ARCs (Asset Reconstruction Companies)
- Specialised agencies which facilitate bad loan resolution of the Banking system
- ARCs deal with multiple banks and acquire their loans for resolution
- ARCs in India are regulated by RBI

Advantages of ARCs
- Specialist Agency has NPA resolution as its core activity
- Depending on nature of NPA, different resolution strategies followed by ARC
- Easier dealing for Borrower – Faster resolution of NPA problem
- By transferring NPAs to ARCs, Banks can concentrate on core lending business
- By accumulating bad loans of a Borrower from several banks, new investors in distressed
company may show interest
- Fixed timeline (5 years extendable to 8 years) forces ARCs to resolve NPAs quickly
- Most ARCs in Private Sector – Can resolve NPAs fast as no CVC / CAG risk
- No special powers for ARCs – All powers same as those available to Banks

How ARCs operate
- Acquire NPAs from Banks / Financial institutions, on cash or Security Receipt (SR) basis
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ROLE OF ARCS: RESOLUTION STRATEGIES FOR DIFFERENT CATEGORIES OF NPA
Management Quality
High
Low
44
Box I
Good management, Operating
company in unviable industry
Settlement with existing
promoters
Box II
Good management, Operating
company in viable industry
Restructuring
Box IV
Poor management, Unviable
industry
Sale of Assets
Box III
Poor management, Viable industry
Sale of business / Induction of JV
partner
Industry viability
High
ROLE OF ARCS – RELIANCE ARC’S FOCUS AREAS




Retail and SME NPAs – Acquisition on Cash or SR basis
Large Corporate – Acquisition preferably on SR basis (say 5-15% cash)
Secured assets preferred
Focus on Retail
- Arrangements for collection in 70 locations across India, with a preference
for West and South India.
Focus on SME NPA acquisition for this group
– Forms a large part of our Business Plan
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HOW CAs CAN WORK WITH RARC – IDENTIFICATION OF NPA BORROWERS
Identify suitable NPA borrowers preferably in SME segment (not Retail)


YOU should do preliminary due diligence on the Borrower

He should not be a wilful defaulter (if he has diverted funds wilfuly, he may do the same with
Reliance ARC)

Reliance ARC exposure, per single Borrower, shall not exceed Rs. 10-12 cr

Larger cases may be done jointly with other ARCs

The exit route for Reliance ARC (post-acquisition of the loan from the selling Bank) should be
clearly defined

Time frame for exit would normally be up to 2 – 3 years

Adequate security cover (exceeding 1.8 times) – Saleable security

IRR for RARC (annualised): 25%+ p.a.

Borrower shall show his commitment to the deal by bringing in part of the fund requirement
and / or providing additional security
If preliminary due diligence on the Borrower is satisfactory, furnish to RARC

Preliminary profile of the case (Background of company and promoters, why it landed in
difficulty, summary of last 3 years annual reports, details of proposal including RARC exit route,
etc.)

If RARC finds deal prima facie workable, will take discussion forward – Seek further information
/ clarifications / meeting with Borrower, etc.

No costs to Borrower until deal is successfully closed with the selling bank(s)
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HOW CAs CAN WORK WITH RARC – WHAT’S IN IT FOR YOU
As our DSA (Direct Selling Agent) 
You may independently negotiate a fee from the Borrower / Reliance ARC may separately offer a
fee for successfully closed deals which will be decided on case-to-case basis

Post closure of deal (post investment but before exit by RARC, RARC expects you to 
Maintain contact with the Borrower to ensure that he is complying with his obligations

Advise RARC, as and when any material information about the Borrower or his securities is
known to you

Facilitate modification, if necessary, in terms (repayment schedule, etc.) if justified in selected
cases
What support you would get from RARC

A dedicated contact official of RARC to address your queries

Leads on certain NPA borrowers of Banks, whom you may contact independently for business

Regular updates on developments in the NPA market
What RARC would expect from you

Commitment to ensure RARC’s interest is protected when bringing any deal

Satisfying yourself on credibility of the Borrower, by making your own independent enquiries

Bringing out all relevant information (positive or negative) in respect of Borrower / his securities
We are looking for a win-win arrangement with you
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Thank You
COPYRIGHT CA SAMEER KAKAR
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