Non Performing Assets - Causes
 Improper financing
 Obsolete technology.
 Uneconomic size
 Delays in project implementation
 Fraudulent management.
 Diminishing market potential./ Life cycle theory
 High project cost
 Changes in direct / indirect tax structure.
 Competition from unorganized sector.
 Macro economic factors
1
Early warning signals
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Stagnant /declining sales.
Continuing losses.
Erosion of working capital margins.
Irregularity in bank limits.
Uneconomic levels of operation
Chronic cash shortages.
Accumulation of non moving inventories.
Sticky debtors.
Pressing creditors.
Unsatisfactory financial ratios
2
.
NPA Management
•The rehabilitation package for sick units is administered by the
Board of Industrial Finance Reconstruction.
•Section 15 / 22 of BIFR act states that if a company has a
100% / 50% erosion of networth and cash loss in 2 successive
years both occurring simultaneously. then it should be refered
to the BIFR for rehabilitation. further, the company should be
in existence for 3 years.
•Under the purview of SICA , 1986
3
• BIFR appoints operating agency to prepare revival
scheme under SICA guidelines.
• Concessions restricted to not more than 2% of the
normal lending rate.
• With a rehabilitation package for 7 years, company
should repay all liabilities in 10 years with a DSCR
of 1.33
• Appeal against BIFR order to AIFR
• In forming a Rehab scheme sacrifice of public
interests should not exceed infusion of cash by new
4
promoter.
Short comings of BIFR
-No powers to instruct any authority, Banks, FI or
company.
Only if there is a consensus,on a scheme can BIFR
pass orders.
Revival measures
1.
2.
3
4.
5.
6.
7.
Working with concessions as per SICA act.
Merging with profitable unit, and claiming Sec 72A
Change in management.
Introduction of new value added products.
Conversion of debt to equity.
Controlling costs.
One time settlement of debt, funded interest etc. 5
Management of NPA’s
• SICA , 1986
• Narsimham committee recommendations
• Recovery of debt to banks & financial
institutions act 1993
• Securities & Reconstruction of Financial
assets & enforcement of security interest act
2002.
• To help Banks / FII’s reduce NPA’s
6
Enforcement of security interest
act , 2002
• Secured creditor can enforce the security directly,
with out intervention of court or tribunal after
giving 60 days notice.If borrower does not pay
outstanding interest & principal within that time
secured creditor can take possession of the assets ,
management of assets or appoint any other person
to manage the assets.
• The power can be only be exercised if the asset is
an NPA as per RBI guideline which defines NPA
if interest & installment is overdue for a period
exceeding one quarter.
7
• Presently these powers are only to public financial
institutions & banks.
• Secured creditor can sell the assets & if dues are
not fully recovered he can file application with
DRT for balance amount.
• Banks / Institutions can also hand over possession
to securitistion or reconstruction company.
• Appeal can be filed by the borrower with the DRT
only after the assets or management is taken over
and not at the stage of receiving notice.Jurisdiction
of civil courts is barred however writ can always 8
be filed in the high court
• Protection of SICA will not be available once
secured creditor takes steps for realisation of
assets.
• Any refrence pending with the BIFR will abate.
• Provisions of “ Asset reconstruction” combine the
features of securitisation and enforcement of
security interest.
• Act effective from June 21,2002.
• Act is based on the recommendation of the
Narsihman committee reports
9