1. BANK MANAGEMENT
UNIT–IV: Management of non–performing assets, Asset recovery companies.
Banking sector plays a key role in economic development of a country through mobilization of
savings and distribution of funds to the productive sectors. It is well known fact that a delicate
banking system can not only hamper the development of a particular economy but also it can deepen
the real economic crisis. Therefore, the health of the banking system should be one of the primary
concerns of the government of each country.
Till 1991, asset quality was not prime concern in Indian banking sector. Performance objectives such
as opening wide networks/branches, development of rural areas, priority sector lending, higher
employment generation, etc. were the main concern of the government. While the primary function
of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans,
housing loans etc. But in recent times the banks have become very cautious in extending loans. The
reason being mounting non-performing assets (NPAs) and nowadays these are one of the major
concerns for banks in India. In this unit you will learn about non-performing assets, various reasons
that are responsible for the growth of non-performing assets. You will also learn about various
provisions that are available for non-performing assets and the non-performing assets recovery
Banks play a very useful and dynamic role in the economic life of every modern state. They are
important constituents of the money market and their demand deposits serve as money in the modern
community. Bankers are the custodians and distributors of the liquid capital of the country.
Therefore, most important function of the banking system is to mobilize the savings of the people by
accepting deposits from the public. The banker becomes the trustee of the surplus balances of the
public. The Non-performing Asset (NPA) concept is restricted to loans, advances and investments.
As long as an asset generates the income expected from it and does not disclose any unusual risk
other than normal commercial risk, it is treated as performing asset.
Meaning of NPAs
A performing asset is an advance which generates income to the bank by way of interest and other
charges. A non-performing asset in the banking sector may be referred to an asset not contributing to
the income of the bank or which does not generate income for the bank. In other words, an advance
account, which ceases to yield income, is a non-performing asset
Definition as per Narasimham Committee: Narasimham Committee clearly defined that an asset
may be treated as Non-performing Asset (NPA), if interest or instalments of principal or both remain
unpaid for a period of more than 180 days. However, with effect from March 2004, default status is
given to a borrower account if dues not paid for a period of 90 days.
Definition as per RBI Guidelines: RBI guidelines defined that NPAs consist of sub-standard assets,
doubtful assets and loan assets. Any asset usually turns as NPA when it fails to yield income during a
Definition according to SARFAESI Act, 2002 The Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 defined Non-
Performing Assets as an asset or account of a borrower, which has been classified by a bank or
financial institution as sub-standard, doubtful or loss assets in accordance with the direction or
guidelines relating to asset classification issued by the RBI.
As per the Reserve Bank of India (RBI), an asset becomes non-performing when it stops to
generate income for the bank. The Non-Performing Assets in Public Banks are valued at
approximately $ 62 Billion, which represents 90% of total NPA in India.
What were the reasons behind the rise of Non-Performing Assets in India?
1. In the period from 2004 to 2009, there was a huge growth in the economy, which led to firms
taking bank loans very aggressively.
2. Most of the investment was in infrastructure sectors like roads, power, aviation, steel
3. Laxity in lending norms by the banks, without analysing the financial health of the companies
and their credit ratings
4. The banning of mining projects, delay in environment permit, led to a rise in prices of raw
materials and a big gap in demand and supply thereby affecting the power, steel, and iron
industries. This affected the capacity of the companies to repay the loans to banks which
resulted in Non-Performing Assets (NPA).
RBI revised the norms and made them stricter as compared to the previously made in 2001.The
specified period was reduced in a phased manner and below given is the RBI guidelines for NPAs
YEAR Specified Period
3. (Ending 31st March)
1993 Four Quarters
1994 Three Quarters
1995 Two Quarters
2001 180 Days
2004 90 Days
NPA - Classifications
Based on different parameters the Non-Performing Assets are classified into three types. The below
table gives the different classification of Non-Performing Assets:
Classification NPA Criteria
These are the assets which have remained NPA for a period of less than or
equal to 12 months
Doubtful Assets If the asset is in the substandard category for a period of 12 months
These assets are of little value, it can no longer continue as a bankable
asset, there could be some recovery value.
What are the impacts of Non-Performing Assets (NPA)
Special MentionAccounts (SMA)
4. 1. Banks won’t have sufficient funds for other development projects which will impact the
2. To maintain a profit margin, banks will be forced to increase interest rates.
3. Due to the curb in further investments, it may lead to the rise of unemployment.
SUGGESTIONS TO REDUCE NON-PERFORMING ASSETS
Non-performing assets are alarming for the stability of a bank. If this not controlled, it will be
dangerous for the financial system. RBI issued guidelines in 1993 based on recommendations of the
Narasimham Committee that mandated identification and reduction of NPAs to be treated as a
national priority because NPA direct toward credit risk that bank faces and its efficiency in allocating
resources. Profitability and earnings of banks are affected due to NPA numbers. In recent years
financial reform led by RBI has helped in reducing NPA numbers. The government has taken several
policy decisions and has prepared several strategies to control the high rate of NPAs in the banking
sector. But these steps have not created desired effect on the rate of NPAs. Following are the
suggestions for reducing non-performing assets:
1. Careful Selection of Borrower/Activity
2. Systematic Post-sanction Follow Up
3. Pro-active Steps by Banks
4. Use of Local News Papers
5. Keep in Touch with Persons Trading with the Borrower
6. Schemes for Prompt Repayments
7. Establishment of a Recovery Cell
8. Services of Credit Investigation and Information Agency
9. Legislative Changes
10. Asset Reconstruction Fund
11. Increase the Role of Branch Manager
The banking sector has been facing the serious problems of the rising NPAs. In fact, PSBs are facing
more problems than the private sector banks and foreign banks. In order to reduce NPAs with
immediate effect, above mentioned suggestions need to be implemented effectively.
NON-PERFORMING ASSETS RECOVERY MECHANISM
Presently, it is the burning issue for the RBI as well as the Government of India to control the NPAs.
Reduction in NPAs is the most important task for the banks. The government of India has taken
5. certain steps for reducing NPAs of the Indian banking sector. Indian commercial banks are adopting
the measures to reduce and control the NPAs in accordance with the recommendations of RBI. These
strategies are necessary to control NPAs. For this, the government has established a recovery
mechanism that involves the steps of preventive management and curative management
A. PREVENTIVE MANAGEMENT:
Preventive measures are to prevent the asset from becoming a non-performing asset. In order to
minimize the level of NPAs, Banks has to concentrate on the following preventive management:
1. Redesigning Unpaid Loan Instalments: The bank should make an effort to redesign the
loan repayment schedule for those borrowers who are unable to repay the loans. By reducing
the amount of instalment and extend the time for repayment of the loan, bank can recover the
maximum loan from its borrowers. This will convince the borrowers that they can repay the
2. Know Your Client (KYC): The bank should make it a point that the reminders are sent on
time and frequent visits should be taken in the case of hardcore borrowers. The visit should
not be only the formality but it should bring some quality results. The continuous follow–up
for collecting the advances will definitely help the banks in collecting the older advances
also. Most banks in India have a system of preparing ‘know your client’ (KYC) profile/credit
report. As a part of KYC system, visits are made on clients and their places of business/units.
The frequency of such visits depends on the nature and needs of relationship.
3. Credit Assessment and Risk Management Mechanism: Managing credit risk is a much
more forward-looking approach and is mainly concerned with managing the quality of credit
portfolio before default takes place. It is believed that the credit assessment and risk
management mechanism are ever lasting solution to the problem of NPAs. The
documentation of credit policy and credit audit immediately after the sanction is necessary to
upgrade the quality of credit appraisal in banks.
4. Recovery Camps: It is believed that in the recovery camp the banks can recover maximum
advances by offering some discount or certain other relaxations. These camps can be
organized in the cases of agricultural advances and advances given to seasonal businesses. It
is also suggested that these camps should be organize during the peak season of the business
or during the harvest season in agriculture. It is advisable to take the help of outsiders such as
local Panchayats officials, regional bank managers and similar other person and these camps
should be properly planned to ensure maximum advantage.
6. 5. Watch-List: The purpose of identification of potential NPAs is to ensure that appropriate
preventive/corrective steps could be initiated by the bank to protect against the loan asset
becoming non-performing. Most of the banks have a system to put certain borrowable
accounts under watch list or special mention category if performing advances operating under
adverse business or economic conditions are exhibiting certain distress signals. The
categorization of such accounts in watch list or special mention category provides early
warning signals enabling Relationship Manager or Credit Officer to anticipate credit
deterioration and take necessary preventive steps to avoid their slippage into nonperforming
6. Willful Defaulters: As per the revised guidelines of RBI, a willful default occurs when a
borrower defaults in meeting its obligations to the lender when funds have been utilized for
purposes other than those for which finance was granted. The list of willful defaulters is
required to be submitted to Securities Exchange Board of India (SEBI) and RBI to prevent
their access to capital markets. The process of sharing of information of this nature helps
banks in their due diligence exercise and helps in avoiding financing unscrupulous elements.
7. Early Warning Signals (EWS): Banks should have adequate preventive measures, fixing
pre-sanctioning appraisal responsibility and having an effective post-disbursement
supervision. It is believed that the origin of the flourishing NPAs lies in the quality of
managing credit assessment, risk management by the banks concerned. Therefore, banks
should continuously monitor loans to identify accounts that have potential to become non-
performing. Most banks in India have laid down a series of operational, financial,
transactional indicators that could serve to identify emerging problems in credit exposures at
an early stage. Early warning signals can be classified into five broad categories viz: (a)
Financial, (b) Operational, (c) Banking, (d) Management and (e) External factors.
8. Rehabilitation Package: According to RBI guidelines, the banks should introduce
rehabilitation package for such sick units. For this banks should firstly identify sick units in
SSI as well as in medium and large scale industry. It is suggested that while introducing such
rehabilitation package, the bank should keep in mind that the causes of sickness should be
genuine and the project should be viable in terms of debt-service coverage ratio.
9. Deposit Insurance and Credit Guarantee Corporation of India (DICGC): Banks can also
take the services of DICGC regarding settlement of their claims. For that bank should submit
their proposals for outstanding loans with DICGC for settlement of their claims and reduce
7. 10.Corporate Debt Restructuring (CDR): The process of CDR enables the companies to
restructure their dues and reduce the incidence of fresh NPAs. It has been introduced in the
year 2001. The aim of CDR is to provide a timely and transparent system for restructuring of
the corporate debt with the banks and financial institutions. It reforms the loan servicing
obligation of the borrower and gives some concession in the interest rate
11.Asset Reconstruction Companies (ARC): CBSR suggested that the most effective way of
removing NPAs from the books of the weak banks would be to move these out to a separate
agency which will buy the loans and put their own efforts for the recovery of these loans. The
Committee suggest remedies to recover the NPAs as well their subsequent transfer as asset
through Asset Reconstruction Companies. These companies’ efforts are generally profit
oriented and its aim is to recover from the acquired assets more than the price paid for it.
12.Legal Actions for Recovery: The bank should start immediate actions against such
borrowers those who have not accepted the compromise proposals given by the banks.
Because in these cases it is believed that there are chances of their willful default. Therefore,
it is suggested that it would be better for the banks to file the civil suits instead of waiting for
the long time.
B. CURATIVE MANAGEMENT:
The Central government and RBI have taken various steps for controlling the issue NPAs. For the
same they create legal and regulatory environment to facilitate the recovery of existing NPAs of
banks. The curative measures are designed to maximize recoveries so that banks funds locked up in
NPAs are released for recycling. Following are the curative measurement:
1. Compromise Settlement Schemes: This scheme covers all sectors sub-standard assets, doubtful
or loss assets as on 31st March 2000. All cases on which the banks have initiated action under the
SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being
obtained from the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and
malfeasance are not covered
2. Lok Adalats: RBI has issued guidelines to commercial banks advising them to make use of Lok
adalats. They are voluntary agencies created by state governments to assist in matters of loan
compromise. Lok adalats work out an acceptable compromise and issue a recovery certificate which
shortens the period of obtaining a court decree.
3. Debt Recovery Tribunals (DRTs): The Debt Recovery Tribunals have been established by the
Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and
recovery of debts due to banks and financial institutions.
8. 4. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002: The Government has passed the SARFAESI Act on 21st June 2002 in
order to vested more powers to the banks to proceed against the “willful defaulter”, and affect
recoveries without the intervention of courts and tribunals. Securitization is considered an effective
tool for improvement of capital adequacy.
Some of important NPA Recovery Mechanisms are:
Debt Recovery Tribunal
(DRT) – 2013
It was set up to reduce the time required for settling cases
Governed by Recovery of Debt due to Banks and Financial
Institutions Act, 1993
Insufficient numbers, hence cases are pending for longer
Credit Information Bureau
This step is to prevent NPA’s by sharing of information on wilful
ARC (Asset Reconstruction
Recovering value from stressed loans bypassing courts which was
a time-consuming process.
Corporate Debt Restructuring
Reduce the burden of debts on the company by giving more time
to the company to payback as well as decreasing the rates along
5:25 Rule (2014)
This is also called Flexible Restructuring of Long Term Project
Loans to Infrastructure and Core Industries
This involves refinancing of long term projects
Joint Lenders Forum (2014)
It is done to avoid a situation where a loan is taken from one bank
to repay the loans in other banks
Mission Indradhanush (2015)
It is the most comprehensive reforms undertaken to improve the
functioning of the Public Sector Banks, by using the ABCDEFG
Strategic Debt Restructuring
(SDR) – 2015
Corporates who have taken loans from banks if they are unable to
repay, then the banks can convert part or complete loans into
Asset Quality Review (2015)
This is a kind of preventive measure, involving early identification
of assets which could turn out to be stressed at a later stage.
Insolvency and Bankruptcy One-stop process for solving insolvencies.
9. Code (2016) Aims to protect small investors.
An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad
assets from banks and financial institutions so that the latter can clean up their balance sheets. In
other words, ARCs are in the business of buying bad loans from banks.
Why was it in the news?
In the Union Budget 2021-22, Finance Minister Nirmala Sitharaman announced the setting up of
Asset Reconstruction Companies in India to take care of Non-Performing Assets (NPAs) of stressed
banks. ARCs in India shall be set up by state-owned and private sector banks, as proposed. Also,
there will be no equity contribution from the government.
Asset Reconstruction Companies
At the time of the Asian Financial Crisis, India’s non-performing assets stood at a whopping
14.4 per cent. It was in this context that the Narasimham Committee (1998) recommended
setting up an ARC specifically for purchasing NPAs from banks and financial institutions
Following this, the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 was enacted in December 2002 which provides
the legal basis for the setting up ARCs in India
The asset reconstruction companies or ARCs are registered under the RBI
It helps the bank clear up its balance sheets and concentrate in normal banking activities
The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-
Performing Assets. Thus ARCs are engaged in the business of asset reconstruction or
securitisation or both
The ARC can take over only secured debts which have been classified as a non-performing
A few of the existing ARCs in India, which are being regulated by the Reserve Bank of
Asset Reconstruction Company (India) Ltd. (ARCIL)
ASREC (India) Ltd.
Reliance Asset Reconstruction Company Ltd.
India SME Asset Reconstruction Company Ltd. (ISARC)
International Asset Reconstruction Company Private Ltd.; and more
ARC NAME ARC ADDRESS
Company (India) Ltd,
The Ruby,10th Floor, 29,Senapati Bapat Marg, Dadar (West),
Assets Care & Reconstruction
2nd Floor, Mohan Dev Building 13, Tolstoy Marg, New Delhi –
ASREC (India) Ltd. Solitaire
Bldg No.2, Unit No.201-202A & 200-202 B Gr.Floor, Andheri
Ghatkopar Link Rd, Chakala Andheri (E), Mumbai-400093
Reconstruction Pvt Ltd,
55-56,5th Floor, Free Press House, Nariman Point, Mumbai-
Reconstruction Company Ltd.
D-54,1st Floor, Defence Colony New Delhi-110024
Reconstruction Company Pvt
709,7th Floor, Ansal Bhawan, 16, Kasturba Gandhi Marg, New
Delhi - 110 001
Reconstruction Company Ltd.
19 Walchand Hirachand Marg, Ballard Estate, Mumbai – 400
Pridhvi Asset Reconstruction
and Securitisation Company
D No.1-55, Raja Praasadamu, 4 th Floor, Wing-I, Masjid Banda
Road Kondapur, Hyderabad-500084
9 Phoenix ARC Private Ltd.
5th Floor,Dani Corporate Park 158, CST Road, Kalina,
Santacruz (East) Mumbai-400098
Invent Assets Securitisation &
Reconstruction Pvt Ltd,
107,Jolly Maker Chambers No.2 225,Nariman Point Mumbai-
JM Financial Asset
7th Floor, Cnergy Appasaheb Marathe Marg Prabhadevi
India SME Asset
Reconstruction Company Ltd.
1004, 10th Floor, Naman Centre, Plot No. C-31, G-Block,
Bandra - Kurla Complex, Bandra (E), Mumbai400051
Reconstruction Company Ltd.
Edelweiss House, Off CST Road, Kalina, Mumbai-400098
UV Asset Reconstruction
704, Deepali Building, 92, Nehru Place, New Delhi-110019
Meliora Asset Reconstruction
106, Bharat Towers, 5 th Lane, Dwaraka Nagar, Visakhapatnam
Andhra Pradesh -530016
Reconstruction Private Ltd.
9, M.P. Nagar First Street, Kongu Nagar Extension, Tirupur,
Tamil Nadu 641 607
Prudent Asset Reconstruction
611, Sixth Floor, D Mall, Plot No. A-1, Netaji Subhash Place,
Pitampura, New Delhi – 110 034
18 MAXIMUS ARC Ltd.
59A-18/1-5A, Sri Plaza Teachers Colony, Patamata, Vijaywada,
Andhra Pradesh -520 008
CFM Asset Reconstruction
A/3, Safal Profitaire, 5th Floor, Near Prahlad Nagar Garden,
Encore Assets Reconstruction
Company Private Ltd.
15th Floor, Eros Corporate Tower, Nehru Place, New Delhi -
Rare Asset Reconstruction
203, Gala Argos, Nr. Harikrupa Tower, Ellisbridge Gymkhana,
Gujarat College Road, Ahmedabad – 380006
Reconstruction Private Ltd.
20th Floor, A - Wing, Naman Midtown, Elphinstone Road,
Mumbai - 400013
Ambit Flowers Asset
Reconstruction Private Ltd.
Ambit House, 449, Senapati Bapat Marg, Lower Parel, Mumbai
- 400013 24
Reconstruction Private Ltd.
M-62 & 63, First Floor, Connaught Place, New Delhi- 110 001