This document provides information on non-performing assets and the SARFAESI Act in India. It defines what constitutes a non-performing asset and outlines different types of loans like term loans, demand loans, cash credits, and overdrafts. It also discusses asset classification, reasons for non-performing assets, and the key aspects of the SARFAESI Act which allows banks to seize collateral for loan defaults without court intervention.

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Non Performing Assets &
SARFAESI Act
General Awareness

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Non Performing Assets
A non-performing asset (NPA) is a loan or an advance where:
 Interest and/or installment of principal remain overdue for
a period of more than 90 days in respect of a term loan
 The account remains ‘out of order’ for a period of more
than 90 days in respect of an Overdraft/Cash Credit
 The bill remains overdue for a period of more than 90
days in the case of bills purchased and discounted
 Interest and/or installment of principal remains overdue
for two harvest seasons but for a period not exceeding
two half years in case of agricultural loans

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Term Loan
 A term loan is a monetary loan that is repaid in
regular payments over a set period of time
 Usually last between one and ten years, but may last
as long as 30 years in some cases
 Prepayment penalty - if you pay off your entire loan
before repayment date
 Ex: Vehicle loan, educational loan, housing loan, etc.

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Demand Loan
 Demand Loan is a monetary loan that can
demanded by the bank anytime and the
borrower has to repay it within short period of
time which may range from 1 to 7 days
 Ex: Loan against fixed deposit, overdraft facility, etc.

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Cash Credit & Overdraft
 To prevent checks from bouncing and credit cards
from being declined or to provide working capital
cash credit or overdraft are provided
 The primary differences between overdraft
and cash credit lie in how they are secured and
whether the money is lent out of a separate
account

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Cash Credit
 Cash Credit – Loan up to certain limit
 Against the security of commodities
 Cash credit account
 Payable on demand

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Overdraft
 Customers withdraw money more than the
amount he holds in his account
 Clean Overdraft and Secured Overdraft (property
like land)
 Current account
 Payable on demand

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Bill Discounted
 An accepted bill of exchange sold for early payment
to a bank or credit institution at less than face value
 If the drawer of the bill does not want to wait till the
due date of the bill and is in need of money, he may
sell his bill to a bank at a certain rate of discount
 The bank deducts fees or applicable interest charges
 The bank or credit institution then collects full value
on bill of exchange when payment comes due

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Asset Classification
SMA Category Classification basis
SMA – 0 (NF) Principal or interest payment not overdue for
more than 30 days but account showing non-
financial (NF) signals of incipient stress
SMA – 1 Principal or interest payment overdue between
31-60 days
SMA – 2 Principal or interest payment overdue between
61-90 days
SMA – Before a loan account turns into an NPA, banks should identify
potential stress in the account by creating a new sub-asset category, 'Special
Mention Accounts' with the three sub-categories as given in the table

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Non-financial Signals of Stress
Some of the non-financial signals of stress are
 Delay of 90 days or more in
 submission of stock statement
 financial statements
 non-renewal of facilities based on audited financials
 Increase in frequency of overdrafts in current
accounts
 The borrower reporting stress in the business and
financials
https://rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=715

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Asset Classification
Substandard assets: An asset which has remained NPA
for a period less than or equal to 12 months
Doubtful assets: An asset which has remained in the
substandard category for a period of 12 months
Loss assets: As per RBI, “Loss asset is considered
uncollectible and of such little value that its continuance
as a bankable asset is not warranted, although there may
be some salvage or recovery value”
https://economictimes.indiatimes.com/definition/non-performing-assets

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Reasons for NPAs
 Usual banking operations/bad lending practices
 A banking crisis (as happened in USA, and Japan)
 Overhang component (due to natural calamities,
disease occurrence, etc..)
 Incremental component (due to credit policy,
terms of credit, etc..)

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Securitization And Reconstruction of
Financial Assets and Enforcement of
Security Interest Act, 2002
SARFAESI

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Background
 The previous legislation enacted for recovery of the
default loans was Recovery of Debts Due to Banks and
Financial Institutions Act ,1993
 The Debts Recovery Tribunals (DRTs) and Debts
Recovery Appellate Tribunal (DRATs) were established
under the RDDBFI Act, 1993
 To provide expeditious adjudication and recovery of debts
due to Banks and Financial Institution
 38 DRT's and 5 DRAT's are functioning in India

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SARFAESI
 If borrower’s account is classified as NPA, banks can
seize the securities without the intervention of court
or tribunal
 A prior notice of 60 days should be given to borrower
 Borrower can restructure within 15 days of such notice
 Borrower can bring stay order, within 45 days after the
failure of restructuring, from DRT or DRAT
 Bank can do the following
 Take possession of the security for the loan
 Sale(auction) or lease or assign the right over the security
 Manage the security

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Exemptions
 SARFAESI is effective only for secured loans
 For unsecured assets, the bank would have to
move to the civil court
 Loans outstanding up to one lakh rupees
 The amount due is less than 20 percent of principle
and interest
 Agricultural land cannot be sold

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Other Implications
 Birth of Asset Reconstruction Companies (ARC)
in India
 These companies are to be registered with RBI
 Some NPAs may not be sold, in such cases banks
sell the property to ARCs
 ARCs buy NPAs from Banks and reconstruct the
asset to make profit out of it