Page 210 - DMGT303_BANKING_AND_INSURANCE

Unit 10: Non-performing Assets

The CDR mechanism covers only multiple banking accounts/syndication/consortium accounts Notes
with outstanding exposure of ` 20 crore and above. There are two categories of debt restructuring
under the CDR system: Category 1 accounts classified as substandard and Category 2 accounts
classified as doubtful.
The accounting treatment of the restructured accounts would be governed by the applicable
prudential norms. The asset classification would continue to be bank-specific as per the existing
prudential norms.

Banks should disclose in their annual accounts details about corporate debt restructuring.
The norms on income recognition, asset classification and provisioning relating to projects
under implementation involving overrun would conform to the specified norms.

The main objective of the SARFAESI Act is to regulate securitization and reconstruction of
financial assets and enforcement of security interest.
In terms of the regulation of the scheme of securitization and reconstruction of financial assets,
the SC/RC should be registered with the RBI, with a minimum net owned fund of ` 2 crore or an
amount up to 15 per cent of the financial assets acquired. Securitization means acquisition of
financial assets (i.e., debt/receivables/any financial assistance) by the SC/RC from its owner,
either by raising funds from a QIB by issue of security receipts representing undivided interest
in the financial asset concerned or otherwise. Asset reconstruction means acquisition by an SC/
RC, of any right/interest of any bank in any financial asset, for its realization.

Any SC/RC can acquire financial assets of any bank/FI. All rights in relation to the assets would
vest in the SC/RC. The bank may give a notice of acquisition of the financial assets by an SC/RC
to the obligor (i.e., the person liable to the owner of the financial asset) or the concerned
registering authority in whose jurisdiction the mortgage/charge/hypothecation/assignment/
other interest in the asset has been registered. Any payment to the SC/RC, pursuant to the
notice, would be a full discharge from all liability in respect of such payment. After the acquisition
of financial assets, an SC/RC may offer security receipts to QIBs for subscription.
The measures for asset reconstruction may be: takeover of management, sale/lease a part/
whole of the business of the borrower, rescheduling of debts payable, enforcement of the security
interest, settlement of dues payable by the borrower and taking possession of the secured assets.
Any SC/RC may act as (1) an agent for a bank for the recovery of their dues from the borrower,
(2) a manager of the secured assets taken over by the secured creditor from the borrower.
Any security interest credited in favour of a secured creditor can be enforced without the
intervention of courts/tribunal, by the concerned creditor. In case of failure of a borrower to pay
to the secured creditor, he may take recourse to the following measures: (1) take possession/
takeover the management of the secured assets, (2) takeover of the management, of the business
of the borrower, (3) appointment of a manager to manage the assets, and (4) to require any
person who has acquired any secured asset(s) from the borrower and from whom money is due
to the borrower, to pay to the secured creditor, sufficient money to pay the secured debt. Payment
made by such person would give him a valid discharge as if the payment were made to the
borrower. All rights in the secured assets would be vested in the transferee as if transfer had
been made by the borrower (owner of the asset).

Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured
assets, he may approach the DRTs for recovery of the balance from the borrower.
The secured creditors would be entitled to proceed against the guarantors/sell the pledged
assets without first taking any of the measures specified above.

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