Page 226 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 15: Management of NPAs by Banks

9. Sale of NPA to other Banks Notes
(a) A NPA is eligible for sale to other banks only if it has remained a NPA for at least
two years in the books of the selling bank

(b) The NPA must be held by the purchasing bank at least for a period of 15 months
before it is sold to other banks but not to bank, which originally sold the NPA
(c) The NPA may be classified as standard in the books of the purchasing bank for a
period of 90 days from date of purchase and thereafter it would depend on the
record of recovery with reference to cash flows estimated while purchasing

(d) The bank may purchase/sell NPA only on without recourse basis
(e) If the sale is conducted below the net book value, the short fall should be debited to
P&L account and if it is higher, the excess provision will be utilized to meet the loss
on account of sale of other NPA.
10. SARFESI (Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest) Act, 2002
(a) SARFESI provides for enforcement of security interests in movable (tangible or
intangible assets including accounts receivable) and immovable property without
the intervention of the court.
(b) The bank and FI may call upon the borrower by way of a written legal notice to
discharge in full his liabilities within 60 days from the date of notice, failing which
the bank would be entitled to exercise all or any of the rights set out under the Act.

Caselet Banks find DRT a better Recovery Mechanism

ok Adalats have not proved to be a good means of effecting recoveries from bad
loans, statistics show. The ‘public courts’ have accounted for only 5 to 8 per cent of
Ldelinquent loans recovered in the last couple of years. Also, as the Chairman and
Managing Director of Indian Bank, Mr. M.S. Sundara Rajan, observes, borrowers often do
not honour the commitment reached in Lok Adalats.
However, banks have found the mechanism of Debts Recovery Tribunal and the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, more helpful. SARFAESI empowers banks to recover their non-performing
assets without the intervention of the Court. A borrower aggrieved by the action of the
bank can file an appeal with DRT and then with the Debt Recovery Appellate Tribunal
(DRAT), but not with any civil court. The borrower has to deposit 50 per cent of the dues
before an appeal with DRAT.

Many bankers have told Business Line that it is easier to recover small-ticket bad loans, of
around 1 crores, because they are typically backed by securities and borrowers come
forward to negotiate.
On the other hand, the large borrowers are seen to have sufficient ‘muscle’ and succeed in
stalling the recovery process.

In addition to DRTs and the SARFAESI, the 11 registered asset reconstruction companies
that buy off the bad loans from banks and make the recovery by themselves, seem to have
found favour with banks.
Contd...

LOVELY PROFESSIONAL UNIVERSITY 221