Thursday, February 2, 2017

What Happens to NPAs in Banks?

A few weeks ago, at the peak of the Demonetization drive, there was a new about a loan given to Kingfisher Airlines being written off and the social media was full of propaganda posts about how the government was trying to use Demonetization to Waive Off Bad loans. I had published an article then about how a Write Off is different from a Loan Waiver and also mentioned that Banks have certain options on how they can recover their dues from a loan defaulter. In this article, you will learn how Banks go about Recovering their money from borrowers.

What is an NPA?

Just to Refresh, a Non-Performing Asset is nothing but a Loan given out by a bank on which the borrower has stopped making the monthly repayments.

How Do Banks Recover the Amount that is Owed by the Borrower?

The following are the steps the Banks would take in order to Recover the money that is due.

Step 1: Contact the Borrower and Discuss Repayment Terms.

Most banks reach out to borrowers and try to discuss about why payments have been overdue and whether the customer has plans to start repaying the loan. Sometimes the problem could be a temporary one (like a customer who lost a job and is searching for a new job) and Banks might give some time and allow customers to resume repayment and move the loan back to the Regular loans pool instead of being an NPA.

Step 2: Restructuring of Loans

In some cases, like businesses that are going through temporary problems, there may be negotiations between the customer and the bank about Restructuring of the loan and maybe even some extra funds to help the business get revived. This type of restructuring is quite common and in case of large businesses where the outstanding amount (or the extra borrowing) is huge, many banks may join together to form something like a consortium and offer the loan facility to the customer. Of course, Banks will review the creditworthiness of the Borrower before they decide to offer further loans because the existing credit is already at risk and the extra loans could end up as NPAs as well.

Note: Kingfisher Airlines was on the receiving end of this type of loan restructuring deal many times in the last few years of its existence before it went Bust. Interestingly, this restructuring did not help kingfisher revive their business and only resulted in Banks ending up adding more 0’s to the NPA pool. Experts suggest that there were severe lapses on the part of Banks when they offered further loans to kingfisher. The fact that collateral was not requested during the initial loan screening process or during the subsequent restructuring highlights just re-confirms the previous statement.

Step 3: Banks Approach the Debt Recovery Tribunal (DRT)

When discussions with the Borrower fail, the next course of action for the Banks would be to approach the Debts Recovery Tribunal (DRT). To avoid interrupting this steps flow, you will learn more about what this DRT is toward the end of this article.

The bank or Financial Institution that needs to recover debt from any individual or company can contact the Tribunal and make an application. All Documentary evidence/proof reg. the debt that is due also needs to be submitted along with the Application. If an existing proceeding is going on through the Tribunal, any other banks that need to recover money from the same individual or company can join the proceedings before the final order is passed by making an application to the Tribunal (just like the first Bank/institution)

Step 4: The DRT Reviews the Application and issues a Summon to the Borrower/Defaulter

The DRT then reviews the application and documentary evidence submitted by the Bank and then issues a summon to the Borrower. The Borrower has 30 days within which he/she has to respond to the DRT about the overdue loan payments.

Step 5: DRT Completes the Inquiry and Declares Final Order

After evaluating all the facts & information provided by both the Bank and the Borrower, the DRT then Declares the Final Order. If the Borrower is unable to make the necessary Repayments, the DRT has the power to attach the Assets/Properties that belong to the Borrower to the Loan. These assets can then be Auctioned off to repay the amount that the Bank is due.

In the case where the Borrower is unwilling to make the repayment, the DRT has the powers to arrest the defendant and imprison them. If there are any appeals to be made against the orders issued by the DRT, either party could approach Debt Recovery Apellate Tribunals for resolution.

An Important Point to note here is that, this Debt Recovery process will take a very long time and may involve lawyers from both the Banks side as well as the Borrowers Side.

What is this Debts Recovery Tribunal?

Keeping in line with the international trends on helping financial institutions recover their bad debts quickly and efficiently, the Government of India has constituted thirty three Debts Recovery Tribunals across the country.

The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 and also Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.

Under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 banks approach the Debts Recovery Tribunal (DRT) whereas, under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 borrowers, guarantors, and other any other person aggrieved by any action of the bank can approach the Debts Recovery Tribunal (DRT).

Debts Recovery Tribunal are located across the country. Some cities have more than one Debts Recovery Tribunals. New Delhi, Chennai, Kolkata and Mumbai have three Debts Recovery Tribunals. Ahmedabad and Chandigarh have two Debts Recovery Tribunal (DRT) each. One Debts Recovery Tribunal has been constituted at Allahabad, Aurangabad, Bangalore, Coimbatore, Cuttack, Earnakulam, Guwahati, Hyderabad, Jabalpur, Jaipur, Lucknow, Madurai,Nagpur, Patna, Pune, Vishakapatnam and Ranchi.

What is Debts Recovery Appellate Tribunal?

Appeals against orders passed by Debts Recovery Tribunal (DRT) lie before Debts Recovery Appellate Tribunal (DRAT). There five Debts Recovery Appellate Tribunal (DRATs) located in the country. One Debts Recovery Appellate Tribunal (DRAT) is located each at Delhi, Allahabad, Mumbai, Chennai and Kolkatta. A Debts Recovery Appellate Tribunal (DRAT) conducts circuit sittings in different cities where Debts Recovery Tribunal (DRTs) are located over which it has appellate jurisdiction.

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