MODULE-2

Question 1

PRE- NPA MANAGEMENT

Answer 1

Pre-NPA Management - This occurs at the time of sanction or Before the asset becoming an NPA, taking steps to prevent it becoming an NPA.

i. Due Diligence - Do a proper check with Credit Agencies (CIBIL, CRIF, EXPERIAN, EQUIFAX, CRISIL)
ii. Prior Experience - Banks determine eligibility based on their prior experience with similar loan seekers.
iii. Security Analysis - CERSAI Check, Ensure proper
documentation, check land records.

There must be a margin of at least 20% between the
principle disbursed and the security provided (Eg. loan of
₹100, then the security must be not less than ₹120)

Valuation must be on 3 grounds
Market Price - Could be valued high or low, based on the
current scenario

Realisable Sale Value (RSV) - Based on market
conditions

Distressed Sale Value (DSV) - The lowest value that
property can fetch in time of crisis

iv. Legal Security Ownership

Legal Survey Report - Also called as ‘Search & Title’. Check value of stamp duty. Check how ownership was acquired

v. Credit Analysis
i. Project feasibility (eg. private uni next to NLUO for ₹200Cr)
ii. (eg. from the C1&C2 diagram - ATMs were purchased by
company, but bank could not manage to acquire)
iii. Do proper monitoring

Question 2

Credit Analysis

Answer 2

1. Project feasibility
2. Chances of success/Failure
3. Past experience
4. Back-up in case of failure
5. Personal Securities of Guarantors

Question 3

Before NPA Classification-

Answer 3

a. Regular Due Dilligence - DD needs to be done regularly, so that the bank is secured and not subject to surprises if EMI suddenly stops coming in.

b. Monitoring - Credit, Legal, Risk
i. Account
ii. Borrower
iii. Security
iv. Documents

Question 4

Prompt Corrective Actions

Answer 4

Actions taken by the RBI towards the bank. RBI came up with PCA guidelines in 2017, based on which 3 categories are determined based on which RBI exercises control over the Financial Institution when NPA crosses a particular limit-

a. <6% - No PCA required
b. Risk Threshold 1 (RT1) - Net NPA (NNPA) is ≥ 6% && ≤ 9 (Essentially -
6%≤ NPA ≤ 9%) of the total advances
c. RT2 - Net NPA is >9% and ≤12%
d. RT3 - NNPA>12%

Question 5

Causes attributable to borrowers

Answer 5

• Improper borrower identification.
• Wilful defaults
• Financial indiscipline / diversion of funds.
• Non-submission of KYC or Wrong/ Misleading KYC
• Poor stake / contribution of borrower
• Poor Inventory / Receivable management
• Entry into business at an inappropriate time of
  business cycle.

Question 6

Causes attributable to Banks- Internal

Answer 6

1. Poor pre-sanction appraisal / unrealistic projections.
2. Poor assessment of commercial viability (due to lack
   of inadequate data / knowledge on market industry).
3. Delayed decision-making at operative level itself or
   due to multiplication of processing tiers (without real
   value addition).
4. Delayed disbursements.
5. Non-compliance of terms of sanction.
6. Incomplete / Defective documentation.
7. Inadequate supervision, absence of effective monitoring (post disbursement) & delays in detection of symptoms & initiation of remedial measures.
8. Over-stress on long relationships / family / group
   connections even at the cost of commercial viability of
   projects.

Question 7

Causes attributable to Banks- External

Answer 7

1. Changes in regulatory prescriptions causing change
   in norms for classification.
2. Long drawn legal processes for recovery of loan.
3. Non-compliance or delay in compliance of terms of rehabilitation package by borrower.
4. Lack of exchange of information / coordination
   between financial institutions & Bank.
5. Non-availability of powers for enforcing securities (possession & sale) unlike those enjoyed by SFCs.

Question 8

Causes beyond control of both the
Borrower and the Bank- Third Parties

Answer 8

1. General slow-down in the Economy / Recessionary
   trends.
2. Depressed capital markets and consequent delay in
   arrangement of funds for the project.
3. Frequent adverse changes in the govt. policies, excise
   and customs duties, decategorisation of items
   reserved for SSI, price preferences, cash incentives,
   product reservation quota system, etc.
4. Changes in policies regarding pollution control including legal decisions as in case of aquaculture and few chemical industries, which virtually ruined them, resulting in huge NPA with banks.
5. Isolated or general law and order problem resulting in stoppage of industrial production and movement of goods.
6. Inadequacy of infrastructure, in particular power resulting in high cost of production and
   hence lesser marketability of products.
7. Insensitivity of Govt. towards non-payment of dues by PSUs and procedural delays in
   invocation of govt. guarantees.