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Non Performing Assets - Causes Improper financing Obsolete technology. Uneconomic size

Non Performing Assets - Causes Improper financing Obsolete technology. Uneconomic size Delays in project implementation Fraudulent management. Diminishing market potential./ Life cycle theory High project cost Changes in direct / indirect tax structure.

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Non Performing Assets - Causes Improper financing Obsolete technology. Uneconomic size

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  1. Non Performing Assets - Causes • Improper financing • Obsolete technology. • Uneconomic size • Delays in project implementation • Fraudulent management. • Diminishing market potential./ Life cycle theory • High project cost • Changes in direct / indirect tax structure. • Competition from unorganized sector. • Macro economic factors

  2. Early warning signals • 1. Stagnant /declining sales. • 2. Continuing losses. • 3. Erosion of working capital margins. • 4. Irregularity in bank limits. • 5. Uneconomic levels of operation • 6. Chronic cash shortages. • 7. Accumulation of non moving inventories. • 8. Sticky debtors. • 9. Pressing creditors. • 10. Unsatisfactory financial ratios

  3. . • NPA Management • The rehabilitation package for sick units is administered by the Board of Industrial Finance Reconstruction. • Section 15 / 22 of BIFR act states that if a company has a 100% / 50% erosion of networth and cash loss in 2 successive years both occurring simultaneously. then it should be refered to the BIFR for rehabilitation. further, the company should be in existence for 3 years. • Under the purview of SICA , 1986

  4. BIFR appoints operating agency to prepare revival scheme under SICA guidelines. • Concessions restricted to not more than 2% of the normal lending rate. • With a rehabilitation package for 7 years, company should repay all liabilities in 10 years with a DSCR of 1.33 • Appeal against BIFR order to AIFR • In forming a Rehab scheme sacrifice of public interests should not exceed infusion of cash by new promoter.

  5. Short comings of BIFR • -No powers to instruct any authority, Banks, FI or company. • - Only if there is a consensus,on a scheme can BIFR pass orders. • Revival measures • 1. Working with concessions as per SICA act. • 2. Merging with profitable unit, and claiming Sec 72A • 3 Change in management. • 4. Introduction of new value added products. • 5. Conversion of debt to equity. • 6. Controlling costs. • 7. One time settlement of debt, funded interest etc.

  6. Management of NPA’s • SICA , 1986 • Narsimham committee recommendations • Recovery of debt to banks & financial institutions act 1993 • Securities & Reconstruction of Financial assets & enforcement of security interest act 2002. • To help Banks / FII’s reduce NPA’s

  7. Enforcement of security interest act , 2002 • Secured creditor can enforce the security directly, with out intervention of court or tribunal after giving 60 days notice.If borrower does not pay outstanding interest & principal within that time secured creditor can take possession of the assets , management of assets or appoint any other person to manage the assets. • The power can be only be exercised if the asset is an NPA as per RBI guideline which defines NPA if interest & installment is overdue for a period exceeding one quarter.

  8. Presently these powers are only to public financial institutions & banks. • Secured creditor can sell the assets & if dues are not fully recovered he can file application with DRT for balance amount. • Banks / Institutions can also hand over possession to securitistion or reconstruction company. • Appeal can be filed by the borrower with the DRT only after the assets or management is taken over and not at the stage of receiving notice.Jurisdiction of civil courts is barred however writ can always be filed in the high court

  9. Protection of SICA will not be available once secured creditor takes steps for realisation of assets. • Any refrence pending with the BIFR will abate. • Provisions of “ Asset reconstruction” combine the features of securitisation and enforcement of security interest. • Act effective from June 21,2002. • Act is based on the recommendation of the Narsihman committee reports

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