Introduction of Tribunal

Banks and financial institutions have been experiencing considerable difficulties in recovering loans and enforcement of securities charged with them. The procedure for recovery of debts due to the banks and financial institutions, which is being followed, has resulted in a significant portion of the funds being blocked.

Mounting of NPA is a major challenge for the banking industry. NPA recovery plays the main role in a bank’s profitability. Recovery of dues from borrowers through courts and legal action is a major problem for banks and financial institutions. It was observed that existing legal actions initiated by banks and FI were not adequate for debt dues recovery. Undue delay for finalizing banking NPA cases in various courts affects the productivity of banking and financial institution. For speedy recovery of bank’s dues, Debts Recovery Tribunals have been established by the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions.

Establishment of Tribunal:

Recovery of debts due to banks and financial institutions act 1993 came into force on the 24th day of June 1993. The Act is applicable throughout India, except the State of Jammu and Kashmir. Presently there are 39 DRTs in India.

List of Amending Acts:

1. The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 1995

2. The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 2000

3. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004

4. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012

5. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2016

6. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2018

7. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2018

Language of the Tribunal: 

The proceedings of the Tribunal shall be conducted in English or Hindi. No reference, application, representation, documents, or other matter contained in any language other than English or Hindi shall be accepted by the Tribunal unless the same is accompanied by the true translation thereof in English or Hindi.

Composition of tribunal:

A Tribunal shall consist of one person only (hereinafter referred to as the Presiding Officer) to be appointed by notification of the Central Government for 5 years or till he attains the age of 62 years, whichever is earlier. The Presiding Officer of a tribunal is a person who is qualified to be, a District Judge. The Presiding Officer of the DRT is called President.

Central Government provides the tribunal one or more recovery officers and such other officers and employees as that Government may think fit.

Establishment of Appellate Tribunal:

The Central Government shall, by notification, establish one or more Appellate Tribunals, to be known as the Debts Recovery Appellate Tribunal, to exercise the jurisdiction, powers, and authority conferred on such Tribunal by or under this Act.

DRAT is headed by Chair Person is in the rank of High Court Judge is appointed by Central Govt. for 5 years & maximum age 65 years.

Any person aggrieved by the order passed by DRT may appeal to DRAT within 45 days of the order received. The Tribunal may condone the delay in preferring an appeal beyond 45 days.

For filling appeal, as per Sec. 21 of DRT 50% of the amount is to be deposited by the appellant. Provided that the Appellate Tribunal may, for reasons to be recorded in writing, reduce the amount to be deposited by such amount which shall not be less than 25% of the amount of such debt so due.

At present 5 DRATs at Mumbai, Delhi, Kolkata, Chennai & Allahabad are in India. It can transfer, on application, any case from one tribunal to another.

Bar of Jurisdiction:

DRT is open only for Banks and Financial Institutions. DRT has Territorial Jurisdiction. As per Section 31 on the establishment of a DRT no Civil Court or any other authority is to hear the proceeding of eligible cases. (Not applicable for High Court & Supreme Court). All existing cases are also to be transferred to a DRT.

Application to the Tribunal:

Where a bank or a financial institution has to recover any debt from any person, it may make an application to the Tribunal within the local limits of their jurisdiction. DRT has Territorial Jurisdiction.

DRT jurisdiction covers recovery of debts due to banks and financial institutions with an amount of Rs. 20.00 lakh (Changed from notification of Ministry of Finance dated 6^th September 2018. Earlier it was Rs. 10.00 lakh) or more (Central Government can reduce the amount to Rs. 1 lakh).

Now, therefore, in the exercise of the powers conferred by sub-section (4) of section 1 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Central Government hereby specifies that the provisions of the said Act shall not apply where the amount of debt due to any bank or financial institution or to a consortium of banks or financial institutions is less than twenty lakh rupees.

If another bank has a claim against the same person, then that bank can join the case before the final order is passed subject to separate fees. They have powers to order Attachment, to appoint a Receiver/Commissioner for preparation of Inventory or sale.

On receipt of the application under sub-section (1) or sub-section (2), the Tribunal shall issue a summons requiring the defendant to show cause within thirty days of the service of summons as to why the relief prayed for should not be granted.

Counterclaim by the defendant:

A defendant in an application may, in addition to his right of pleading a set off as above, set up, by way of counter-claim against the claim of the applicant, any right or claim in respect of a cause of action accruing to the defendant against the applicant either before or after the filing of the application but before the defendant has delivered his defense or before the time limited for delivering his defense has expired, whether such counter-claim is like a claim for damages or not.

Effect of a counterclaim by the defendant:

A counterclaim shall have the same effect as a cross-suit to enable the Tribunal to pass a final order on the same application, both on the original claim and the counter-claim.

Answer to counter-claim by applicant Bank/Financial Institutions:

The applicant shall be at liberty to file a written statement in answer to the counter-claim of the defendant within such period as may be fixed by the Tribunal.

Exclusion of counterclaim from the main suit:

Where the defendant sets up a counter-claim and the applicant contends that the claim thereby raised ought not to be disposed of by way of counter-claim but in an independent action, the applicant may, at any time before issues are settled about the counter-claim, apply to the Tribunal for an order that such counter-claim may be excluded, the Tribunal may, on the hearing of such application make such order, as it thinks fit.

Procedure for filing application in DRT:

Every application shall be in such form and accompanied by such documents or other evidence and by such fee as may be prescribed. The application shall be filed by the applicant with the Registrar within whose jurisdiction the applicant is functioning as a bank or financial institution, as the case may be, for time being. Important points for filling an application at DRT are as under:

An application shall be presented in the prescribed Performa. The application can be filled out online. An application presented by the applicant in person or by his agent or by an authorized legal practitioner.

An application shall be presented to the registrar of the Bench within jurisdiction his case falls or shall be sent by registered post addressed to the Registrar. If sent by post shall be deemed to have been presented to the Registrar the day on receiving date.

The application shall be presented in four sets along with an empty file size envelope bearing the full address of the respondent. Envelopes bearing the full address of each of the respondents shall be furnished by the applicant.

Documents required:

Every application shall be accompanied by a paper book containing:-

1. A statement showing details of the Debt due from a Respondent and the circumstances under which such debt has become due.
2. All documents relied upon by the applicant and those mentioned in the application.
3. Details of crossed Bank Draft or Indian Postal Order representing the application fee.
4. Index of the documents.

Where the parties to the suit or proceedings are being represented by an agent, documents authorizing him to act as such agent/ Vakalatnama in case of an advocate shall also be appended to the application.

Application fee:

Every application shall be accompanied by a fee provided in sub-rule (2). A fee may be remitted either in the form of crossed demand draft or a Postal Order drawn in favour of the Registrar and payable at the Registrar’s office is situated.

Presentation & scrutiny of application:

The registrar or, as the case may be, the officer authorized by him, shall endorse on every application the date on which it is presented or deemed to have been presented under that rule and shall sign the endorsement. If on scrutiny the application is found to be in order, it shall be duly registered and give a serial number.

Procedure at DRT:

• Registrar of DRT is responsible for the overall administration of the tribunal.
• He gives the Original Application (OA) number and issues summon after scrutinising the application.
• He serves a copy of the application and paper book on each of the respondents.
• The respondent may file 4 complete sets containing the reply to the application along with documents within 1 month (or extended time allowed by the tribunal) of its receipt.
• The respondent shall also endorse one copy of the reply along with documents to the applicant.
•  If the defendant admits a part of the liability, the bank can request DRT to pass an interim order for the admitted amount & pursue the balance dues.
• The Presiding Officer is responsible for ordering injunction or stay for appointment of Commissioner/ Receiver for issuance of a garnishee order or for passing orders for attachment before judgment.
• The presiding officer finally issues a recovery certificate and sends it to Recovery Officer (RO) for execution.
• The recovery officer shall, on receipt of the recovery certificate issue notice to certificate debtors and give 15 days for payment of the amount specified in the recovery certificate.
• If the defendant fails to pay the amount, recovery officer will proceed to recover the amount by any one or more of the modes, which are detailed below:-
• Attachment and sale of movable/immovable property of   the defendant;
• Arrest and detention of the defaulter;
• Appointment of receiver.                                      

The time limit for decision:

The application made to the Tribunal shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the application finally within 180 days from the date of receipt of the application.

Powers of DRAT:

On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying, or setting aside the order appealed against. DRAT shall send a copy of every order made by it to the parties to the appeal and the concerned Tribunal.

The time limit for decision:

The appeal filed before the Appellate Tribunal shall be dealt with by it as expeditiously as possible and endeavor shall be made by it to dispose of the appeal finally within 6 months from the date of receipt of the appeal.

Appeal against the order of the Recovery Officer:

Any aggrieved person can appeal against the order of the recovery officer to DRT can be made within 30 days of the date of order. On receipt of an appeal, the Tribunal may, after allowing the appellant to be heard, and after making such inquiry as it deems fit, confirm, modify or set aside the order made by the Recovery Officer in the exercise of his powers under sections 25 to 28 (both inclusive).

Closing of DRT Application:

After full recovery of bank dues, the application is closed by the recovery officer.

The Chairperson of an Appellate Tribunal, the Presiding Officer of a Tribunal, the Recovery Officer and other officers and employees of an Appellate Tribunal and a Tribunal shall be deemed to be public servants within the meaning of section 21 of the Indian Penal Code.

BRIEF HISTORY OF RBI

The Reserve Bank, as the central bank of the country, started its operations as a private shareholder’s bank. RBI replaced the Imperial Bank of India and started issuing the currency notes and acting as the banker to the government. Imperial Bank of India was allowed to act as the agent of the RBI. RBI covered all over undivided India. To have close integration between policies of the Reserve Bank and those of the Government, it was decided to nationalize the Reserve Bank immediately after the independence of the country. From 1st January 1949, the Reserve Bank began functioning as a State-owned and State-controlled Central Bank. To streamline the functioning of commercial banks, the Government of India enacted the Banking Companies Act,1949 which was later changed as the Banking Regulation Act 1949. RBI acts as a regulator of banks, banker to the Government, and banker’s banks. It controls the financial system in the country through various measures.

STRUCTURE OF THE RBI

The Reserve Bank of India is a central bank and was established on 1^st April 1935 by the provisions of the Reserve Bank of India Act 1934. RBI works as a central bank where commercial banks are account holders. The central office of RBI is located in Mumbai since its inception. It was inaugurated with a share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up. RBI was Nationalised on 1^st January 1949 based on the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. RBI is fully owned by the Government of India. The Reserve Bank of India has 20 regional offices, most of them in state capitals and 11 Sub-offices.

RBI is governed by a central board (headed by a governor) appointed by the central government of India. The general superintendence and direction of the bank are entrusted to the central board consisting of:

1. One Governor;
2. Not more than four Deputy Governors;
3. Two Governmental officials from the Ministry of Finance;
4. Ten nominated directors from various fields by the government to give representation to important elements in the economic life of the country, and
5. The four-nominated director by the Central Government to represent the four local boards with the headquarters at Mumbai, Kolkata, Chennai, and New Delhi.

The local Board consists of five members each central government-appointed for a term of four years to represent territorial and economic interests and the interests of cooperative and indigenous banks.

OBJECTIVES OF RBI

The main objectives of RBI may be stated as follows in specific terms:

• To maintain monetary stability such that the business and economic life of the country can deliver the welfare gains of a mixed economy;
• To maintain the financial stability and ensure sound financial institutions so that economic units can conduct their business with confidence;
• To maintain stable payment systems, so that financial transactions can be safely and efficiently executed;
• To ensure that credit allocation by the financial system broadly reflects the national economic priorities and social concerns;
• To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of price stability;
• To promote the development of financial markets and systems to enable itself to operate/regulate efficiently.

ROLE OF RESERVE BANK OF INDIA

Chapter III of the RBI Act, 1934 describes the role and functions of RBI. These functions are as under:

1. Monetary policy
2. Issuer of currency
3. Transact government business
4. Banker to banks
5. Regulator and supervisor of the financial system
6. Manager of Foreign Exchange
7. Supervisory Functions
8. Developmental role
9. Other Control and Supervisory Roles

1. Monetary policy:

Monitory policy refers to the use of instruments under the control of the Central Bank to regulate the availability, cost, and use of money to maintain price stability, inflation, and credit. The Central Government may, by notification in the Official Gazette, constitute a Committee to be called the Monetary Policy Committee of the Bank. The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target. The Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer Price Index, once every five years. The Central Government shall, upon such determination, notify the inflation target in the Official Gazette.

The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth; The decision of the Monetary Policy Committee shall be binding on the Bank. RBI uses several direct and indirect instruments in the formulation and implementation of monetary policy.

DIRECT INSTRUMENTS

a) Cash Reserve Ratio (CRR):

Cash Reserve Ratio is a certain percentage of bank deposits that banks are required to keep with RBI in the form of reserves or balances. Higher the CRR with the RBI lower will be the liquidity in the system and vice versa. RBI is empowered to vary CRR between 15 percent and 3 percent.

Maintenance of CRR daily:

To provide flexibility to banks in choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows, all SCBs are required to maintain minimum CRR balances up to 95 percent of the average daily required reserves for a reporting fortnight on all days of the fortnight with effect from the fortnight beginning September 21, 2013.

All SCBs are required to submit to Reserve Bank a provisional Return in Form ‘A’ within 7 days from the expiry of the relevant fortnight which is used for preparing press communique. The final Form ‘A’ Return is required to be submitted to RBI within 20 days from expiry of the relevant fortnight.

The Reserve Bank does not pay any interest on the CRR balances maintained by SCBs with effect from the fortnight beginning March 31, 2007. 

Penalties:

From the fortnight beginning June 24, 2006, penal interest is charged as under in cases of default in maintenance of CRR by SCBs:

• In case of default in maintenance of CRR requirement daily which is currently 95 percent of the total CRR requirement, penal interest will be recovered for that day at the rate of three percent per annum above the Bank Rate on the amount by which the amount maintained falls short of the prescribed minimum on that day and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at the rate of five percent per annum above the Bank Rate.
• In cases of default in maintenance of CRR on an average basis during a fortnight, penal interest will be recovered as envisaged in sub-section (3) of Section 42 of Reserve Bank of India Act, 1934.

SCBs are required to furnish the such as date, amount, percentage, the reason for default in maintenance of requisite CRR, and action taken to avoid recurrence of such default.

b) Statutory Liquidity Ratio (SLR):

All commercial banks in the country have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold, and unencumbered securities. Treasury bills, dated securities issued under market borrowing program and market stabilization schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance and pay penalties for failing to maintain SLR as mandated.  The value of such assets of an SCB shall not be less than such percentage not exceeding 40 percent of its total DTL in India as on the last Friday of the second preceding fortnight as the Reserve Bank may, by notification in the Official Gazette, specify from time to time.

Penalties:

If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect of that default, the penal interest for that day at the rate of three percent per annum above the Bank Rate on the shortfall and if the default continues the next succeeding working day, the penal interest may be increased to a rate of five percent per annum above the Bank Rate for the concerned days of default on the shortfall.

INDIRECT INSTRUMENTS

• Liquidity Adjustment Facility:

A liquidity adjustment facility (LAF) is a tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets. LAF is used to aid banks in adjusting the day-to-day mismatches in liquidity. LAF helps banks to quickly borrow money in case of any emergency or for adjusting their SLR/CRR requirements. LAF consists of repo and reverses repo operations.

• Repo Rate and Reverse Repo Rate:

Repo or repurchase option is collateralised lending i.e. banks borrow money from the Reserve bank of India to meet short-term needs by selling securities to RBI with an agreement to repurchase the same at a predetermined rate and date. The rate charged by RBI for this transaction is called the repo rate. Repo operations, therefore, inject liquidity into the system. Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI in this case is called the reverse repo rate.

• Open Market Operations (OMO):

Open market operations refer to the buying and selling of government securities in the open market to expand or contract the amount of money in the banking system. Securities’ purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy.

•  Marginal Standing Facility (MSF):

RBI announced that the MSF scheme has become effective from 9^th May 2011. Marginal Standing Facility is a liquidity support arrangement provided by RBI to commercial banks if the latter doesn’t have the required eligible securities above the SLR limit. Under MSF, a bank can borrow one-day loans from the RBI, even if it doesn’t have any eligible securities excess of its SLR requirement (maintains only the SLR). This means that the bank can’t borrow under the repo facility. MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging government securities, where the rates are lower in comparison with the MSF. 

• Bank Rate:

A bank rate is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is a method by which central banks affect economic activity.

2. Issuer of currency:

RBI shall have the sole right to issue banknotes in India. Banknotes shall be of the denominational values of 2, 5, 10, 20, 50, 100, 500, 1000, 5000, and 10000 rupees or such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify in this behalf. Every banknote shall be legal tender at any place in India in payment or on account for the amount expressed therein and shall be guaranteed by the Central Government.

3. Transact government business:

The Reserve Bank shall undertake to accept monies for the account of the Central Government and to make payments up to the amount standing to the credit of its account, and to carry out its exchange, remittance, and other banking operations, including the management of the public debt of the Union.

4. Banker to banks:

An important role and function of RBI are to maintain the banking accounts of all scheduled banks and act as the banker of last resort. RBI works as a central bank where commercial banks are account holders.  The RBI must control the credit through the CRR, bank rate, and open market operations.

5. Regulator and supervisor of the financial system:

RBI prescribes broad parameters of banking operations within which the country’s banking and financial system functions. Their main objective is to maintain public confidence in the system, protect depositors’ interests and provide cost-effective banking services to the public.

6. Manager of foreign exchange:

The manager of the exchange control department manages the foreign exchange, according to the foreign exchange management act, 1999. The manager’s main objective is to facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India. The RBI plays a crucial role in foreign exchange transactions. It does due diligence on every foreign transaction, including the inflow and outflow of foreign exchange. It takes steps to stop the fall in the value of the Indian Rupee. The RBI also takes the necessary steps to control the current account deficit. They also give support to promote export and the RBI provides a variety of options for NRIs.

7. Supervisory Functions:

In addition to its traditional central banking functions, the Reserve Bank performs certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act 1934 and the banking regulation act 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management, and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and retaliation of certain desired social objectives.

8. Developmental Role:

Being the banker of the Government of India, the RBI is responsible for the implementation of the government’s policies related to agriculture and rural development. The RBI also ensures the flow of credit to other priority sectors as well. Section 54 of the RBI gives stress on giving specialized support for rural development. Priority sector lending is also in the key focus area of the RBI.

9. Other Control and Supervisory Roles:

The other control and supervisory roles of the Reserve Bank of India are done through the following:

• Issue of Licence:

Under the Banking Regulation Act 1949, the RBI has been given powers to grant licenses to commence new banking operations. The RBI also grants licenses to open new branches for existing banks. Under the licensing policy, the RBI provides banking services in areas that do not have this facility.

• Directed credit for lending to Priority Sector and Weaker Sections:

RBI issues guidelines for lending to Priority Sector and Weaker Sections advances. Banks have to follow the guidelines and have to achieve Priority Sector and Weaker Sections advance targets.

• Prudential Norms:

The RBI issues guidelines for credit control and management. The RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such, they are responsible for the implementation of international standards of capital adequacy norms and asset classification.

• Corporate Governance:

The RBI has the power to control the appointment of the chairman and directors of banks in India. The RBI has powers to appoint additional directors in banks as well.

• KYC Norms:

To curb money laundering and prevent the use of the banking system for financial crimes, The RBI has “Know Your Customer” guidelines. Every bank has to ensure KYC norms are applied before allowing someone to open an account and monitor transactions in the accounts.

• Transparency Norms:

This means that every bank has to disclose their charges for providing services and customers have the right to know these charges.

• Risk Management:

The RBI provides guidelines to banks for taking the steps that are necessary to mitigate risk. They do this through risk management in Basel Norms.

• Audit and Inspection:

The procedure of audit and inspection is controlled by the RBI through the off-site and on-site monitoring systems. An on-site inspection is done by the RBI based on “CAMELS”. Capital adequacy; Asset quality; Management; Earning; Liquidity; System and control.

• Publish periodicals:

Apart from the above, the RBI publishes periodical reviews and data related to banking. The RBI plays a very important role in every aspect related to banking and finance.

REGULATORY RESTRICTIONS ON LENDING

RBI provides a framework of the rules and regulations issued to Scheduled Commercial Banks on statutory and other restrictions on loans and advances. Banks should implement these instructions and adopt adequate safeguards to ensure that the banking activities undertaken by them are run on sound, prudent and profitable lines.

• Loans against own Shares:

A bank cannot grant any loans and advances on the security of its shares.

• Loans to the Directors:

BR Act also lays down the restrictions on loans and advances to the directors and the firms in which they hold a substantial interest.

• Restrictions on Holding Shares in Companies:

While granting loans and advances against shares, statutory provisions contained in Sections 19(2) and 19(3) of the Banking Regulation Act, 1949 should be strictly observed.

• Restrictions on Credit to Companies for Buy-back of their Securities:

In terms of provisions of the Companies Act, 2013, companies are permitted to purchase their shares or other specified securities out of their free reserves, or securities premium account, or the proceeds of any shares or other specified securities, subject to compliance with various conditions specified therein. Therefore, banks should not provide loans to companies for buy-back of shares/securities.

• Lending to directors and their relatives on a reciprocal basis:

There have been instances where certain banks have developed an informal understanding or mutual/reciprocal arrangement among themselves for extending credit facilities to each other’s directors, their relatives, etc.

• Restrictions on Grant of Loans & Advances to Officers and Relatives of Senior Officers of Banks:

The statutory regulations and/or the rules and conditions of service applicable to officers or employees of public sector banks indicate, to a certain extent, the precautions to be observed while sanctioning credit facilities to such officers and employees and their relatives.

• advances against FDRs or other term deposits of other banks.

The banks should desist from sanctioning advances against FDRs or other term deposits of other banks.

• Loans against Certificate of Deposits (CDs):

Banks may lend against CDs and buy back their CDs, until further notice, only in respect of CDs held by mutual funds, subject to the provisions of paragraph 44(2) of the SEBI (Mutual Funds) Regulations, 1996.

• advance for subscription to Indian Depository Receipts (IDRs).
• No bank should grant any loan/advance for subscription to Indian Depository Receipts (IDRs).
• No additional facilities to wilful defaulters.No additional facilities should be granted by any bank/FI to the listed wilful defaulters.

CONTROL OVER MANAGEMENT

Power of Reserve Bank to remove managerial and other persons from office (Section 36AA):

Where the Reserve Bank is satisfied that it is necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by order, remove from office, with effect from such date as may be specified in the order, any Chairman, Director, Chief Executive Officer (by whatever name called) or other officer or employee of the banking company. Such person, within 30 days from the date of communication to him of the order, prefers an appeal to the Central Government. The decision of the Central Government on such appeal, and subject thereto, the order made by the Reserve Bank, shall be final and shall not be called into question in any court. Where an order has been made for removal, the Reserve Bank may, by order in writing, appoint a suitable person in place of the Chairman or Director or Chief Executive Officer or other officer or employee who has been removed from his office, with effect from such date as may be specified in the order.

Any person appointed as Chairman, Director or Chief Executive Officer or other officer or employee under this section, shall hold office during the pleasure of the Reserve Bank and subject thereto for a period not exceeding 3 years or such further periods not exceeding three years at a time as the Reserve Bank may specify;

Power of Reserve Bank to appoint additional Directors (Section 36AB):

If the Reserve Bank is of opinion that in the interest of banking policy or the public interest or the interests of the banking company or its depositors it is necessary so to do, it may, from time to time by order in writing, appoint, with effect from such date as may be specified in the order, one or more persons to hold office as additional directors of the banking company.

Any person appointed as additional Director in pursuance of this section shall hold office during the pleasure of the Reserve Bank and subject thereto for a period not exceeding 3 years or such further periods not exceeding 3 years at a time as the Reserve Bank may specify and shall not be required to hold qualification-shares in the banking company.

In line with international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks to move towards greater consistency and transparency in the published accounts.

The policy of income recognition should be objective and based on a record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done based on objective criteria which would ensure a uniform and consistent application of the norms. Also, the provisioning should be made based on the classification of assets based on the period for which the asset has remained non­-performing and the availability of security and the realisable value thereof.

RBI issued Master Circular No. RBI/2023-24/06 Dated April 1, 2023 on Prudential norms on Income Recognition, Asset Classification, and Provisioning about Advances. Banks are urged to ensure that while granting loans and advances, realistic repayment schedules may be fixed based on cash flows with borrowers. 

PRUDENTIAL NORMS

The policy of income recognition should be objective and based on the record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done based on objective criteria which would ensure a uniform and consistent application of the norms. Also, the provisioning should be made based on the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof.

Banks are urged to ensure that while granting loans and advances, realistic repayment schedules may be fixed based on cash flows with borrowers. This would go a long way to facilitate prompt repayment by the borrowers and thus improve the record of recovery in advances.

Automation of IRAC Norms and Provisioning processes in banks

Banks were advised to have appropriate IT systems in place for the identification of Non-Performing Assets (NPA) and the generation of related data/returns, both for regulatory reporting and the bank’s own MIS requirements. It was observed that the processes for NPA identification, income recognition, provisioning, and generation of related returns in many banks are not yet fully automated. Now RBI issued circular Ref. No. DoS.CO.PPG./SEC.03/11.01.005/2020-21 Dated September 14, 2020 on Automation of Income Recognition, Asset Classification, and Provisioning processes in banks.

To ensure the completeness and integrity of the automated Asset Classification (classification of advances/investments as NPA/NPI and their up-gradation), Provisioning calculation, and Income Recognition processes, banks are advised to put in place / upgrade their systems to conform to the following guidelines latest by June 30, 2021. As per the norms coverage of accounts are as under.

• All borrowed accounts, including temporary overdrafts, irrespective of size, sector, or types of limits, shall be covered in the automated IT-based system (System) for asset classification, upgradation, and provisioning processes. Banks’ investments shall also be covered under the System.
• Asset classification rules shall be configured in the System, in compliance with the regulatory stipulations.
• Calculation of provisioning requirements shall also be System-based as per pre-set rules for various categories of assets, value of security as captured in the System, and any other regulatory stipulations issued from time to time on provisioning requirements.
• In addition, income recognition/derecognition in case of impaired assets (NPAs/NPIs) shall be system-driven, and the amount required to be reversed from the income account should be obtained from the System without any manual intervention.
• The System shall handle both the downgrade and upgrade of accounts through Straight Through Process (STP) without manual intervention.
• Frequency: The System-based asset classification shall be an ongoing exercise for both down-gradation and up-gradation of accounts. Banks should ensure that the asset classification status is updated as part of the end process.

NON-PERFORMING ASSETS

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) is a loan or an advance where;

1. Loan Account: For loan account, if the Interest and/or installment of principal remain ‘overdue’ for more than 90 Days.

Overdue status: Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

2. Cash Credit or Overdraft Account: The account remains ‘out of order’ for more than 90 days.

Out of order status: Either the outstanding balance remains continuously more than the sanctioned limit/drawing power or there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period.  

3. The Limit is not reviewed within 180 days from the due date of renewal.
4. Where stock statement has not been received for 90 days or more in case of Cash Credit Accounts.
5. Bills- The bill remains overdue for a period of more than 90 days from the due date of payment.
6. For Direct Agricultural loans: For short duration crops the Interest or instalment remaining overdue for 2 crop seasons & for long duration crop the Interest or instalment remaining overdue for 1 crop season.
7. The credit facilities backed by the Guarantee of Central Govt. though overdue, may be treated as NPA only when the Govt. repudiates its guarantee when revoked.
8. The credit facilities backed by the Guarantee of State Govt. become NPA normally.
9. In the case of bank finance given for industrial projects, housing loan or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes ‘due’ only after the moratorium or gestation period is over.

Advances under consortium arrangements: Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances.

Projects under implementation: For all projects financed by the FIs/ banks , the ‘Date of Completion’ and the ‘Date of Commencement of Commercial Operations’ (DCCO), of the project should be clearly spelt out at the time of financial closure of the project and the same should be formally documented. These should also be documented in the appraisal note by the bank during sanction of the loan.

There are occasions when the completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / reschedulement of loans by banks. Accordingly, the following asset classification norms would apply to the project loans before commencement of commercial operations.

For this purpose, all project loans have been divided into the following two categories:

1. Project Loans for infrastructure sector
2. Project Loans for non-infrastructure sector

For the purpose of these guidelines, ‘Project Loan’ would mean any term loan which has been extended for the purpose of setting up of an economic venture. Further, Infrastructure Sector is a sector as defined in extant Harmonised Master List of Infrastructure of RBI.

Classification of the loan against Term Deposits, NSCs, KVPs/IVPs, etc.: Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

Classification will be done borrower-wise & not facility-wise: when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular.

In case of loans to PACS/FSS classification will be done facility-wise: In respect of advances granted by banks to PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS which is in default will be classified as NPA and not all the credit facilities sanctioned to a PACS/ FSS.

Reversal of Income: If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and credited to income account in the past periods, should be reversed if the same is not realised. This will apply to Government Guaranteed advances also.

In respect of NPAs, fees, commissions, and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected.

Leased Assets: The finance charge component of finance income [as defined in ‘AS 19 Leases’ issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on the leased asset which has accrued and was credited to the income account before the asset became nonperforming, and remaining Unrealised, should be reversed or provided for in the current accounting period.

Upgradation of Loan Accounts classified as NPAs: If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-­performing and may be classified as ‘standard’ accounts.

Appropriation of recovery in NPAs: Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.

In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

Interest Application: On an account turning NPA, banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest. However, banks may continue to record such accrued interest in a Memorandum account in their books. For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account.

COMPUTATION OF NPA LEVELS

Banks are advised to compute their Gross Advances, Net Advances, Gross NPAs and Net NPAs, as per the format given below.

• Gross Advances = Standard Asset Plus Gross NPA
• Gross NPAs as a percentage of Gross Advances = Gross NPA/Gross Advances
• Net Advances = Gross Advances – Deductions
• Deductions includes:

1. Provisions held in the case of NPA Accounts
2. DICGC / ECGC claims received and held pending adjustment
3. Part payment received and kept in Suspense Account or any other similar account
4. Balance in Sundries Account (Interest Capitalization – Restructured Accounts),
5. Floating Provisions
6. Provisions in lieu of diminution in the fair value of restructured accounts classified as NPAs
7. Provisions in lieu of diminution in the fair value of restructured accounts classified as standard assets

• Net NPAs = Gross NPAs minus Deductions (listed above)
• Net NPAs as percentage of Net Advances = Net NPAs/ Net Advances (in %)

Upgradation of loan accounts classified as NPAs: If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as ‘standard’ accounts.

Early Recognition of Stress: Before a loan account turns into a NPA, banks are required to identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the table below:

SMA Sub-categories	Basis for classification
SMA-0	Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress.
SMA-1	Principal or interest payment overdue between 31-60 days.
SMA-2	Principal or interest payment overdue between 61-90 days.

 

ASSET CLASSIFICATION

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues:

1. Substandard Assets
2. Doubtful Assets
3. Loss Assets

Sub-Standard Assets – Account which has remained in NPA category for not more than 12 months. As to realisability these accounts show credit weakness and there is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful Assets – Account that remained in the NPA category for more than 12 months. A loan classified as Doubtful has all the weaknesses inherent to Sub-Standard assets with the added characteristic that the full recovery of the advance is highly improbable due to erosion of security value or fraud or such other reasons.

Loss Assets – Account where Loss has been identified by the bank or Internal Auditors or External Auditors or by RBI Inspector but the amount has not been written off. It is an asset that is considered uncollectible although there may be some salvage or recovery value.

Accounts where there is erosion in the value of security/frauds committed by borrowers: In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non­-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate:

1. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of the last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
2. If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 percent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.

DETERMINATION OF ASSET CLASSIFICATION AND HEALTH CODE

 

To Determine the correct Asset Classification of an NPA borrower two aspects are Important:

1. “NPA Since” Date and,
2. “Value of Security”

Note– When RVS (Both Primary & Collateral) falls below 10% of the O/S balance of the account, the account is straightway classified as ‘LOSS’ and when RVS is above 10% but less than 50% of the O/S balance, it is straightway classified as ‘DOUBTFUL’.

RVS: Value of Security (Realisable Value of Security) to reckon NPA is the total of the amounts of security available in each account of the borrower:

1. Value of Principal (Primary) Security,
2. Value of security, other than Primary Security,
3. Value of Credit/Cash Margin,
4. Value of Guarantee (only of the Nature of Guarantee Cover obtaining in the account i.e., (ECGC), (DICGC) (CGFMU) and (CGTMSE).

NET OUTSTANDING (NOS) = Total Outstanding less amount of Unrealised Interest (URI).

Determination of Asset Classification and Assets Code from Standard to NPA as under;

A) Where NPA since the date is up to 12 months from the Current Date:

1. 1. Asset Code will be determined as Sub- Standard (Secured), except for as at ‘b’ below.
   2. Asset Code will be determined as Sub-Standard (Unsecured), if the unsecured portion/RVS as stipulated & ascertained is not more than10% abinitio (Clean Personal loan, Clean OD etc.).
   3. Asset Code will be determined as Doubtful I, if erosion of RVS is more than 50% of the value accepted in the last inspection.
   4. Asset Code will be determined as Loss if erosion of RVS is more than 90% of the value accepted in the last inspection.

B) Where NPA since date is more than 12 months and up to 24 months from the current date:

1. 1. Asset code will be determined as Doubtful I if the RVS is not less than 10% of the NOS.
   2. Asset code will be determined as Loss, if the RVS is less than 10% of the NOS.

C) Where NPA since date is more than 24 months and up to 48 months from the current date:

1. 1. Asset code will be determined as Doubtful II, if the RVS is not less than 10% of the NOS.
   2. Asset code will be determined as Loss, if the RVS is less than 10% of the NOS.

D) Where NPA since date is more than 48 months from the current date:

1. 1. Asset code will be determined as Doubtful III.
   2. Asset code will be determined as Loss, if the RVS is less than 10% of the NOS.

CATEGORIES, CODE AND PERIODS OF NPA ASSETS
Category	Period in category
Sub-Standard (Secured)	Up to 1 year from NPA date
Sub-Standard (Unsecured)	Up to 1 year from NPA date
Doubtful I (D1)	Above 1 year to 2 years from NPA date
Doubtful II (D2)	Above 2 years to 4 years from the NPA date
Doubtful III (D3)	More than 4 years from NPA date
Loss	No time limit

 

PROVISIONING NORMS

The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investments or other assets is that of the bank management and the statutory auditors.

Loss assets: Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.

Doubtful assets: Provision for doubtful assets should be done as under;

1. 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.
2. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful.

Sub-standard assets: Provision for Substandard assets should be done as under;

1. A general provision of 15 percent on the total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.
2. The ‘unsecured exposures’ that are identified as ‘substandard’ would attract an additional provision of 10 percent, i.e., a total of 25 percent on the outstanding balance.
3. However, given certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts that are classified as sub-standard will attract provisioning of 20 percent instead of the aforesaid prescription of 25 percent.

SUMMARY OF PROVISION IN NPA ACCOUNTS
NPA Category	Provision Amount (RBI Guideline)
Sub- Standard (Secured)	15% of Net Outstanding
Sub- Standard (Unsecured)	25% of Net Outstanding
Unsecured Exposures in respect of Infrastructure loan accounts where certain safeguards such as Escrow accounts are available	20% of Net Outstanding
Doubtful I (Fully secured by RVS)	25% of Net Outstanding
Doubtful I (Partly secured by RVS)	25% of RVS plus 100% of the unsecured Portion (NOS less RVS)
Doubtful II (Fully secured by RVS)	40% of net Outstanding
Doubtful II (Partly secured by RVS)	40% of RVS plus 100% of the Unsecured Portion (NOS less RVS)
Doubtful III	100% of net Outstanding
Loss	100% of net Outstanding

 

Calculation of Provision in Doubtful Asset

1. Advances covered by ECGC guarantee: In the case of advances classified as doubtful and guaranteed by ECGC, provision should be made only for the balance over the amount guaranteed by the Corporation. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision made as illustrated hereunder:

Example

Outstanding Balance	Rs. 4 lakh
ECGC Cover	50 percent
Asset Classification	Doubtful I D1 (say as on March 31, 2024)
Value of security held	Rs. 1.50 lakh

Provision required to be made:

Outstanding balance	Rs. 4.00 lakh
Less: Value of security held	Rs. 1.50 lakh
Unrealised balance	Rs. 2.50 lakh
Less: ECGC Cover (50% of unrealisable balance)	Rs. 1.25 lakh
Net unsecured balance	Rs. 1.25 lakh
Provision for unsecured portion of advance	Rs. 1.25 lakh (@ 100 percent of unsecured portion)
Provision for secured portion of advance	Rs.0.375 lakh (@ 25 percent of the secured portion)
Total provision to be made	Rs.1.625 lakh (as of March 31, 2024)

 

2. Advance covered by CGTMSE: In case the advance covered by CGTMSE guarantee becomes non­performing, no provision need be made towards the guaranteed portion. The amount outstanding more than the guaranteed portion should be provided for as per the extant guidelines on provisioning for non­-performing assets. An illustrative example is given below:

Example

Outstanding Balance	Rs. 10 lakh
CGTMSE Cover	75% of the amount outstanding or 75% of the unsecured amount, whichever is the least
Asset Classification	Doubtful II D2 (say as on March 31, 2024)
Value of security held	Rs. 1.50 lakh

Provision required to be made:

Balance outstanding	Rs.10.00 lakh
Less: Value of security	Rs. 1.50 lakh
Unsecured amount	Rs. 8.50 lakh
Less: CGTMSE cover (75%)	Rs. 6.38 lakh
Net unsecured and uncovered portion:	Rs. 2.12 lakh
Provision for Secured portion @ 40% of Rs.1.50 lakh	Rs.0.60 lakh
Provision for Unsecured & uncovered portion @ 100% of Rs.2.12 lakh	Rs.2.12 lakh
Total provision required	Rs.2.72 lakh

 

Standard Assets: Provision on Standard Assets is done as under;

(i) The provisioning requirements for all types of standard assets stand as below. Banks should make general provisions for standard assets at the following rates for the funded outstanding on a global loan portfolio basis:

1. Direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25 percent;
2. Advances to the Commercial Real Estate (CRE) Sector at 1.00 percent;
3. Advances to Commercial Real Estate – Residential Housing Sector (CRE – RH) at 0.75 percent;
4. Housing loans extended at teaser rates and restructured advances as per latest norms;
5. All other loans and advances not included in (a) (b) and (c) above at 0.40 percent.

(ii) The provisions on standard assets should not be reckoned for arriving at net NPAs.

(iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as ‘Contingent Provisions against Standard Assets’ under ‘Other Liabilities and Provisions Others’ in Schedule 5 of the balance sheet.

Takeout finance: The lending institution should make provisions against a ‘takeout finance’ turning into NPA pending its takeover by the taking-over institution. As and when the asset is taken-over by the taking-over institution, the corresponding provisions could be reversed.