Banking Management

Unit- EIGHT

Credit Management

By
Arpan Paudel
The purpose of this chapter is:
(A) To learn why should bank lending policies and practices are important
(B) Deal with problem loans when they appear in a bank’s portfolio
Loan & Advances
Industry Review
NPR’ Million

Source: NRB
Session Plan
A. Background
B. Why does business borrow ?
C. Types of Credit
D. Common Examples of Types of Credit
E. Structure of Credit Organization
F. Function of Credit Marketing
G. Function of Credit Appraisal
H. Function of Credit Administration
I. Function of Credit Recovery
J. Steps in the Lending Process:
Credit Management:
(Credit Documentation, Credit Assessment & Credit Appraisal)
Evaluating Credit Proposals 4

K. Overview of NRB Directives affecting Credit Management

Background

 The activity of collecting deposits and lending money to the public

is synonymous with the name “BANK”.
 An Average Bank lends/invests up to 90% of their deposits
 An Average bank generates more than 70% of its revenues through
lending activities.
 There are various risks in lending money the foremost of which is
the default risk commonly known as the credit risk
 Sound risk management is the key to successful Banking.
Why Does Business Borrow?

 To acquire/create assets.

 To meet cash flow gap

 To plan for contingencies

 To optimize return on shareholders capital

 To manage tax
Types of Loans Made by Banks
 Funded or Non-funded
 Revolving or non-revolving
 Bridge Gap, Fixed Term, Working Capital
 Consumer, Retail, SMEs, Corporate
 Consortium/ Syndicated Facility Arrangements…

The bank loans may be divided into seven broad categories by

their purposes:
1. Real Estate Loans
2. Financial Institutions Loans
3. Agricultural Loans
4. Commercial and Industrial Loans
5. Loans to Individuals
6. Lease Financing Receivables
7. Miscellaneous Loans
Types of Credit
Common examples of Types of Credit
 Fund Based
 Overdraft/ Cash Credit/Hypothecation Loan
 Importers’ Loan/ Trust Receipt Loans
 Exporters’ Loan/ Packing Credit Loan
 Short Term Loan/ Demand Loan
 Long Term Loan
 Home Loan/Hire Purchase/ Consumer/ Mortgage Loan
 Credit Cards

 Non Fund Based

 Letter of Credit
 Guarantees
Regulation in Banking

 Capital Adequacy Ratio (CAR)

 Single Borrower Limit

 Productive Sector Landing

 Deprived Sector Lending

 Loan Loss Classification and LLP

 Blacklisting and Release

 Non Banking Asset and Recovery

 …..
Structure of Credit organization

Credit

Marketing Appraisal

Administration Recovery
Function of Credit Marketing

 This unit works towards marketing the products

and services of banks and financial institutions
(BFIs)
 It makes calls on the potential and existing
customers to sell its products
 In an ideal structure, the personnel in the
marketing unit is only responsible to bring the
potential customer to the BFIs. He should not be
responsible for conducting appraisals,
monitoring and recovery activities.
Function of Credit Appraisal
 This unit is solely responsible for evaluating the
applications received from the clients.

 It is a very crucial and specialized function and hence

requires high caliber personnel with significant
knowledge and experience….

 Another key criterion for personnel of credit appraisal is

high degree of integrity and ethics.

 The philosophy of “prevention better than cure” prevails.

Function of Credit Administration

 It should be independent of the credit marketing and

appraisal function in order to provide check and balance
mechanism.

 This unit carries out a whole lot of activities like

 Executing credit documentation
 Making disbursements
 Making regular visits
 Obtaining required documents periodically

 An effective credit administration provides a pillar of

strength to the entire credit management of the BFIs.
Function of Credit Recovery

 Ideally, very problematic cases are handled by

this unit.
 This is a very specialized task and hence
personnel in this unit should possess special
qualities.
 In order to have an effective credit recovery
system, the support of the board and the senior
management is a must.
Steps in the Lending Process

Credit Management:
 Credit Documentation
 Credit Assessment
 Credit Appraisal
CREDIT MANAGEMENT
1. Credit :
Definition:
Credit means providing of overdraft, loan, discount of bills, issuance of
letter of credit & guarantee, acceptance, investment on any financial
instrument (i.e. preference share, Debenture etc.) or any other action
which create obligations or risk to the Bank’s assets whether
temporarily or permanently.
2. Security:
 Deposit
 Gov./NRB Bond/Marketable securities
 Immovable property
 Movable property (Acceptable to the Bank)
 Inventory/Personal Guarantees
CREDIT Documentation

Importance:
Once the approval of credit facility is received, the job of loan
documentation starts.
- Checklist
- Offer letter/ property valuation letter
- Security Documentation
Maintenance of Credit File

A. Working File

B. Vault File

 Control of Vault File

 Record Retention Schedule
A . Working File
 Credit Approval Sheet
 Credit Analysis Report
 Client Status Review
 Call Memos
 Covenant compliance Checklist
 Correspondence with client
 Correspondence with Head Office/ CEO
 Other correspondence
 Borrower’s Financial Statement
 Guarantor’s Financial Statement
 Credit Report (From Credit Information Bureau/ Local Banks & FIs)
 Copies of original documents maintained in vault file as
appropriate.
B. Vault File
 Certificate of incorporation (Verified copies acceptable)
 Memorandum and Articles of Association
 Board Resolution authorizing borrowings and signatories
 Signature Card.
 Account Opening Forms
 General Security Agreement
 Loan Agreement (Loan Deed)
 Guarantees (PG 1st party and 3rd party)
 Demand Promissory (DP) Note
 Negotiable Instruments
 Real Estate Appraisal
 Mortgage Deed
 Pledged Collateral
 Insurance Policy
 Instruction of local authorities
Control of Vault File
1. Vault Key Arrangement
2. “Security Vault Entry Record”

 Before disbursing loan to the borrower, loan officer ensure and

state that all needed documents, property signed and verifies
are ready on file, these document, among other include.

1. INDIVIDUAL CLIENT
 Loan application form (to be prescribed by directive)
 Personal Record
 Personal Financial Statement or Records.
 Account opening documents
 Loan agreement (Loan Deed)
 Guarantees. (PG 1st party and 3rd party)
 other
2. FOR CORPORATE CLIENT

 Application Form
 Certificate of Incorporation.
 Articles of Association.
 PAN
 Tax Clearance Certificate
 By-laws (Niyamawali)
 Board of Directors
 Guarantees (Corporate G’tee)
 Demand Promissory (DP) Note
 Loan agreement (Loan Deed)
 Financial Statements of Guarantor (s) and parent
company.
 Other
3. For Mortgaged Property

 Appraisal Report
 Title Deed of the Collateral
 Location map
 Recorded Deed of Trust or Mortgaged
Deed
 Insurance Policy
 LENDING CONSIDERATIONS
Credit Assessment
‘Interviewing the Customer’
 For an existing company it is imperative to know why the company has left the
former Bank connection or is thinking of leaving the presently associated Bank?
 In case for a new project the credit officer should find out why the customer intends
to avail credit(s) from our Bank if it is already associated with the other Bank (s) ?
 What kind of credit facility(ies) are required and why are they required ?
 How much is needed ?
 How and when will the loan be repaid ?
 What are the possibilities that the plan of the customer will not work-out ?
 In case the plan do not work-out, what will be situation of the company and how will
it meet its commitment to the Bank ?
 What is the background, character and experience of the principals involved in the
company?
 How old is the business ?
 Is the company member of a group ? if yes, then the credit officer should ask of an
organizational chart of the group ?
 How will the Bank loan be insured ?
LENDING CONSIDERATIONS
‘Site Visit’
 Everyone likes talking about themselves
 check the stock position,
 condition of the fixed assets (in case of a manufacturing company)
 location and area,
 debtors’ position from the register
 labour-management relationship etc..

Analysis of the loan application

Assessment of the person (s) involved in the company
Appraisal of the company’s performance
LENDING CONSIDERATIONS
 6Cs –
 Character, Capacity, Cash, Capital, Condition, Collateral

 CAMPARI
 C - CHARACTER
 A - ABILITY
 M - MARGIN
 P - PURPOSE
 A - AMOUNT
 R - REPAYMENT
 I - INSURANCE
CAMPARI

C - CHARACTER

The person involved, historical

background of the company
CAMPARI

 CHARACTER

 Integrity and honesty

 Is the controller known to the Bank ?
 If already associated with the Bank (Business as well as personal capacity)
how have the past dealings with the Bank been conducted ?
 Ask CIB
 What is the previous borrowing record ?
 Can the controller be trusted and does he stick to his commitments ?
 Has the controller successfully dealt with the untoward situation in the past ?
 Personal stability / resources and liabilities
 Connections / Introduction
 Are there any influential family or business connections we should bear in
mind ? A good connection or introduction does not mean that we can dispense
with our normal enquiries. Lending canons always are to be satisfied ?
CAMPARI

A - ABILITY

Can the Company achieve what is

promised?
CAMPARI
ABILITY
 Management Ability
 Do the people behind the business have the managerial capability to run the
business ?

 Do they have the expertise, experience, drive and energy needed to make the
business a success and to justify the Bank’s support ?

 Do they have other business undertakings ?

 Are they innovative ?

 Do they take unjustifiable risks ?
 Is there depth in management ?
 Does the business have a balanced team ?

 Beware :-
 One Man Rule
 Non- Participating board
 Unbalanced top team
 Weak financial function
 Lack of management depth
CAMPARI
ABILITY
 Obtain details of the Business’s products :
 Which ones make the better profits ?
 Which ones generate cash quickly ?
 What is the present demand ?
 Is demand static, increasing or decreasing ?
 Are the sales dominated by few customers ?
 How is the competition ?
 What is the subject company’s market share / where is it placed ?

 Observe manipulation of Financial Statements.

 value of the fixed assets
 value of the stock
 receivables outstanding
 payables to the creditors
 outstanding bank's loan
 turnover and profits made
CAMPARI

M - MARGIN

Is the Return reasonable for the

Risk?
CAMPARI
MARGIN
 Interest Margin
Set the interest rate to reflect :
 Risk
 the purpose of the credit facility / ies
 the period of the credit facility / ies
 Security

 Commission
 The administrative cost associated with running the credit portfolio

 Fees
 Commitment Fees - charged on any unused facility
 Negotiation Fees - charged for the amount of work involved in preparing
and agreeing a facility
 Management Fees - charged to cover the cost of the branch/Bank and
management dealing with an account on a day to day
basis e.g. interviews, phone calls, control etc.
CAMPARI
MARGIN
Obtain details of the workforce
• Are they sufficiently skilled ?
• Is there a ready supply of manpower particularly if the present workforce leaves or expansion
is planned ?
 Are fixed assets sufficient ? what is their age, their economic life ? How is
the condition e.g. obsolete, modern technology, so etc..?
 Analyze the SWOT i.e. Company’s Strength, Weakness, Opportunity &
Threats


Financial and Business Acumen

 Have the previous facilities been respected ?
 What is the customer’s past track record ?
 Analyze the financial statements (balance sheet and P/L account).
Rundown in the company’s checking account maintained in the Bank.
These two give an indication of the past dealings and company’s financial
health.

 Business Development Opportunities

 This canon mainly concerns the future relationship and its development
and the envisaged profitable association.
CAMPARI
P - PURPOSE

 Why is/are the credit facility/ies needed?

 How will the credit facility/ies utilized?

CAMPARI
PURPOSE
 Against Bank/Government Policy
 Bank Policy
 What is the Bank’s current lending policies ?
 It is an acceptable banking proposition ?
 Is the purpose immoral or against community interest ?

 Government Policy
 Has the government placed restriction on the type lending proposed
?
 Is the government encouraging lending by incentives or special
scheme or making it mandatory for the banks to invest in a
particular type of sector or business ?
 Is it in the customer’s best interest ?
 Help in exposing shortcomings in the proposals will be of great benefit
to the customer as well as to the Bank.
 Trade Financing
 Purchase of fixed assets
CAMPARI

A - AMOUNT
How much is needed?
CAMPARI A=Amount
≠ What is Customer’s Stake?

 Is it reasonable when viewed against:

 Our loan
 Borrowing from all sources
 Creditors normal term of trade of the particular business.

 Is the amount correct?

CAMPARI A=Amount
≠ TRADE FINANCE

 Has the projection been produced?

FIXED ASSETS PURCHASE

 Have competitive estimate been obtained?

- Ensure the Customer’s stake is injected before the Bank

lends or ensure the customer’s stake and Bank finance go
parallel.
CAMPARI

R - REPAYMENT

How and when will the Bank

get its money back?
CAMPARI R=REPAYMENT

≠ SOURCE

 Sale of Assets
 Valueof the item (book value)
 Degree of probability of the Assets being sold?
 When is it likely to be sold?
 What will be tentative value (distress)?

Total dependence for the sale of assets for the

repayment should be avoided.
CAMPARI R=REPAYMENT
≠ SOURCE

 Profits:
 Do the past financial statement show profits?
 Are the assumptions realistic?
 Is the project commercially viable?
 Will Sufficient cash surplus be produced to repay the Bank’s loan?
 What is the degree of risk & margin of safety?

Any Financial commitments which the customer is required to

meet in near future?
CAMPARI
I - INSURANCE

 What happens if the plans don’t

work out and loan goes sour?
 Is there any coverage through
which the loan along with the
accrued Interest can be recovered?
CREDIT MANAGEMENT

Financial Statement
Analysis

Lending
Considerations
FINANCIAL ANALYSIS…
 Net Return on Equity = Net Income/Equity (Net worth)
 Net Profitability = Net Income/Sales
 Gross Profitability = Gross Profit/Sales
 Gross Profit = Sales + Other income – cost of sales

 Solvency Ratio = Net worth X 100/Total liabilities

 Leverage = Total Liabilities/Net Worth

 Liquidity Ratio:
 Current Ratio = Current Assets/Current Liabilities
 Quick Ratio = Quick Assets/ Current Liabilities
FINANCIAL ANALYSIS…
 Days Receivables (ACP) = Receivables X 365/Sales
 Days Inventory (ITR) = Inventories X 365/Sales
 Days Payables = Payables X 365/Cost of goods sold
 Assets Turnover = Sales/Assets

 Net Return on Assets = Net Income/Total Assets

 D/E Ratio = Debt/Equity

 Interest Coverage Ratio (ICR) = EBIT/IE

FINANCIAL ANALYSIS…
Comments on the Cash Flow
 Present:
 Determination of the true cash flow from operations,
investing and financing activities
 Assessment of the liquidity of the company.
 See if funds generation permits debt servicing?
 Analysis of Working capital requirement.
 Other comments such as taxation, dividend policy etc.

 Forecast
 Cash flow projection is mandatory.
 Analyze the net changes in the assets, liabilities and net
worth accounts from the Balance sheet at the beginning
of the year and that at the year end.
FINANCIAL ANALYSIS…
Sources and Uses of funds

 Uses of funds:

Increase in Assets
 Increase in account receivables
 Increase in inventories.
 Increase in work in process
 Increase in Prepaid expenses

Decrease in Liabilities
 Decrease in long term debt
 Decrease in short term debt
FINANCIAL ANALYSIS…
Sources and Uses of funds

 Sources of funds:

Decrease in Assets
 Decrease in cash and marketable securities

Increase in Liabilities
 Increase in notes payable
 Increase in accounts payable
 Increase in accrued expenses
 Increase in Long term debt (LTD)

Increase in Net Worth

 Increase in Shares, Capital Surplus
 Increase in retained earnings
limitations of Analysis
 Document based
 Financials can be window dressed
 Regulatory changes
 Conflict of interest
 Ethical issue
 Limitation of knowledge

• Sources of Error:
Substantive errors: Erroneous assessment of credit exposure
Procedural errors: Two forms
- Credit approval process itself faulty
- Incorrect performance of credit assessment
Project Appraisal Ascertain…

 Project is technically sound

 The venture will provide reasonable stream of return
 Venture is In line with the economic objectives of the
nation.
 Ascertain if there are other effective and less costly
ways to achieve objectives
CREDIT MANAGEMENT…

After comprehensive analysis of the

aforementioned canons of lending considerations
either the Bank is satisfied and agrees for a loan or
rejects the loan application
CREDIT MANAGEMENT…
The Loan application is rejected mainly on the following
grounds

 REASONS FOR REJECTING A LOAN:

Reasons involving credit worthiness
 Not enough owners’ equity
 Poor earnings record
 Questionable management ability
 Amount not justified
 Collateral/security not enough and/or inferior quality
 Slow or past due in trade or loan repayments
 Inadequacy of the borrower’s accounting system
 New firm with no established earnings record.
 Poor moral risk
 Other reasons
CREDIT MANAGEMENT…

 REASONS FOR REJECTING A LOAN:

Reasons involving Banks Overall Policy

 Requested Maturity too long

 Type of loan not handled by the Bank
 Line of Business not handled by the Bank
 Loan portfolio for the type of loan requested already full
 Not impressive income for the Bank by advancing the
loan
 Other reasons
CREDIT MANAGEMENT…

 REASONS FOR REJECTING A LOAN:

Reasons involving Govt. policies and other factors

 Loan amount too large for the Banks’ legal loan limit/
Single Borrower Limit
 Type of Business is not environment friendly
 The owner(s) and/or the company has been a
defaulter
 Other reasons
CREDIT MANAGEMENT…
Credit Appraisal

 Next step : CREDIT/LOAN APPRAISAL

 Format

A. The Party
B. Objective/Purpose
C. Assessment
1. Performance:
 Strengths & Weakness
 Management
 Background and History of Development of the Business
 Activity
 Financial Health
 Research & Development
CREDIT MANAGEMENT…
CREDIT APPRAISAL...

2. Environment


Opportunities & Threats

PEST Analysis
P = Political
E = Economic
S = Social
T = Technological

Legislative
Intra company

D. Conclusion
C A M P A R I

E. RECOMMENDATION
Yes/No

If No = Give Reason
If Yes = Special Covenants (if any)
Overview of NRB Directives affecting Credit Management

KNOW YOUR CUSTOMER

Credit Risk Management
Strategy:
 Several issues which differ in lending:
1. Unusual ratio: lending Vs. equity70:30, effectively Bank
owns (capital majority) the final investment without having
any voting rights (no board member)= lack of information!
Venture Capital!

2. Mostly posses short term deposits as resources as lending has

a much longer lifetime. Risk of Bank liquidity. Possible
solution: issue long term Bonds or Funds with adequate
interest rates.

3. Setting the interest rate for the loan should be based on

deposit interest rate (market related) and be added with
following margin requirement: E.g. banks equity costs,
operational costs, risk costs, earnings etc.
Risk Management Strategy: Contd..

 Bankers Duty:
 We are dealing with the savings of our clients
 We are not allowed to lose any paisa.
 We are in the duty and it should be our sole target to
deal with this saving so that we are always in the
position to pay back the principal including interests.
 No loan disbursal until the credit and security
documentation is not duly sign by all parties (legal
perfection).
 Periodical reporting and utilization visit is mandatory
until maturity of the loan.
Risk Management Strategy: Contd..

 Some Advises:

 Do only approve a credit line and participate in

lending when you understand all concerning the
credit creation and credit structure.

 Try to take your own decision= means judge the

explications of the experts.

 At the end, it is you who has to decide/approve

the loan and to set the necessarily conditions.

 So keep it as simple as possible, act always as you

have to decide to lend your own money.
61
Pricing Loan Products
Methods Used:

1. Cost-Plus Loan Pricing Method

2. Price Leadership Model
3. Below Prime Market Pricing
4. Cost-Benefit Loan Pricing
1. Cost-Plus Loan Pricing

Marginal
Cost of Estimated
Nonfund Bank's
Loan Raising Margin to
Bank Desired
Interest = Loanable + + Compensate +
Operating Profit
Rate Funds to Bank for
Costs Margin
Lend to Default Risk
Borrower
2. Price Leadership Model

Default
Risk Term Risk
Loan
Base or Premium Premium for
Interest = + +
Prime Rate for Non- Longer
Rate
Prime Term Credit
Borrowers

Prime Rate: Major Banks Established a Base Lending Fee During the Great Depression. At
that Time It Was the Lowest Interest Rate Charged Their Most Credit Worthy Customers for
Short-Term Working Capital Loans
LIBOR: The London Interbank Offer Rate. The Rate Offered on Short-Term Eurodollar
Deposits With Maturities Ranging From a Few Days to a Few Months
3. Below-Prime Market Pricing
(The Markup Model)

Interest Cost
Loan Markup
of Borrowing
Interest = + for Risk
in the Money
Rate and Profit
Market
4. Cost-Benefit Loan Pricing
Loan Pricing System that indicate whether the bank is charging
enough for a loan to fully compensate it for all the costs and risks
involved

Three steps:
- Estimate the total revenue the loan will generate
- Estimate the net amount of loanable funds the bank must turnover
to the borrower (after deducting reserve requirement)
- Estimate the before tax yield from the loan by dividing the
estimated loan revenue by the net amount of loanable funds the
borrower will actually use.
Loan Review:

Objective
Aims of the credit monitoring:
 To detect actual/potential problem loan as early as possible
(Early Warning Signal)
 To provide an incentive for loan officers to monitor loans and
to report deterioration in their own loan
 To enforce uniform documentation
 To ensure that loan policies, banking laws and regulations are
followed
 To inform management and board about the overall condition
of the loan portfolio
 To aid in establishing loan loss reserves

67
Classification of defaulters

Wilful
 Remain out of contact
 Un wiling to dispose the collateral property
 Not utilizing earnings to repay loans
 Not utilizing funds for intended purpose
 Using the name of third party for the business
 Offered weak, substandard or insufficient collateral
Non wilful
 Intended to repay but situation beyond control
 Regular interaction with the bank
 Spend time for alternative strategy

68
Early Warning Signal
 Start to avoid bank’s call
 Change in bankers frequently
 Frequent delay in servicing interest instalment or EMI
 Frequent change in security coverage
 Constant overdraft excesses
 Failure to repay seasonal facilities
 Failure to meet forecasts
 Delays in responding to bank requests
 Inadequate financial reporting

 Decrease in sales
 Decrease in profit margins
 Inability to pass on price increases
 Increase in overheads
 Inventory build up
 Receivables build up
 Creditors build up
69
Credit Monitoring
Starts soon after sanction/ disbursement

Three types:

i. Physical Follow up
ii. Legal Follow up
iii. Financial Follow up

i. Physical Follow up

 Qualitative:
 Inspect the system of maintenance of registers, books, stock , Statements
 Be natural, with due care.
 Discuss with partners/ key persons about unit’s activities, problems
 Take note of any decision among partners, industrial relation problem.
 Problem into frequent turnover of key personnel
 Quantitative
 Inspect stock, machinery and condition of real estate
 - collateral
70
Legal Follow up

Documentation
- On the correct formats,
- Adequately stamped
- Signed by all required.
- Properly executed by the appropriate person
Insurance
- Relative risk all covered
- Policy to have Bank’s charge
- Policy renewed in time
Mortgage

71
Financial Follow ups

Call for
 Financial statement periodically, check website
 Stock statement & list of debtors

Scrutinise
 Check account movement (working capital and OD)
 Compare stock and receivables statements with earlier
ones –verify any large variance, investigate the reasons
 Fix quarterly operating limits where applicable
 Monitor performance with budgets submitted earlier

Ratios
 Current, Quick, D/E, Debt Service Coverage ratio

72
Handling Problem Loan Situations (NPA)

Recovery Process:
Identification of NPL/Problematic Loans
 Insolvency/liquidation of borrower or guarantor
 Unsatisfactory account performance
 Deterioration in the security values
 Misutilization of funds
 Loans graded as classified
 Regular monitoring of accounts
 Information to the borrower about the performance of his account.
 Ensure that the charge documents are in order.
 Assess the value of the security.
 Dialogue with the borrower to derive possible solution.
73
Recovery Process……….
 Convey the consequences of the Recovery Action.

 Try to reach an amicable settlement with the

borrower.
 If the borrower still fails to respond, move onto an
auction process to liquidate the security provided by
the clients.

 Blacklisting of the borrower and the guarantor.

 File case at Debt Recovery Tribunal (DRT) to recover

any deficit amount in excess of Rs.5 lacs from the
liquidation of security.

74
Modes of recovery

 Cash settlement
 Renewal, Reschedule and restructure
 Other Amicable settlement
 Liquidation of securities (Auction)
 Non Banking Assets
 Loan Write Off
 Debt Recovery Tribunal

75
Procedures of Auction
 Pre information to the borrower, guarantor and property
owner prior to publication to 35 days public notice.
 35 days public notice.
 Another public notice (if deemed necessary)
 Information about the auction of properties to the borrower,
guarantor and property owner prior to publication to auction
notice.
 Auction notice with details of the property, time and venue.
 Auction in the presence of representatives of government
agencies
 Decision of the board to sale or book the property as Non
Banking Assets.
 Re-auction if necessary
 Transfer the ownership of the property
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Non Banking Assets
 FI moves onto auction of the mortgaged property for realization of loan when all
other avenues fail to yield the desired outcome.
 However, it is not always necessary that the collateral is sold at the auction
either because there are no interested buyers or the bid price is unreasonable.

 In such cases, FIs may take over such properties as their own assets. These assets
are called Non Banking Assets.
 Before taking over the property, FIs should conduct a valuation of the property
and the assets should be booked at that value or outstanding principal whichever
is lower.
 The proceeds of the assets takeover should be utilized to settle the loan of the
borrower.
 The advantage of creation of NBA for the FI is twofold:
• Reducing the value of the NPL
• Procuring assets that might have potential for future use for the FI.
 FIs may convert the NBA into banking assets in case they desire to use it for their
own purposes.
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Loan write-off….
 Even after all the effort, the FI fails to recover the loan, it can
write-off the loan which meets certain requirements.
 The write-off is only a book cleaning exercise and it doesn’t
comprise the right of recovery at a later date.
 Write-off should have fulfilled all conditions as stipulated in the
Write-off policy as approved from NRB.

 Loans that are overdue by more than 5 years should be

compulsorily written off.
 Similarly, unrecovered portion of loan after creation of NBA should
also be written off.
 FIs should maintain a register of all cases of write-offs and
maintain a record of recoveries made since the write-off.

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Debt Recovery Tribunal

 This is a last resort in recovery.

 In order to assist the recovery process of the FI, a
debt recovery tribunal has been set up.
 FIs may lodge a claim at the DRT to recover the
amount in excess of Rs.5 lacs after exhausting all
possible efforts to recover the same.

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Blacklisting

 In order to protect the FIs from defaulters, a

blacklisting mechanism have been set up by
NRB.
 FIs should recommend to include the following,
related to defaulters, in the blacklist
 Company/firm/individual

 Proprietors/partners/directors/guarantors

 Undivided family members

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NPA Management:
Conclusion

 NPL management is an integral part of FIs

operation.
 It is critical to FIs effective credit management.
 Because of various legal issues involved, due care
must be exercised in executing this function.

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Unit Assignment

MCQ

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