1. Compromise Settlement Schemes
Banks are open to design and execute their own policies for recovery and write off incorporation compromise and negotiated settlements with board approval.Specific guidelines were issued in May 1999 for one time settlement of small enterprise sector; Guidelines were modified in July 2000 for recovery of NPAs of Rs.5 crore and less as on 31st March 2007.
2. Restructuring and Rehabilitation
Banks are open to design and implement their own policies for restructuring/ rehabilitation of the NPA accounts. Re-schedulement of payment of interest and principal after considering the Debt service coverage ratio, contribution of the promoter and availability of security
3. Lok Adalats
At present, Lok Adalats —organized by civil courts to effect a compromise between disputing parties in matters pending before any court lok adalats can handle cases up to a ceiling of Rs 20 lakh. Banks want to increase the limit to Rs 50 lakh.
Lok Adalats as a very effective system to recover dues from borrowers, it has been particularly successful in Delhi and states such as Bihar among other states. In August 2004, the Reserve Bank of India upped the monetary ceiling of cases for compromise settlements referred to the Lok Adalats organized by civil courts to Rs 20 lakh from the previous limit of Rs 5 lakh.
After Debt Recovery Tribunals were empowered to organize Lok Adalats to decide on cases of NPAs, public sector banks recovered as much as Rs 40.38 crore as on September 2001, the progress through this channel is estimated to pick up in coming years, say bankers.
Earlier the role of Lok Adalats was restricted to road accidents, matrimonial cases, and compoundable criminal and land acquisition cases until it was broadened to include debt recovery cases and listed cases. There is also a suggestion to bring cases pending in High Courts under Lok Adalats to speed up the legal system.
A Lok Adalat can not only take up cases which are pending before courts but also pre-litigative stage, that is, disputes which have not yet been referred to a court of law, matters can be either civil or criminal in nature.
4. Corporate Debt Restructuring
The objective of Corporate Debt Restructuring (CDR) is to make sure a timely and transparent mechanism for restructuring of the debts of viable corporate entities affected by internal and external factors, outside the purview of BIFR, DRT or other legal proceedings
The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA), all participants in the CDR mechanism must enter the ICA with required enforcement and penal clauses.
The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with outstanding exposure of Rs.10 crores and above, the CDR system is applicable to standard and sub-standard accounts with potential cases of NPAs getting a priority.
5. DRT Act
The banks and FIs can implement their securities by initiating recovery proceeding under the Recovery if Debts due to Banks and FI act, 1993 (DRT Act) by filing an application for recovery of dues before the Debt Recovery Tribunal constituted under the Act.
On adjudication, a recovery certificate is issued and the sale is carried out by an auctioneer or a receiver, DRT has powers to pass injunctions against the disposal, transfer or creation of third party interest by debtors in the properties charged to creditor and to pass attachment orders in respect of charged properties
In case of non-realization of the decreed sum by way of sale of the charged properties, the personal properties if the guarantors can also be attached and sold.However, realization is generally time-consuming, Steps have been taken to create additional benches.
6. Proceeding under Code of Civil Procedure
For claims below Rs.10 lacs, the banks can begin proceedings under the Code of Civil Procedure of 1908, as amended, in a civil court. The courts are empowered to pass injunction orders preventive the debtor through itself or through its directors, representatives, etc from disposing of, parting with or dealing in any manner with the subject property.
Courts are also empowered to pass attachment and sales orders for subject property before judgment, in case required.The sale of subject property is usually carried out by way of open public auction subject to confirmation of the court.
The foreclosure proceedings, where the DRT Act is not applicable, can be initiated under the Transfer of Property Act of 1882 by filing a mortgage suit where the process is same as laid down under the CPC.
7. BIFR (Board for Industrial & Financial Reconstruction) and AAIFR (Appellate Authority for Industrial and Financial Reconstruction)
BIFR has been set the power to consider revival and rehabilitation of companies under the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA), which has been repealed by passing of the Sick Industrial Companies (Special Provisions) Repeal Bill of 2001.
The board of Directors shall make a suggestion to BIFR within sixty days from the date of finalization of the duly audited accounts for the financial year at the end of which the company becomes sick.The company making suggestion to BIFR to prepare a scheme for its revival and rehabilitation and submit the same to BIFR the process is same as laid down under the CPC.The shelter of BIFR misused by defaulting and dishonest borrowers, it is a time consuming process
8. National Company Law Tribunal
In December 2002, the Indian Parliament enacted the Companies Act of 2002 (Second Amendment) to reorganize the Companies Act, 1956 leading to a new regime of tackling corporate rescue and insolvency and setting up of NCLT. NCLT will have the jurisdiction and power relating to winding up of companies currently vested in the High Court and jurisdiction and power exercised by Company Law Board
The second amendments seeks to progress upon the standards to be adopted to measure the competence, performance and services of a bankruptcy court by providing particular qualification for the appointment of members to the NCLT.
However, the quality and skills of judges, newly appointed or existing, will need to be reinforced and no provision has been made for appropriate procedures to assess the performance of judges based on the standards
9. Sale of NPA to other banks
A NPA is entitled for sale to other banks only if it has remained a NPA for at least two years in the books of the selling bank. The NPA must be held by the purchasing bank, minimum for a period of 15 months before it is sold to other banks but not to bank, which originally sold the NPA.
The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and after that it would depend on the record of recovery with reference to cash flows estimated while purchasing
The bank may purchase/ sell NPA only on without recourse basis, if the sale is conducted below the net book cost, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA. Whether Second Amendment to Companies Act and SARFESI Provide efficient and compatible enforcement.
10. Second Amendment & SARFESI
The second amendment and Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest (SARFESI) Act, 2002 are a leap forward but requirement exists to make the laws predictable, transparent and affordable enforcement by competent mechanisms outside of insolvency
No specific time frame has been provided for various stages during the liquidation proceedings. Need is felt for more creative and commercial approach to corporate entities in financial distress and attempts to revive before applying conservative approach of liquidation