EXECUTIVE SUMMERY

Non-performing assets (NPA) occur in loans given by a bank or a financial institution where in the borrower defaults or delays interest and or principal payment. The management of NPAs therefore, is a very important part of credit management of banks and financial institutions in the Country. In fact high levels of NPAs has an adverse impact on the financial strength of the financial institution/ banks who in the present era of globalization, are required to conform to stringent International Standards. Non-Performing Asset means an asset or account of a borrower, which has been classified by bank or financial institution as substandard, doubtful or loan asset. The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans. The reason being mounting non-performing assets (NPAs). An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests can be booked only when it has been actually received. Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and loss account, but their carrying cost is also increased which results in excess & avoidable management attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level; banks eventually look towards their internal financial strength to fulfil the norms thereby slowly eroding the net worth. The spiralling and the devastating effect of NPA on the economy have made the problem of NPA as issue of public debate and of national priority. Therefore, any measure or reform on this front would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction and stall their growth in future, as well. Asset Reconstructions companies (ARC) are created to manage and recover Non Performing Assets acquired from the banking system. The NPAs of the banks are assigned to ARCs which Asset Reconstruction Companies are act as a bad bank by isolated Non Performing Assets from the balance sheet of bank and facilitates the banks to concentrate on its normal banking activity. Banks and financial institutions with a large proportion of their bad debts or Non-Performing Assets can assign their NPAs to a separate entity i.e. Asset Reconstruction Company. Then Asset Reconstruction Companies recovers the loan through attachment, liquidation, settlement or restructuring. The Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest (SARFASI Act 2002) has come into force with effect from 21st June, 2002 for creation / operation of the Asset Reconstruction Companies. The act aims on securitization

and empowering banks and financial institutions to take the possessions of the securities and sell them without intervention of the court. 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. The Committee on the Financial System has considered the setting up of the Special Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector reforms. Under the Resolution of NPAs - Resolution of the NPA is done by following ways: 1. 2. 3. 4. OTS with Borrowers/guarantors. Takeover of units under SARFAESI Act Legal Action against Guarantors Rescheduling of loan of Borrower.