FAQ Readme - Business Loans, npa, Npa finance, Npa Account, Sarfaesi

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This free support column is a courtsey for general awareness of the esteemed visitors to this Web-site, and in no way constitute any legal opinion that can be produced in any Court.  Before taking final decision/action, the readers in their own interest, are advised to follow guidance of their professionally engaged Consultant / Advocate.  The reply given here-under is the personal view of the author and is subject to certain legal strategies that should have been followed in the cases of adversity or special circumstances. The web-site or the author resumes no responsibility, what so ever may be, if anybody suffers any loss by following  the opinion / legal clarification offered by the Author in response to the doubts raised in this column:

Q1. What is the meaning of NPA Account?
ANS. NPA abbreviates 'Non-Performing Asset".  When a Loan account remains irregular continuously for 90 days or more, it is to be declared as an NPA Account by the respective Bank.   The Bank has to make provision for NPA accounts in its Balance Sheet in accordance with  RBI Guidelines (Prudential Norms).

Q2. What is the meaning of AUCA Account?
ANS. An AUCA (Advances Under Collection Account) is that portion of an NPA account, which has been written off by the Bank.  As the balance in an AUCA account represents the written off portion only, the AUCA Balance is not a part of the Double Entry Accounting System. An AUCA is just a memoranda account to record the written off balance in respective loan account, so that it may not skip from the eyes after being written off by the Bank.

Q3. Why a ‘Loan Account’ is called ‘Asset’ by the Bank?
Ans. Loan is liability for the Borrower and the debit balances in all the loan accounts are shown as a ‘Liability’ side and the Deposits are shown in the ‘Assets’ side in his Balance Sheet. For a Bank, the Loans are akin to its deposits with the Borrowers and are, therefore, ‘Assets’ for the Bank.

Q3. What is the effect when a Loan Account is classified as NPA?
Ans. When a Loan Account is classified as NPA, the Bank has to make provisioning in its Balance Sheet according the scheme formulated by the Banking Regulatory, known in India as Prudential Norms of Reserve Bank of India. The NPAs have an adverse impact on the Profit, trade reputation and the value of Shares of a Bank. The Banks therefore initiate serious recovery measures in respect of the NPA accounts. If the desired result is not forthcoming the Banks start hard recovery measures.

Q4. What happens when an NPA account is migrated to SAM or Asset Recovery Branch?
Ans. The NPA Accounts are often migrated from the normal Retail, SME or MCG Branches to the SAM (Stressed assets Managaement), SARB (Stressed Assets Recovery Branch) or ARB (Asset Recovery Branches). By whatever name these are called, in fact, these are the highly specialized branches in the field of implementation of different hard recovery measures available to the lending Banks under different enactments.

Q5. What are the hard recovery methods available with the Banks?
Ans. The Banks have been assigned certain rights under the law for effecting recovery of its dues from the accounts classified as NPA. This includes; Recall of Loan, Declaration of Non-cooperative borrower or Wilful Defaulter, taking over physical possession of the mortgaged assets and their auction under the SARFAESI Act, 2002, taking over management of the Company under SARFAESI Act, Filing of Recovery Suit(OA) in Debts Recovery Tribunal (DRT), Attachment of Book Debts / the amounts like Rent etc, that are likely to become payable in future to the borrowers and guarantors, issue of notice for winding up of the Company, lodging of FIR with police / CBI etc.

Q6. What is SARFAESI Act?
Ans. SARFAESI Act is abbreviation of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. It empowers the Banks and FIs to take possession and auction the assets mortgaged in an NPA account, without recourse to the Court. An Officer of the Bank (not below the rank of Scale IV in Public Sector Banks) is empowered to decide & take action under the SARFAESI Act, is called “Authorized Officer”.

Q7. What is the 13(2) SARFAESI Notice?
Ans. This is the first notice served by the Bank/FI upon the Borrowers/Guarantor-mortgagors under the SARFAESI Act, requiring them to repay the entire dues with interest and costs within 60 days, failing which the Bank may take recourse to proceed further under the SARFAESI Act. This is also known as Demand Notice.

Q8.  Upon receipt of Demand Notice u/s 13(2) of the SARFAESI Act, what are the options available to the Borrowers/Guarantors?
1.  To arrange for payment of dues as per demand raised by the Bank in the Demand Notice.
2.  To contest the Demand Notice by filing objections u/s 13(3-A) of the SARFAESI Act, 2002 (the statutory limit for filing objections is 30 days). These objection should be drafted in consultation with an experience consultant having good exposure to the law. In fact, these objections form the foundation for your legal defense.
(Important: a) As the SARFAESI Act assigns a sort of quasi-judicial role to the Authorised Officer to decide the objection filed u/s 13(3-A), and permits the aggrieved Borrower/Guarantor to approach the DRT only after the Bank has initiated steps (possession) u/s 13(4) of the SARFAESI Act. Yet these rules are bye-passed with certain legal strategies.  b) The Right to property is a Constitutional Right and any action by a Secured Creditor (Bank/FI) can only be in strict compliance with the due proess of law.  C)  The Law does not provide any safeguards or deterrents to dilsatory tactics of debtors.)
4.              
Q9. What is the 13(4) SARFAESI Notice?
Ans. After lapse of 60 days to the Demand Notice, if the borrower has not repaid the dues under demand, the Bank may, at any time resort to taking over Symbolic Possession or Physical Possession in accordance with Section 13(4) of the SARFAESI Act.

Q10. What are the different types of possession?
Ans. The Bank takes possession of its mortgaged assets either as Symbolic Possession by merely notifying of taking over the ownership of the mortgaged property without being taking over of its physical possession. The other form is Physical Possession, which include within it the Symbolic Possession, as well. Both type of possessions are taken over by the Bank u/s 13(4) of the SARFAESI Act.

Q10. How a Bank takes Symbolic Possession under the SARFAESI Act?
Ans. After lapse of 60 days Demand Notice the Bank may take Possession of the mortgaged assets. The Symbolic Possession is taken by pasting a copy of Notice u/s 13(4) on the face of respective properties, sent by registered post to the Borrowers and Guarantor-mortgagors and be published in at least two News Papers (one each, in English & in Vernacular language) circulated in the area where the property is situated. The term “Symbolic” before the term “Possession” is used.

Q11. What are the steps for taking Physical Possession under the SARFAEESI Act?
Ans. The procedure to take Physical Possession of mortgaged property is same, except that the term “Physical” before the term “Possession” is used and the Bank puts its own lock, mostly with the help of an Enforcement Agent accompanied by Revenue Officials and the Police force under orders from District Magistrate (DM) or Chief Metropolitan Magistrate(CMM).

Q12. When the Bank can put a mortgaged asset to auction?
Ans.    After taking Symbolic or Physical possession of a mortgaged property, the Bank is required to fix the Reserve Price for Auction of the properties being put to auction. The Reserve price is fixed on the basis of Valuation conducted by the Wealth Tax Approved Valuers, and it should not be more than 6 months old.  Before a property is put to auction a prior notice of 30 days is to be served upon the Borrower and the Guarantor-mortgagor.

Q13. What is DRT & DRAT?
Ans. DRT is abbreviation of Debts Recovery Tribunal, where Recovery Suits (known as OA Original Application) for Rs.10Lac and more are filed. The SARFAESI Action of the Bank is also challenged at DRT by filing an SA (Securitization Application).

Q14. What is OTS?
Ans. OTS abbreviates in the Banking Terminology as One Time Settlement of Debts. This is a compromised amount offered to be paid by the Borrowers and Guarantors in discharge of full debt and approved by the Competent Authority (a Committee) in the Bank.

Q15. Why the Banks become agreeable to OTS?
Ans. Where the Banks find it very difficult or a long time consuming process to recover the complete out-standings, the Banks may become agreeable to sacrifice a portion thereof by compromising to lesser sum in discharge of the total dues. This strategy enables the Banks to recover and re-circulate the commercially viable portion of their NPA / AUCA accounts.

Q16. What is the status of a Borrower after payment of amount in terms of approved OTS?
Ans.  After making full payment of his dues in terms of the approved OTS, the Borrower is relieved of his debt liability towards the Bank and the Bank waives its charge and releases the mortgaged properties against acknowledgment from the mortgagor.

Q17. What is the SDR ?
Ans. SDR is the Strategic Debt Restructuring Scheme of RBI, that envisages conversion of Debt of the problematic Companies to Equity and thus taking over their management by the lending Banks.  Click here for detailed information on SDR.

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