RBI’s illustrative list of warning features for potential NPAs

Our Banking Bureau
10 October 2002

The thrust of the RBI guidelines is on early identification of problem accounts and early initiation of action that is called for, including recourse to legal remedy where banks encounter malfeasance on the part of promoters and/or borrowers.

“Invariably, by the time banks start their efforts to get involved in a revival process, it is too late to retrieve the situation — both in terms of rehabilitation of the project and recovery of bank's dues. Identification of weakness in the very beginning (when the account starts showing first signs of weakness regardless of the fact that it may not have become an NPA) is imperative,“ the RBI has said.

Main alerts for potential NPAs for identification by banks internally are: delay in submission of statements; return of cheques; devolvement of differed payment guarantees instalments or letters of credit and non-payment within a reasonable period; frequent invocation of bank guarantees and non-payment within a reasonable period; return of bills/cheques discounted; non-payment of bills discounted or under collection; poor financial performance; and non-compliance of terms and conditions of sanction.

Restructuring should be attempted, where, after an objective assessment of the viability and promoter's intention (and his stake), banks are convinced of a turnaround within a scheduled timeframe, the RBI has suggested.

In respect of totally unviable units as decided by the bank/consortium, action under the Securitisation and Reconstruction Ordinance may be initiated without any loss of time. It is better to facilitate winding up/selling of the unit early, so as to recover whatever is possible through legal means before the security position becomes worse, the RBI has said.