This article is written by RIDHIMA SINGH ,LL.B HONS student at ALLAHABAD UNIVERSITY during her internship at LeDroit India.
Keywords–Securitisation, Bad Loans, Mortgaged, Seize, Asset Reconstructions, Liquidation, CIBIL Score.
Abstract– The SARFAESI ACT 2002 was basically brought into effect to empower the bank and financial institutions(givers)to recover the payment of bad loans/Non-Performing Assets from borrower through process of Securitisation and asset reconstruction. Under this bank have power to resale their non-performing assets and get the recovery amount. The non-performing banking assets can be classified into various types on the basis of time period for which they haven’t been beneficial to the banks.
Applicability (Which Assets are to be considered in the Act?)
- Secured Loans-The act is applicable on loans which are been backed by the underlying securities i.e., mortgaged.
In this type of loans bank can seize/or sell the securities to recover loan amount from the borrower.
- Unsecured Loans-This act is not applicable on unsecured loans i.e., not been backed by securities and the on agricultural loans.
NON- PERFORMING ASSETS OF BANKS
- Basically, Non-performing Assets are those secured loans given by banks to the borrowers which with time comes under category of default or arrears. A banking asset becomes NPA when it fails to generate desired profit for the bank. Increase in NPA’s have adverse effect on reputation of the banks and financial institutions.
- It’s because of failure of payments of principal and interest amount bank don’t have sufficient fund to do other activities in economy.
- In order to recover the arrears, the banks then either go for securitisation or reconstruction of assets.
- NPA’s are those assets which have been past due for 90 days.
TYPES OF NON -PERFORMING ASSETS DEALT UNDER THE SARFAESI ACT 2002.
TYPES OF NPA’s In Bank
1)Standard Assets
2)Substandard Assets
3)Doubtful Assets
4) Loss Assets
- Standard Assets-These are the non-performing assets which remain outstanding for more than 90 days or equal to 12 months. It means that borrower has failed to pay the interest amount during this period. In this risk is normal under these assets.
- Substandard Assets- These are the non-performing assets which remain overdue for period more than 12months but less than 18 months. The risk is higher under these assets as even if the liquidation happen still the bank will suffer loss because the asset value may fall with time.
- Doubtful Assets-These are the non-performing assets which remain outstanding for more than 18 months. Under this the value of assets declines to greater extent. The assets may continue in this category until the value of the security not falls below 10%of its original value.
- Loss Assets- When the value of the asset falls below the 10% of its original value and the time period exceeds for more than 18months then the banks tend to believe that recovery of loan amount is not possible, even if the bank goes liquidation, it will suffer loss. This loss on assets is been calculated by the auditors of RBI and is shown as loss in banks’ balance sheet.
CONCLUSION
Banking and Financial Institutions play very important role in strengthening financial position of Country’s. Thus, it is important for borrower and lender both to make sure that there should not be increase of Non-Performing Assets as on part of lender (Banks)it will affect their ability to generate incomes in the economy and also effect their reputations whereas on part of borrower he will lose his borrowing credibility and it might affect the CIBIL score of the borrowing. It will be difficult for borrower to take any loans in future.
