March 1, 2021 | Mukunda Tripathee
Bank is a financial supermarket which offers widest range of menu to its customers. Among the facilities, lending is the top most one. Bank collects scattered surplus money from the market in terms of deposit and supplies to the people in the need of funds. Thus, bank perform as an intermediary between depositors and borrowers.
Loan occupies huge portion in the bank’s balance sheet as an asset. For this, the bank always focuses to maintain quality asset. Quality of assets of the bank depicts financial strength and soundness of organization. This makes it possible to provide attractive dividend to investors, good salary to staffs, sizable tax to government, good appreciation from regulatory bodies, voluminous transaction and good market capture in capital markets.
Banks should properly evaluate the cash flow of borrower, business, drawing power of borrower, needs of borrower, nature of security collateral and additional back of security and income sources, nature of business, capital requirement, debt to equity ratio, loan to collateral ratio and other ratios prior to lending/sanctioning loan.
Bank should have well structured risk assessment practices, process and machination. Lending shall have to well guided by credit guideline policy (CPG) and go through well documentation practice without lapsing. NRB directives, prevailing laws and rules shall have to verbosely implemented in the connection of funding.
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Borrower has the dream to be a big and successful businessman and will visit into bank and explain with golden words with good sounds for funding of his dreams. A professional banker should have to understand and evaluate the viability of business and borrower’s dreams whether it can be converted into reality or not.
If the borrower fails to abide by the terms of the credit as mentioned in the deed or agreement or any terms and contracts made with a bank or fails to repay credit to the bank within the time-limit stipulated in the deed then early warning signal is noticed in credit. Now, bank shall initiate NPL management (Recovery) action without making delay.
As per repayment history of credits, loan is classified into PL (Performing loan) and NPL (non-performing loan). Loan having the overdue status more then 3 months are categories into NPL. If the number of deteriorate accounts increases, NPL of bank increases, which leads to the constraints of profitability and reflect the weakness of management in the regard of NPL management
The average NPL of commercial banks of Q2-2077 is 1.68% whereas the corresponding previous year’s quarter’s NPL was 1.63%. For the calculation of NPL, total loan outstanding of NPL accounts is divided by total loan exposure/outstanding of bank. Lower the NPL, the better. If the total loan outstanding of a bank is Rs. 8,000.00 billion and the total loan outstanding of NPL accounts is Rs. 200 billion then NPL is 2.5 %.
Classification Of Non-Performing Loans (NPL)
Based on overdue time period , non-performing loans (NPL) are further classified as per following:
1. Sub-Standard Loan
Loan and advance having overdue from 3 to 6 months, leads to 25% provisioning. For example- if the total loan outstanding of Mr. K is Rs. 100 million and overdue period is more then 3 months, bank shall maintain loan loss provision of Rs. 25 million (25% of total loan outstanding) which reduces the profitability of bank.
2. Doubtful Loan
Loan and advance having overdue for 6 months to maximum one year- requires 50% provisioning. For instance- if the total loan outstanding of Mr. K.B is Rs. 100 million and overdue period is more than 6 months, bank shall maintain loan loss provision of Rs. 50 million (50% of total loan outstanding) which directly influences the profitability of bank.
3. Loss/ Bad Loan
Loan and advance with overdue period of more than one-year requires 100% provisioning in loan and advances. If the total loan outstanding of Mr. Shyam is Rs. 100 million and overdue days is more than one year, bank shall maintain loan loss provision for the loan Rs. 100 million (100 % of total loan outstanding) which negatively hits the profitability of bank.
Suppose, the financial statement of the bank showed profit Rs. 8,900 million in F.Y 2076/77 after doing 100% loan loss provisioning of Mr. Shyam. However, if the bank didn’t have to maintain the loan loss provisioning for his loan, profit of bank for F/Y would had been Rs. 9,000.00 (ignoring 1% provision). So, NPL management is one of the most crucial task of bank. It directly influences the profitability of bank and shows the efficiency of management.
NPL is unwanted result of banks, where borrower fails to pay bank’s installments as per aforesaid terms and conditions of loan agreement. If the borrower is unable to pay installment on time, then bank should have to take necessary action to recover loan as per recovery policy of bank and NRB directives.
Process Of Recovery Of Loan
1) Send Recovery Letters
If the borrower starts to show irregularity in installment, then the bank, without making any postponement should initiate recovery action. At first, bank shall have to write letter to borrower to make payment with in stipulated time with request as per recovery policy of bank. In general, bank has to issue two three letters to borrower in certain time interval. In last recovery letter it is better to send format of 35 days facility call notice.
2) 35 Days Facility Call Back Notice
Even after sending multiple letters to the borrower in order to either regularize or settle the loan as per credit agreement, the borrower may fail to regularize loan or remain out of contact with bank. Then, as per recovery policy/NRB directive/prevailing rules, bank shall have to publish 35 days facility call back notice in newspaper stating consequences of being unable to pay bank installments/loan within 35 days.
3) Auction Property/Mortgaged Collateral
In the connection of recovery of defaulted loan, if borrower is unable to keep contact/ pay/regularize/settle loan within 35 days of facility call back notice, then the bank shall initiate further recovery process to settle the loan by auctioning the mortgaged security collateral in the name of bank. Collateral may be gold, silver, time deposit (fixed deposit), stock, receivables, land and building, shares, debentures, government securities, and so on.
For the settlement of loan through the dispose of security collateral, the Bank shall publish auction notice to sell the security collateral in the newspaper. Interested bidder shall apply bid for the collateral. If bank assumes that the bid amount is reasonable and sufficient to cover the loan amount, it would award bid to the highest bidder and transfer the ownership of collateral in to bidder’s name. Then, it settles the loan. Remember that, if bid amount is excess then loan amount, excess amount shall refund to the borrower’s account. If not, the bank shall seek further recovery action to recover the loan.
Suppose, Mr. Ram had defaulted his loan facility which had been enjoying from XYZ bank. His total loan outstanding was Rs. 2.5 million. Whereas, bank auctioned his mortgaged collateral at Rs. 3 million. Here Rs. 5 lakhs is more then loan amount, which has to refunded to Ram’s account by the bank.
4) Assuming Of NBA (Non-Banking Assets)
Supposed, in the auction notice of mortgaged security collateral, if no bid is received, then the bank takes the ownership of collateral in to bank’s name as NBA and settles the loan. Before assuming mortgaged security collateral as NBA, bank shall get fresh revaluation of collateral through the independent valuator. Bank shall assume NBA equivalent to the market value of collateral or total loan outstanding whichever is lower. And bank will sell the NBA through auction process. Here, if the NBA selling value is more than NBA assuming value, it results in profit to bank from NBA selling.
For example, Mr. Shyam had been enjoying home loan facility Rs. 2 million from PNB bank and had defaulted loan facility since one years. Bank had published auction notice for the mortgaged collateral multiple times but no bid was received. So, bank assumed collateral as NBA at Rs. 1.5 million, loan was not fully covered. Then, bank sold collateral (NBA) at Rs. 3 million last year. Here, equivalent to Rs. 1.5 million NBA is disposed and rest of Rs. 1.5 million is profit from selling of NBA. However, Rs. 5 lakhs is still Shyam’s liability to be settled.
5) Case file To DRT (Debt Recovery Tribunal)
If total loan outstanding is not fully recovered through either auction of mortgaged security collateral or assuming of non-banking assets (NBA), then the bank shall have to initiate further recovery process in order to recover loan. In the same line, bank submits case file into DRT against borrower to recover loan as far as possible. File shall be petition into DRT within four years from the date of loan expired. For the purpose of loan recovery/settlement DRT conducts the recovery action as per policy. Bank shall have to deposit 0.25% of total claim amount at the time of case file into DRT. DRT shall not entertain loan file having less than Rs. 5 lakhs principal amount for the recovery loan.
6) Loan Written/Write Off
The loans and advances which are not recovered either through auction of mortgaged security collateral or assuming NBA bank shall be written off from the core banking system (CBS) of the bank. And the written off amount and account shall be recorded manually in a separate register for future reference. For the purpose of recovery of written off loan, the bank forms a committee. The committee will seek additional security and alternative way to recover written off loan and report to Loan Recovery Committee (LRC) on quarterly basis. If the overdue period is more than 5 years, there is mandatory provision to write-off the loan.
(Mr. Mukunda Tripathee is currently working in the banking sector.)
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