ASSET CLASSIFICATION AND METHODS OF RECOVERY

INTRODUCTION 

1 Definition of Asset Classification: Categorization of bank assets based on their risk profile and repayment ability. 
2 Purpose: Supports stability in the financial system, compliance with rules, and effective risk management. 
3 Why it Matters: Helps banks in provisioning, risk mitigation, and financial reporting. 

IMPORTANCE OF ASSET CLASSIFICATION

 • Helps in identifying Non-Performing Assets (NPAs) early. 
 • Aids in determining risk exposure and capital adequacy. 
 • Assures that banking practices are in line with RBI standards. 
 • Enhances transparency in financial statements and investor confidence. 
 • Facilitates structured recovery efforts to minimize losses. 

CATEGORIES OF ASSET CLASSIFICATION

1.Standard Assets – Performing loans with regular repayments and no default. 
2.Substandard Assets – Loans overdue for more than 90 days but less than 12 months. 
3.Doubtful Assets – Loans overdue for more than 12 months, having high default risk.
4.Loss Assets – Non-recoverable loans declared by banks and written off as per RBI guidelines. 

STANDARD ASSETS

 1 Definition: Loans that are being repaid as per schedule without any default. 

 2 Characteristics: 1 No overdue payments. 2 Low credit risk. 3 Classified as low-risk assets for banks. 

 3 Example: A home loan with regular EMI payments. 

SUBSTANDARD ASSETS

1 Definition: Jo loan ki installment ya interest 90 din se lekar 12 mahine tak bachi ho aur wapas nahi aayi ho, usse Sub-standard Asset kaha jata hai.. 

2 Risks: 1 Higher credit risk due to delayed payments. 2 May require additional provisions by the bank. 

3 Example: A business loan overdue for 5 months. 

DOUBTFUL ASSETS

1 Definition: Loans that have remained substandard for more than 12 months. 

2 Risks: ⚬ High default probability. ⚬ Requires banks to make larger provisions. 

3 Example: A personal loan unpaid for 15 months

LOSS ASSETS 

 1 Definition: Loans identified as completely irrecoverable by banks. 
 2 Risks: • Must be fully written off by banks. • Severe impact on bank profitability. 
 3 Example: An enterprise that has gone insolvent and lacks assets to cover the loan.

INTRODUCTION TO METHODS OF RECOVERY 

 • Recovery is crucial for banks to reduce NPAs and maintain financial stability. 
 • Banks use multiple methods, legal as well as non-legal, for recovering assets.

METHODS OF RECOVERY

 1.SARFAESI Act, 2002 – Direct asset seizure and auction. 

 2.Lok Adalat – Out-of-court settlements for small-value disputes. 

 3.Debt Recovery Tribunal (DRT) – Handles large loan defaults. 

 4.One-Time Settlement (OTS) – Discounted lump sum payment agreements. 
 5.Compromise Settlement – Negotiated settlements between banks and borrowers. 
 6.Asset Reconstruction Companies (ARCs) – Banks sell NPAs to Asset Reconstruction Companies (ARCs) for collection.

SARFAESI ACT, 2002

1 Full Form: A law that allows banks to recover loans by selling secured assets of the borrower without going to court.

2 Objective: Gives banks the power to recover loans without judicial process. 

3 Example: A bank seizing and auctioning a defaulted home loan property. 

LOK ADALAT

1 Definition: Alternative dispute resolution mechanism for small value loan settlements. 

2 Advantages: ⚬ Faster than courts. ⚬ Cost-effective recovery method. 

3 Example: Settling a credit card overdue loan through mutual agreement. 

DEBT RECOVERY TRIBUNAL (DRT)

 1 Purpose: Set up under the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act).

 2 Scope: Handles cases above ₹20 lakh. 

 3 Example: Corporate loan defaults resolved through DRT proceedings. 

ONE-TIME SETTLEMENT (OTS) 

1 Definition: Banks offer a reduced lump sum repayment option to defaulters.  

2 Benefits: ⚬ Encourages borrowers to clear dues. ⚬ Helps banks recover funds quickly. 

3 Example: A borrower clearing a ₹50 lakh loan by paying ₹35 lakh in one go. 

COMPROMISE SETTLEMENT 

1 Definition: Negotiation between banks and borrowers to settle NPAs at a lower amount. 

2 Example: A bank agreeing to accept ₹7 crore for a ₹10 crore outstanding loan

ASSET RECONSTRUCTION COMPANIES (ARCS) 

1 Definition: Companies that buy NPAs from banks and try to recover them. 

2 Example: An ARC purchasing ₹500 crore NPAs from a bank at a discount.

ROLE OF RBI IN ASSET CLASSIFICATION & RECOVERY 

 1 Issues guidelines for classification and provisioning. 

 2 Monitors NPA levels across banks. 

 3 Implements regulatory measures to strengthen recovery processes

CHALLENGES IN ASSET RECOVERY 

1 Legal Delays: Court processes take time. 

2 Uncooperative Borrowers: Defaulters may hide assets. 

3 Lack of Documentation: Poor records may weaken bank claims..  

4 Economic Factors: Downturns affect repayment capacity.

CASE STUDY - SUCCESSFUL ASSET RECOVERY 

1 Example: How a bank successfully recovered a defaulted loan using SARFAESI. 

2 Key Takeaways: Importance of timely intervention and legal frameworks

MULTIPLE CHOICE QUESTIONS (MCQS)

Q1. What is the time frame for classifying a loan as a substandard asset? 

a) Less than 90 days 

b) 90 days to 12 months 

c) More than 12 months

d) More than 24 months

Q2. Which Act allows banks to recover NPAs without court intervention? 

 a) Companies Act 

 b) SARFAESI Act 

 c) Insolvency Act 

 d) RBI Act

Q3. Which body resolves small loan disputes through out-of-court settlements? 

 a) Debt Recovery Tribunal 

 b) Lok Adalat 

 c) SEBI 

 d) RBI

 Q4. Which type of asset is considered completely irrecoverable? 

 a) Standard Asset 

 b) Substandard Asset 

 c) Doubtful Asset 

 d) Loss Asset

Q1. Answer: b) 90 days to 12 months  
Q2. Answer: b) SARFAESI Act 
Q3. Answer: b) Lok Adalat 
Q4. Answer: d) Loss Asset 

  

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