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POLICY FOR ONE TIME SETTLEMENT PICUP

 

March, 2010

INDEX

 

Sl. No.

Particulars

Page Nos.

1.0

One Time Settlement of NPAs

 

 

One Time Settlement Policy

4

3.0.

Calculation of Recoverable Dues

4

 

(i)

Relevant/ material date

4

 

(ii)

Base Amount

4

4.0

Calculation of Indicative OTS Amount

6

4.1

Indicative OTS Amount

7

6.0

Earnest Money

18

7.0

Payment Terms

19

8.0

OTS Cum Sale

20

13.0

Negotiation Principle

25

14.0

Principle of Sacrifice

26

 

14.1.

Waiver

26

 

14.2

Write Off

27

 

14.4

Discretionary Powers

28

15.0

Non Discrimination

29

16.0

Overriding Clauses

30

 

ONE TIME SETTLEMENT OF NPAs

 

1.0 OTS Policy for PICUP needs more objectivity in its appraisal efforts. At the same time, however, it is important that the policy should allow for a scientist's precision as well as an artist's appreciation to ensure that while the system remains objective, it does not loose out on the need for factoring in uniqueness of each case that will come up for a settlement. Early settlement is the essence of any OTS policy equally important is the fact that such policy should be attractive to the borrowers. Accordingly the state's OTS policy will stand on two principles;

 

1.1 A system of standardized measurable indicators to ensure transparency, consistency and accountability

 

1.2 An appropriate system for exercising discretionary powers by competent authority.

 

2.0 OTS system being practiced by PICUP needs to be strengthened on the following counts:

 

(i)           Calculation of Recoverable Dues

(ii)          Calculation of Indicative OTS Amount

(iii)         Willful Default

(iv)         Staff Accountability

(v)          Negotiation Principle

(vi)         Principle of Sacrifice

 

ONE TIME SETTLEMENT POLICY

 

(The Policy shall apply to all types of loans)

 

3.0 Calculation of Recoverable Dues

 

Calculation of the recoverable dues should be standardized. It should particularly factor in the following:

 

(i)           Relevant/Material Date: The date of identification of NPA. In cases where a unit became NPA, revived subsequently and then again became NPA, then the last event of becoming NPA will be the Relevant Date.

(ii)          Base Amount: Principal Outstanding including Interest upto the date of NPA (ie.90 days Interest) shall be treated as Base Amount for all practical purpose.

 

3.1 It need be noted that in these recommendations it is proposed to include Interest upto the date of NPA for calculation of Base Amount. However, the existing system in the concerned organization calculates Base amount by including Interest uptill the date of settlement. This system in many cases have lead to situations where a small loan jumped to Base Value which was several times higher (i.e. loan worth around Rupees Ten Lac jumped to Rs. one Crore or much more). The Macro picture itself is revealing. Currently the Principal amount outstanding is around Rs. 270 crore while the interest due is measured at Rs 4000 crore. Liabilities got so inflated that settlement became difficult rather prohibitive. In many cases the available collateral was much less than the outstanding liabilities (after including interest). No distinction was made between good bad and loss account for this purpose. Almost all the accounts fall in the category of D3 or L (Loss). Somehow, this fact has not been factored in by the current policy and this apparently is one of major barriers to the settlement process.

 

3.2 It be noted that in majority of outstanding NPA cases recovery options have already been exercised, even issuing of 'RCs' has not helped much. The realizable security in many of the OTS cases was not enough and borrowers were not even willing to pay the Principal amount. This highlights the degree of difficulty involved and provides the backdrop for this policy effort. Also the institution under consideration have ceased to be lending institution for atleast around ten years.

 

3.3 Normally businesses are run on the principle of maximizing returns and minimizing costs. In this case, given the asset profile, principle of profit maximization is no longer relevant. Therefore all efforts have to be focused on minimization of costs, including minimum decline in asset value before the recoveries happen. This pre-supposes early settlement of NPAs.

 

4.0   Calculation of Indicative OTS Amount

 

The spirit behind calculation of indicative OTS Amount is that it should help in arriving at an 'Indicative' amount which could serve as a yardstick in the negotiation process. It is recommended that PICUP should use standardized modules for arriving at an indicative OTS amount. This approach is being successfully followed by some of the leading nationalized banks where a standardized weighted (Using Weight System) module for arriving at an indicative OTS amount has lead to both transparency and accountability. Table T1 (below) & Table T2 (displayed later) detail a module, which shall be adopted by PICUP:

 

4.1   Indicative OTS Amount

 

Table 1 - Line of Approach to OTS

Sl. No.

Marks

Category

Basis of arriving at Indicative OTS Amount

(i)

(ii)

(iii)

(iv)

1.1

91-100

SS

Indicative OTS Amount = Base Amount + 100% OSI calculated at document rate from the date of NPA

1.2

 

D-1

Indicative OTS Amount = Base Amount + 50% OSI calculated at document rate from the date of NPA

1.3

 

D-II

Indicative OTS Amount = Base Amount + 25% OSI calculated at document rate from the date of NPA

1.4

 

D-III

Indicative OTS Amount = Base Amount + 15% OSI calculated at document rate from the date of NPA

1.5

 

Loss

Indicative OTS Amount = Base Amount + NIL

2.1

81-90

SS

Indicative OTS Amount = Base Amount + 50% OSI calculated at document rate from the date of NPA

2.2

 

D-1

Indicative OTS Amount = Base Amount + 25% OSI calculated at document rate from the date of NPA

2.3

 

D-II

Indicative OTS Amount = Base Amount + 12.5% OSI calculated at document rate from the date of NPA

2.4

 

D-III

Indicative OTS Amount = Base Amount + 7.5% OSI calculated at document rate from the date of NPA

2.5

 

Loss

Indicative OTS Amount = Base Amount + NIL

3

1-80

All

Indicative OTS Amount = Marks Obtained X Base Amount

80

 

4.2 ARO dues etc. + RC Collection Charges will be in addition to the final OTS amount.

 

4.3 The methodology discussed here is similar to the one used by nationalized banks like the Punjab National Bank and is very much in line with the RBI guidelines. A marginal departure has been scripted in cases where scores exceed 80. In such cases in addition to the practice followed by some banks a distinction has been made between SS, D1, D2 D3, and loss categories. This is logical because the circumstances of the units in these different categories are different and this calls for a differential treatment. Even in the current policy a distinction is made on the basis of above categorization.

 

4.4 Any interest debited in the books of account, over and above the one included in the indicative OTS Amount, as recommended in this policy, will automatically stand waived off once this OTS is sanctioned. However, if the OTS is cancelled the waived off amount will again be treated as written back.

 

5.0   Indicative OTS amount - Parameters for Calculation

 

In the above methodology "Marks Obtained" mentioned in 'Table 1' for calculation of the OTS indicative amount will come from Table 2 below. Each one of the parameters mentioned in the Table 2 below will involve measurement or an independent scoring system for arriving at a value for each of the specific

parameter. Values for each of the parameter will then become part of the over all scoring system (as outlined in Table 1).

 

I Table -2 Parameters for OTS Amount I

 

Sl. No.

Parameters

Maximum Score

(i)

(ii)

(iii)

1.

Activity of the Unit

05

2.

Primary/ Collateral Security

70

3.

Other Securities including net worth of

guarantors

10

4.

Enforcement of Security Interest & Legal Status

05

5.

Amount Paid by the Borrower

10

 

TOTAL Score

 

6.

Less: Other Attendant Factors (5 Marks for each discount factor (with a Max of 10 points). Discount factors detailed later in this note.)

10

 

Net Score

 

 

The considerations for awarding the scores under various parameters included in 'Table 2' will be as follows:

 

5.1    Activity of the Unit

 

The present business activity of the borrower/ guarantor and genuineness of the problems/ difficulties of the borrower and their willingness to enter into OTS should be kept in view while arriving at a negotiated settlement. Therefore, keeping in view the present level of operations of the unit/borrower(s), the

marks under this parameter would be awarded in the range of '0 to 5' of Table 3 based on the following broad considerations:

 

Table 3 Present Level of Activity

Sl. No.

Present Level of Activity

Points

(i)

(ii)

(iii)

1.

Activity not started or closed

0

2.

Running less than full capacity (as established by CA Reports)

2

3.

Running at full capacity

5

 

Score

 

 

5.2    Primary and Collateral Security

 

The valuation reports shall be submitted by approved valuers and verified by the official(s). The realizable value should take into consideration various aspects, affecting realizable value. To quote a few:

 

(i)           whether the property is commercial or residential,

(ii)          whether the property is self occupied or tenant occupied. If tenant occupied, since how many years the same is occupied by the present tenant.

(iii)         whether land, is on lease from the Government, its agencies/ authorities, since such leased property carry clause of sharing unearned increase/ profit resulting in diminutive realizable value of property;

(iv)         whether dispute about validity and enforceability of the IPs/Block Assets charged/available in the account surfaced at any stage of the negotiation/legal proceedings;

(v)          Demand for the underlying security in the event of its sale/ disposal and availability of ready buyers.

(vi)         Statutory encumbrances like property tax, lease rent, development charges etc.

(vii)        Actual value to be received under circumstances of forced/ distress sale.

(viii)       Attachment of IP by Sale Tax/ Income Tax/ other revenue authorities   Other Statutory/ related liabilities on the IP.

 

The valuation report should clearly specify the reasons and discounting factors on market value taken into consideration for each reason to arrive at the realizable value.

 

Table -4 Realisable Value of Security

Realisable value of security as percentage of Base Value

Sl. No.

Realisable value

Marks allotted

(i)

(ii)

(iii)

1.

If realisable value of primary / collateral security is equal to 100% of the Base Value

60

2.

If realisable value is less than 100% of Base Value, the awarded marks shall be:

Realisable value of the Primary+Collateral Security X 60 (Base value as mentioned above)

Subject to Maximum of 59 marks and a minimum of 50 marks. The range of marks shall be allotted as below:

- Realizable value Less than 50% of Base value = 50 Marks

- Realizable value 51 to 79% of Base value = 55

- Realizable value 80 to 99% of Base value = 59

3.

If realisable value is more than 100% of Base Value, the awarded marks shall be:

Realisable value of the Primary+Collateral Security X 60 (Base value as mentioned above)

Subject to Maximum 70 marks and a minimum of 61 marks. The range of marks shall be allotted as below:

- Realizable value more than 100 and upto 125% of Base value = 64 Marks

- Realizable value 126 to 150% of Base value = 67 Marks

- Realizable value Above 150% of Base value = 70 marks

 

5.2.1 If the primary/ collateral security is shared on first charge basis with other secured creditor(s) the value to be considered in above Table 4 shall be computed on pro rata basis with respect to the principal outstanding of the said creditors.

 

5.2.2 If realizable value of security i.e. realizable value of primary/ collateral and realizable value of Networth, is more than 100% of base value as on the date of NPA in the a/c, negotiation process shall not hover around the indicative amount. Dues as per memoranda account shall be advised to the obligants and negotiation will start from such total/gross dues owed by the borrower. Efforts should be made to recover the maximum amount. With indicative OTS amount derived from the above formulae as the minimum starting point for negotiation. 5.2.3 Valuation of Assets

Proper distinction has to be made between market value and realisable value of the securities while considering OTS proposals. Valuation report must clearly indicate the 'Realisable Value' and the 'Market Value'. Wide variation in value of property(ies) at the time of considering the OTS/Write off compared to its valuation at the time of original last sanction or at the time of making provisions should be critically examined. Earlier valuations may also be correlated/ commented in the latest valuation report. Wide variation in the valuation of securities at the time of considering the OTS proposal may negate the bargaining power/pressure on the borrower to reach at an amount more favorable to PICUP. Further, under SARFAESI Act, sale of charged assets is much faster. Particularly in such cases, there is no justification to build discount factor while arriving at realizable value of the assets vis-a-vis their market value. Therefore, it is important that the valuation reports are analyzed and self assessment be made about the genuineness of the market/realizable value of the securities given by the valuer keeping in mind the real estate market and other attendant factors prevailing in the area so that it proves to be an effective tool for discussion/ negotiation for OTS amount. In view of the above, the valuation assessed by the approved valuer shall be verified by the Institution as given in Table 5.

 

Table 5

Sl. No.

Column (i)

Column (ii)

1.

Accounts with principal outstanding equal to or above Rs.50 lac

Valuation to be verified by 2 officials (Team consisting of one technical one finance officer)

2.

Accounts with principal outstanding up to Rs.50 lac

Valuation to be verified by an official independently

 

Officials verifying the valuation given by the approved valuers shall submit their report on appropriate proforma for approval by competent authority.

 

5.3 Other Securities Including Net Worth of Guarantors

Based on the records available in respect of other attachable securities/ Assets the marks on 0 to 10 scale in Table 6 will be as follows:

 

Table - 6

Immovable Assets of guarantors (personal) as percentage of Base Value in Excess of Realisable value of realizable value of primary/ collateral assets

Sl. No.

Column (i)

Column (ii)

1.

Nil

0

2.

Upto 40% of Base Value

4

3.

41 to 60% of Base Value

8

4.

61% of Base Value and above

10

 

Score

 

 

5.4    Enforcement of Security Interest & Legal Status

Securities eligible for action under SARFAESI Act and Status of Legal Action initiated for recovery of the dues plays an important role during the negotiation process. Accordingly, marks in the range of 0 to 5 in Table 7 (a) and 7 (b) below may be allotted as under and higher of the two shall finally be taken for calculation of Indicative OTS amount: Table -7 (a) - Enforcement of Security Interest & Legal Status