Industrial sickness

1

• Non Performing Assets - Causes
• Improper financing
• Obsolete technology.
• Uneconomic size
• Delays in project implementation
• Fraudulent management.
• Diminishing market potential./ Life cycle
  theory
• High project cost
• Changes in direct / indirect tax structure.
• Competition from unorganized sector.
• Macro economic factors

2
Early warning signals 1. Stagnant /declining
sales. 2. Continuing losses. 3. Erosion of
working capital margins. 4. Irregularity in bank
limits. 5. Uneconomic levels of operation
6. Chronic cash shortages. 7. Accumulation of
non moving inventories. 8. Sticky
debtors. 9. Pressing creditors. 10. Unsatisfactory
financial ratios
3

• .
• NPA Management
• The rehabilitation package for sick units is
  administered by the Board of Industrial Finance
  Reconstruction.
• Section 15 / 22 of BIFR act states that if a
  company has a 100 / 50 erosion of networth and
  cash loss in 2 successive years both occurring
  simultaneously. then it should be refered to
  the BIFR for rehabilitation. further, the
  company should be in existence for 3 years.
• Under the purview of SICA , 1986

4

• BIFR appoints operating agency to prepare
  revival scheme under SICA guidelines.
• Concessions restricted to not more than 2 of the
  normal lending rate.
• With a rehabilitation package for 7 years,
  company should repay all liabilities in 10 years
  with a DSCR of 1.33
• Appeal against BIFR order to AIFR
• In forming a Rehab scheme sacrifice of public
  interests should not exceed infusion of cash by
  new promoter.

5
Short comings of BIFR -No powers to instruct
any authority, Banks, FI or company. - Only if
there is a consensus,on a scheme can BIFR pass
orders. Revival measures 1. Working with
concessions as per SICA act. 2. Merging with
profitable unit, and claiming Sec 72A 3 Change in
management. 4. Introduction of new value added
products. 5. Conversion of debt to
equity. 6. Controlling costs. 7. One time
settlement of debt, funded interest etc.
6
Management of NPAs

• SICA , 1986
• Narsimham committee recommendations
• Recovery of debt to banks financial
  institutions act 1993
• Securities Reconstruction of Financial assets
  enforcement of security interest act 2002.
• To help Banks / FIIs reduce NPAs

7
Enforcement of security interest act , 2002

• Secured creditor can enforce the security
  directly, with out intervention of court or
  tribunal after giving 60 days notice.If borrower
  does not pay outstanding interest principal
  within that time secured creditor can take
  possession of the assets , management of assets
  or appoint any other person to manage the assets.
• The power can be only be exercised if the asset
  is an NPA as per RBI guideline which defines NPA
  if interest installment is overdue for a period
  exceeding one quarter.

8

• Presently these powers are only to public
  financial institutions banks.
• Secured creditor can sell the assets if dues
  are not fully recovered he can file application
  with DRT for balance amount.
• Banks / Institutions can also hand over
  possession to securitistion or reconstruction
  company.
• Appeal can be filed by the borrower with the DRT
  only after the assets or management is taken over
  and not at the stage of receiving
  notice.Jurisdiction of civil courts is barred
  however writ can always be filed in the high court

9

• Protection of SICA will not be available once
  secured creditor takes steps for realisation of
  assets.
• Any refrence pending with the BIFR will abate.
• Provisions of Asset reconstruction combine
  the features of securitisation and enforcement of
  security interest.
• Act effective from June 21,2002.
• Act is based on the recommendation of the
  Narsihman committee reports