OTS for Loans up to Rs. 25,000

The Reserve Bank has advised the boards of public sector banks to formulate a policy for one time settlement (OTS) for recovery of dues pertaining to loans outstanding upto Rs. 25,000. The policy is to be formulated keeping the following parameters in view:

(i) Coverage 

(a) The scheme should cover all loan accounts with outstanding balance of upto Rs. 25,000 principal amount (excluding interest which have become non-performing assets (NPAs) as on March 31, 1998.

(b) The guidelines will also cover suit-filed and decreed debts. After the settlement is reached, the banks may take appropriate steps for closure of cases in respective courts.

(c) The scheme will not, however, cover cases of fraud, malfeasance and wilful defaults.

(d) The guidelines will be operative upto June 30, 2002.

(ii) Settlement Formula -Amount and Cut-off Date

The  amount that should be recovered as settlement amount under these guidelines would  be the balance outstanding towards the loan account as on March 31, 1998.Any interest which is included in the outstanding amount as on March 31, 1998 or accrued on the balance outstanding after March 31, 1998 will be waived.

(iii) Payment

The amount of settlement arrived at as above, should normally be paid in one lump sum. In deserving cases, banks may consider recovering the settlement amount in instalments with down payment of atleast 25% to be received at the time of settlement. The balance amount should be recovered within one year from the date of settlement.

(iv) Sanctioning Authority

The decision on the compromise settlement would be vested with the branch manager. In case the loan had been sanctioned by the branch manager himself, the decision on compromise settlement for such cases, should be taken by the next higher authority.

(v) Non-discriminatory Treatment

Banks should follow the above guidelines for 'compromise settlement of NPAs, without discrimination.

(vi) Formulation of  Policy

The board of directors of banks should frame the policy on compromise settlement of NPAs covered under the guidelines. Banks can also devise their own accounting procedure for treatment of the outstanding amount subject to the one-time settlement.

(vii) Publicity

Banks should give adequate publicity to the scheme to enable all the eligible defaulting borrowers to avail of the opportunity of one time settlement of their outstanding dues.

(viii) Review by the Board

A Monthly report on the progress and details of settlements made should be submitted by the concerned authority to the next higher authority and the head office. The compromise settlements reached should be reviewed by the board at monthly intervals.

Limits on Credit Exposure

RBI has decided that infusion of capital either through domestic issue or overseas float, after the published balance sheet date would be taken into account for determining exposure ceiling. Banks will have to furnish a certificate to the Reserve Bank on completion of the augmentation of capital before reckoning the additions.

It was mentioned earlier that capital funds for determining exposure ceiling would comprise paid-up capital  and free reserves as per the published accounts as on March 31, of the previous year. In terms of the Reserve Bank's  circular on exposure norms issued earlier, the concept of capital funds has been broadened to comprise the total capital as defined under capital adequacy standards (Tier 1 and Tier 2 capital), effective from March 31, 2002.

The Reserve Bank had been receiving representations from banks that the reckoning of capital funds as at the end of  the previous year deprive them of the benefit of capital/long-term resources raised after the date of balance sheet for determing the exposure ceiling.

Banks were earlier advised that other accretion to capital funds by way of quarterly profits etc., would not be eligible to be reckoned for determining exposure ceiling. Banks should also ensure that they do not take exposures in excess of the ceiling prescribed in anticipation of infusion of capital on a future date.

Investments by Banks/Fls

Banks/financial institutions (Fls) have been advised to exercise due caution while taking any investment decision to subscribe to debentures, bonds, shares etc. and refer to the 'Defaulters Lists' to ensure that investments are not made in companies/entities who are defaulters to banks and Fls.

Earlier, banks and notified Fls were required to report to the Reserve Bank, at prescribed periodicity, the particulars of borrowers with outstanding aggregating Rs. One crore and above (both funded and non-funded) classified as doubtful or loss and borrowers against whom suits had been filed. Banks and Fls were also required to report cases of wilful default of Rs.25 lakh and above on a quarterly basis.

It was observed that some of the banks/Fls had not exercised due precaution by referring to the defaulters list while investing in bonds, debentures etc., of companies.

Collateral Exemption Limit for SSI

To improve flow of  credit to the small scale industries sector (SSI) the Reserve Bank has raised the exemption limit of  borrowal accounts for obtaining collateral securities. The exemption limit has been raised to Rs.5 lakh from Rs. 1 lakh for all SSI units. The exemption limit of  borrowal accounts for obtention of collateral securities was raised in March 2000 from Rs. 1 lakh to Rs.5 lakh for the tiny sector.

ARC formed with Rs.360 cr Corpus

The government has asked all public sector banks (PSBs) to contribute Rs.360 crore towards the initial equity of Rs.1,400 crore for Asset Reconstruction corporation of India Ltd., the country's first asset reconstruction company.

Apart from PSBs and financial institutions, UTI Bank and IDBI bank would also be stakeholders. Also taking equity position in the ARC, to be headquartered in Mumbai, would be HDFC, Life Insurance Corporation of India, Asian Development bank and Would Bank subsidiary International Finance Corporation, Finance ministry officials said.

A formal missive for contributing to the equity of the ARC, to be governed by the Companies Act, was sent to banks on 29.1.2002.

The State Bank of  India is expected to be the largest stakeholder among banks.

The company would have a dozen directors with two professionals from the banking sector, one each representing the Refinance assistance to earthquake affected units in Gujarat-Revision in loan ceiling and Interest Rate Structure under Relief Refinance Scheme (RRS):

SIDBI vide its circular dated 8.1.2002 has advised that in order to extend the benefit of the relief to large SSI units affected by the earthquake, it has now been decided to remove the existing loan ceiling of Rs.50 lakh per unit. Accordingly, SIDBI would provide 100% refinance against term loans extended by eligible PLIs to quake affected units in SSI sector (including SRTOs) situated in the areas as notified by the Government of Gujarat, irrespective of the loan amount.

The interest rate structure under RRS has also since been reviewed by SIDBI and it has been decided to revise the rates of interest on refinance against term loans sanctioned to SSI units covered under the Scheme. The modified interest rate structure is given as under:

Loan Limit Interest rate on refinance (%p.a.) Remarks
(i) Upto Rs. 50,000/- 9.50 Under RRS for loans upto Rs. 10 lakh, PLIs would not charge interest of more than 12% p.a. from ultimate borrowers.
Above Rs.50,000/- and upto Rs.10 lakh 10.00
(iii) Above Rs.10 lakh 10.00 As may be decided by PLIs

Fls and banks, and one each to be nominated by shareholders who contribute over Rs.100 crore to the ARC's initial paid-up capital.

While the revised rate of interest on loans upto Rs.50,000/- will be applicable to all disbursements made under RRS on or after December 3, 2001, the rates on loans above Rs.50,000/- will be applicable to all disbursements made under the Scheme since beginning. Debt Equity ration is 2:1 for loans above Rs.50 lakh under RRs.

NHB cuts refinance rates by 50 basis points

The National Housing Bank (NHB) has slashed its refinance rates by 50 basis points. The interest rates now range from 8.5 per cent for loans up to Rs.1 lakh in rural areas to 10.75 per cent for loans up to Rs.20 lakh and above.

While the interest rate has come down from 10.75 per cent to 10.25 per cent for loans between Rs.2 lakh and Rs.15 lakh, it has been reduced from 10.5 per cent to 10 per cent for loans between Rs.1 lakh and Rs.2 lakh. Interest rate has been brought down from 11 per cent to 10.5 per cent for the Rs. 15-20  lakh slab.

NHB has also decided to extend conversion facility to the primary lending institutions permitting adjustment in refinance interest rate whit conversion fees. The move will benefit housing finance institutions, agriculture and rural development banks and cooperative institutions with lower refinance rate of 11.5 per cent in respect of the refinance availed earlier at 13 per cent.

The board has also decided to shorten the period of refinance by providing flexibility of HFCs in choosing the repayment period for refinance. The HFCs now have an option to choose repayment period between 5-15 years. This will greatly help the HFCs who have witnessed an average amortisation  period of around 7-8 years on individual loan portfolios.

SIDBI to spin off tech, credit operations

The Small Industries Development Bank of India (SIDBI) is planning to spin off its two major activities of technology exchange and micro credit into independent units.

To give thrust to the technology upgradation of small and medium enterprises, SIDBI plans to convert its technology bureau into a separate technology bank. The bank has already appointed a consultant to facilitate the transformation. SIDBI has till now done 156 cases of technology transfer.

Once operational, the technology bank will not only offer services like match-making but will provide finances for funding the technical requirements of the small scale sector.

It will maintain a comprehensive data bank of information gathered from various agencies like the council for Scientific and Industrial Research and the  Centre for Development of Technology.

Among the technologies which have been transferred are abrasive paper-packed onions with increased shelf life upto two years and light engineering goods. Similarly, SIDBI has exported the technology for making holograms to China the demand for which has increased rapidly. SIDBI had ear-marked a corpus of Rs.100 crore for micro credit schemes in 1994. Till now the bank has disbursed Rs.87 crore and the recovery rate is approximately 97-98 percent. The bank has therefore, gone in for formation of the SIDBI foundation for micro credit where the disbursement is totally through NGOs. There are about 140 NGOs through whom SIDBI has worded and its disbursements have benefited over 4.5 lakh persons.

Small Scale Industrial Undertakings-Investment Ceiling

SIDBI vide its circular dated December 12, 2001 has enhanced the investment ceiling to Rs.500 lakh in respect of Small Scale&Ancillary industrial undertakings manufacturing the items specified in the APPendix to the Order published in the official gazette date October 09,2001 by the Ministry of commerce & Industry, Gol. Accordingly, all such proposals with investments not exceeding Rs.500 lakh would be eligible for refinance from SIDBI subject to the same satisfying all other norms and guarantees of the refinance scheme. These modifications come into force w.e.f. October 09,2001