Smart Agro Foods Ltd. is a listed entity at BSE and NSE. It started its operations since September, 2015. The Company is engaged in the business of trading of agriculture commodities. It was enjoying a working capital ca

CS Professional · Banking - Law & Practice · PYQS · June 2021
Smart Agro Foods Ltd. is a listed entity at BSE and NSE. It started its operations since September, 2015. The Company is engaged in the business of trading of agriculture commodities. It was enjoying a working capital cash credit limit of ₹ 100 lakh and from West Bank Ltd. In the month of January, 2017, the company decided to expand its business activity and to undertake the manufacturing and processing of agro commodities. The expansion plan included manufacturing of tomato catch-up, bakery biscuits & cakes and packaged sweets of Rasgulla & Gulabjamun. For this ambitious expansion plan the company came out with IPO in June, 2017 to raise the money for purchase of land and erection of factory site at Telangana, Jadhpur and Bikaner. The issue was successfully completed and the company purchased the land and erected the factory buildings at the above three places. To meet out the cost of plant and working capital at these places the company availed consortium loans from three banks, including the present banker. The various credit facilities sanctioned by the consortium of three banks in April, 2019 were as under: Credit Facility West Bank Ltd. Jodhpur Bank Ltd. Bikaner Bank Ltd. Total Cash Credit (existing) 100 100 New Cash Credit Limit 75 (For Tomato Catch-up Division) 50 (For Bakery and Cake Division) 50 (For Sweets Division) 175 Term Loan (For Purchasing of Automatic Plant for Manufacturing) 40 (For Tamoto Catch-up Division) 25 (For Bakery and Cake Division) 30 (For Sweets Division) 95 Total 215 75 80 370 The company has offered the following securities for its cash and term loan to the bankers: Security West Bank Ltd. Jodhpur Bank Ltd. Bikaner Bank Ltd. Hypothecation of Book Debts 200# 60# 65# Hypothecation of Plant & Machinery 40 50+25=75 50+30=80 Value of Land and Building 1200 (At Telangana Industrial Area where Tomato Ketch-up is manufactured) 1500 (At Jodhpur Industrial Area where Baker and cakes are manufactured) 1000 (At Bikaner Industrial Area where Sweets are manufactured) # It represents the average of the book debts during the FY 2019-20. The company's performance during the FY 2019-20 was satisfactory. However, with the beginning of the FY 2020-21 the manufacturing activity got slow down due to nationwide closure on account of COVID-19 and migration of the workers. On account of this the company was not able to pay the instalments of the term loans to all the three bankers as well as the transactions in the cash credit account were also stopped and the company was not able to service the interest charged in the cash credit account. As a result, the accounts were classified by the bankers as Non-performing accounts (NPA). The West Bank Ltd. is the Consortium Leader. By the end of the June, 2020 quarter the accounts of the company were showing problems. From July, 2020 to Sept., 2020 the company could not deposit the EMI of term loan, no stock statements were submitted in cash credit accounts and no interest on outstanding amount of cash credit could be deposited. The accounts were classified as Sub-standard in the books of all the banks. The bankers insisted for recovery of the dues. The company pleaded that security pledged/hypothecated/mortgaged with the bankers is much more than the amount outstanding in the various loan accounts. The bankers did not accept the plea, continuously pressurised the company to pay the dues of the bankers else will take legal recourses available under various lows such as, Recovery of Debts and Bankruptcy Act, 1993, Insolvency and Bankruptcy Code, 2016 (IBC) and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Based on the above facts, answer the following questions: In the above question, the bankers have classified the accounts as Sub-standard. Explain the classification of NPAs. What is meant by re-structuring of Bank Loans ?

Answer & Explanation:

Classification of NPAs Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: Substandard Assets. Doubtful Assets. Loss Assets. Standard asset is one which does not show any problems and does not carry more than normal business risk. Substandard Assets A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values- highly questionable and improbable. Three sub-categories are as under: Doubtful up to one year; Above one up to three years; and Above three years. Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. Restructuring When a lender gives concession to the borrower, for economic or legal reasons relating to the borrower's financial difficulty it is called Restructuring. It normally involves: Modification of terms of the Advances / Securities, including alteration of repayment period/repayable amount / the amount of instalments/rate of interest. Sanction of additional credit facility. Roll over of credit facility. Enhancement of existing Credit Limit. Compromise Settlement. Banks may restructure standard, sub-standard and doubtful category accounts. Standard assets are to be classified as sub-standard assets on restructuring. NPAs upon restructuring continue to be in the same asset classification.

Topics: Non-Performing Assets (NPA)

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