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: If any loan or advances is classified as NPA, what provisions have to made by the bankers in their books and how to treat such provisions ?

Answer & Explanation:

Provisioning Norms The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below: Loss Assets Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. Doubtful Assets 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful: Period for which the advance has remained in 'doubtful' category Provision requirement (%) Up to one year 25 One to three years 40 More than three years 100 With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of ₹5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors. Substandard Assets A general provision of 15 percent on total outstanding should be made. Sub-standard (unsecured) 25%, sub-standard unsecured (infrastructure) 20%. In addition to the above the banks are also required to maintain provisions on standard assets, details of which are as under: Standard Assets The provisioning requirements for all types of standard assets stands as below. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis: Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent; Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent; Advances to Commercial Real Estate - Residential Housing Sector (CRE - RH) at 0.75 per cent; Housing loans extended at teaser rates, provisioning will be 2.00 per cent in view of the higher risk associated with them. The provisioning on these assets would revert to 0.40 per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain 'standard'. On restructured advances it will be 5%; All other loans and advances not included in (a) (b) and (c) above at 0.40 percent.

Topics: Non-Performing Assets (NPA)

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