What changed
RBI issued a new circular on September 3, 2005, providing detailed guidelines for a one-time settlement scheme for SME NPAs below Rs.10 crore. This follows an earlier circular from August 19, 2005, and aims to standardize recovery processes across all public sector banks.
What it means for you
Banks must now offer a uniform, non-discriminatory settlement option to eligible SME borrowers with chronic NPAs, ensuring minimum recovery of the full outstanding amount at classification date. This reduces discretion in settlement decisions and mandates strict timelines for application receipt by March 31, 2006, and processing by June 30, 2006.
What you must do
- Identify all SME NPA accounts classified as doubtful or loss as on March 31, 2004, with outstanding balance of Rs.10 crore or less at classification date.
- Exclude cases of wilful default, fraud, or malfeasance from the scheme and initiate prompt action against such accounts.
- Ensure settlement amounts are calculated as 100% of outstanding balance at classification date, plus interest for accounts sub-standard on March 31, 2004 that became doubtful/loss, and offer lump sum or installment payment options.
- Publicize the scheme widely and give notice to eligible defaulting borrowers by January 31, 2006, with application deadline of March 31, 2006.
- Submit monthly progress reports on settlements to the next higher authority and central office.
Who it affects
All public sector banks in India, SME borrowers with NPAs up to Rs.10 crore, Bank branches handling SME loan portfolios, Credit and recovery departments
Which SME NPA accounts are eligible under this one-time settlement scheme?
Accounts classified as doubtful or loss as on March 31, 2004, with outstanding balance of Rs.10 crore or less at the date of classification, including those that were sub-standard on March 31, 2004 and later became doubtful or loss. Cases under SARFAESI, courts, DRTs, or BIFR are also covered, subject to consent decree.
What is the minimum recovery amount under this scheme?
For accounts classified as doubtful or loss as on March 31, 2004, the minimum recovery is 100% of the outstanding balance at the date of classification. For accounts that were sub-standard on March 31, 2004 and later became doubtful or loss, the minimum is 100% of that outstanding balance plus interest at the Prime Lending Rate from April 1, 2004 until final payment.
What are the payment terms for the settlement amount?
The settlement amount should preferably be paid in one lump sum. If not possible, at least 25% must be paid upfront, and the remaining 75% can be paid in installments within one year, with interest at the Prime Lending Rate from settlement date to final payment.