Who is a Secured Creditor & when can security be enforced

A secured creditor means any bank or financial institution or any consortium or groups of banks or financial institutions and includes -

1. Debenture trustee appointed by bank or financial institution
2. Securitisation company or reconstruction company
3. Any other trustee holding securities in whose favour security interest is created for due repayment by any borrower of any financial assistance.

When Can Security Be Enforced

Any security interest can be enforced by a secured creditor without intervention of Court or Tribunal in accordance with the provisions of the Act.

Such action can only be taken any borrower, who is under liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof and the account is classified as NPA. (Non Performing Asset by the secured creditor)

No action can be taken if:

1. It is agricultural land
2. When amount due is less than Rs. one Lakh
3. When amount due is less than 20% of the principal amount and interest thereon, i.e. the borrower has repaid more than 80% of the principle amount and interest.

No action can be taken if the debt is time barred under the Limitation Act.

What is a NPA (Non Performing Asset)?

Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset.

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where

1. interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC),
3. the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,
4. interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and
5. any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where;

1. interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 90 days, inrespect of an overdraft/ cash Credit(OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
4. interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and
5. any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

'Out of order'

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order'.

Overdue

Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.