This has been written to provide you access to easy and simplified CAIIB 2023 study material, we’ll study Restructuring/Rehabilitation and Recovery.

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These notes will help you understand the meaning of credit default, stressed assets, and non-performing assets and dealing with these, the meaning of rectification, reconstructing and recovery, the regulatory framework for debt restructuring available for MSMEs and corporates, the legal framework available for recovery, restructuring of assets and sale of financial assets.


Understanding what are credit defaults, stressed assets and NPAs

Inability/unwillingness of a customer/counterparty to meet the commitments about:

  • Lending
  • Trading
  • Any financial transaction 

Is defined as credit default.

It could occur in any of the forms mentioned below:

In the case of:
Direct lending Principal and/or interest amount may not be forthcoming from the constituents upon crystallisation of the liability  
Guarantee or letter of credit After an obligation crystallises, money from the constituents might not come in. 
Treasury operations  The payment or series of payments due from the counterparties under the respective contracts may not be forthcoming or ceases

Securities trading businesses

Funds/securities settlement may not be affected
Cross-border exposure Availability and free transfer of foreign currency funds may be either cease or restrictions may be imposed by the sovereign



Stressed assets may be defined as those assets in which default has either already occurred or which are facing reasonably certain prospects of default.

Let’s understand this with a simple example:

A term loan for an industrial project whose implementation has been abandoned is a stressed asset even though repayment has not fallen due as per the repayment terms.


RBI has directed banks in India to classify their assets into:

  1. Performing (Standard) assets
  1. Non-performing assets (NPAs), are further classified into:
  1. Substandard
  1. Doubtful 
  1. Loss of assets 

This classification is based on:

  • Period of default 
  • Availability of security 

Banks should build provisioning buffers to absorb the losses in a downturn, the adequacy of this buffer is determined by PCR (Provisioning coverage ratio).

PCR measures how much money a bank has set aside to cover loan losses.


Wilful defaulters 

In case any of the following events is observed the defaults would be said to be a wilful defaulter:

  • Not meeting its payments/repayment obligations to lenders despite having the capability to honour the obligations.
  • Not able to meet its payments/repayment obligations to the lender while having diverted funds for other purposes instead of using them for the specific purpose for which finance was availed.
  • Not able to meet its payments/repayment obligations to the lender and has not been utilised for the specific purpose for which finance was availed and neither funds are available with the unit in form of other assets.
  • Failing to fulfil its payment/repayment commitments to lenders despite having removed or sold the movable fixed assets or real estate provided by her or it to secure a term loan without the bank’s or lender’s knowledge.

Diversion of funds

In case any of the following events is observed the term ‘diversion of funds should be construed:

  • Discording with terms of sanction, utilisation of short-term working capital for long-term purposes.
  • Deployment of funds for activities other than those for which the loan was granted.
  • Transfer borrowed funds to subsidiaries/group companies or other corporate by any means.
  • Without prior permission of the lender, routing of funds through any bank other than the lender bank or members of the consortium.
  • Without the approval of lenders, investment in other companies by way of acquiring equities/debt instruments.
  • The shortfall in the deployment of funds regarding amounts drawn without accounting reason for it.

Siphoning of funds

Borrowed funds from banks/FIs are utilised for purposes unrelated to the borrower’s operations, resulting in siphoning off funds to the lender’s financial health.

Based on the objective facts and circumstances of the case decision ‘of whether the instance amounts to siphoning of funds would be made.

Non-cooperative defaulters

The definition of a non-cooperative borrower does not engage constructively with their Banks/FIs and must take measures to declassify/classify a borrower and report information on such borrowers to the central repository of Information on the large credits.

Borrowers are classified as non-cooperative if they have total fund-based and non-fund-based facilities from the concerned bank of Rs. 5 crores.

The committee will issue a show cause notice to the borrower and issue an order recording the borrower’s non-cooperative status and the reasons for it.

An opportunity should be given to the borrower for her hearing if the committee feels such an opportunity is necessary. The order of the Committee should be reviewed by a Review Committee, which must confirm it before it becomes final.

Options banks are left with for stressed assets


  1. The most important details in this text are the steps taken by banks to ensure regularisation and exit from problematic accounts. Rectification is to persuade and prevail on the borrower to remit the unpaid amount and to remain prompt in meeting obligations in future. 
  2. Exit from the account is possible only when symptoms of stress are detected at a very early stage and when the borrower can shift her account to another bank with a different credit appetite. 
  3. In the case of consortium/multiple banking, other banks may take up the share of the bank wanting to exit, but in the case of sole banking, the bank may find it difficult to exit a problematic account and may have to consider other options. 
  4. Common tactics used to make a borrower exit include withdrawing concessions and priorities, enforcing covenants, ignoring pleadings, reducing limits, declining requests for excess drawing, etc.


Restructuring is a process where a bank grants concessions to a borrower in response to their financial difficulty. 

These concessions include elongation/sanction of the fresh moratorium, elongation of the repayment period, reduction of repayment instalment amount, reduction in pricing and margin, sanction of fresh facilities to overcome immediate crises, capitalisation of unpaid interest and instalments and future cash loss, conversion of outstanding in FB working capital facilities and devolved amount of LCs and invoked amount of BGs into medium-term or long term loans without interest or with a low rate of interest.



Banks have to initiate recovery proceedings in cases where rectification is not possible and restructuring is not feasible. The forums available to them include civil courts, interim reliefs, a list of documents and witnesses, and issues framed by the Court. 

After the matter is argued, the magistrate or judge will issue a preliminary decree, ordering the defendants to pay the money within 6 months. If the same is not paid within 6 months, the banks have to apply and obtain a final decree, based on which an execution petition needs to be filed for recovery of the dues. The limitation period of the final decree is 12 years.

Lok adalats

The Legal Services Authority Act, 1987 has conferred a statutory basis on Lok Adalats (people’s courts). The Reserve Bank has issued guidelines to commercial banks and financial institutions to make increasing use of the forum for dues up to Rs. 20 lacks if the Lok Adalat is convened under the civil judiciary. DRTS/DRATS banks can refer cases irrespective of the amount involved.

SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) provided the impetus for banks and FIs to hasten the recovery of their dues. 

It was extended to cooperative banks by a notification dated January 28, 2003, and provided for enforcement of security interest for the realisation of dues without the intervention of courts or tribunals. To guarantee that the asset rebuilding process follows sound guidelines, guidelines have been issued.

The Act was amended in 2004 to enable the borrower to make an application before the debt recovery tribunal against the measures taken by the secured creditor without depositing any portion of the money due. 

It also allows secured creditors to take possession of the collateral, against which a loan had been provided, upon a default in repayment after serving due notice of the default.

The Insolvency and Bankruptcy Code, 2016 (IBC)

The Insolvency and Bankruptcy Code, 2016 (IBC) is a single law for insolvency and bankruptcy. It outlines insolvency resolution processes and is intended to ensure the continuation of business entities as going concerns and protect creditors from harassment. 

It has been proven to be an effective tool in the hands of banks for recovery. Compromise offers are made if legal action takes more time than anticipated or does not yield the desired results. The cardinal principle of accepting a compromise offer is that the PV of the compromise offer should be higher than the realizable value of the available security.

Write off

The write-off is when the bank is convinced that further pursuit of the case will not result in worthwhile results, and the outstanding amount is written off by utilizing the provision made for that account in the books. It does not mean that the borrower’s liability to the bank has ended, and if the bank can recover any amount from her in future, it has the legal right to appropriate that amount.

The technical write-off is where the provision for bad debts is set off against bad debt on the asset side, and the actual write-off of non-recoverable assets to the debit side of the P&L account. It is not the first desired course of action, but it can save time and money if done at the right time.

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