Rehabilitation/ Rehabilitation and Recovery: CAIIB Paper 1 (Module D), Unit 8

Rehabilitation/ Rehabilitation and Recovery: CAIIB Paper 1 (Module D), Unit 8

Dear Bankers,
We all know that CAIIB exams are conducted by the Indian Institute of Banking and Finance (IIBF).  CAIIB is said to be one of the difficult courses to be cleared for the bankers. But we assure you that with the help of our “CAIIB study material”, you will definitely clear the CAIIB exam.
CAIIB exams are conducted twice in a year. Candidates should have completed JAIIB before appearing for CAIIB Exam. Here, we will provide detailed notes of every unit of the CAIIB Exam on the latest pattern of IIBF.
So, here we are providing “Unit 8: Rehabilitation/ Rehabilitation and Recovery of “Module D: Credit Management” from “Paper 1: Advanced Bank Management (ABM)”.

♦Credit Default/Stressed Assets/NPAs

Credit default means the inability or the unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, or any financial transactions. This may take the following forms;

  • In the case of direct lending: principal and/or interest amount may not be repaid  as per the terms of repayment.
  • In the case of guarantees or letters of credit: funds may not be forthcoming from the constituents upon crystallization of the liability;
  • In the case of treasury operations: the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases;
  • In the case of securities trading businesses: funds/securities settlement may not be effected;
  • In the case of cross-border exposure: the availability and free transfer of foreign currency funds may either cease or restrictions may be imposed by the sovereign.
Non Performing Assets (NPAs)
  • As per RBI directives, banks in India have to classify their assets into Performing or Standard assets or Non performing assets (NPAs). NPAs are further classified into (a) Sub-standard, (b) doubtful and (c) loss assets.
  • The classification is based on the period of default as also the availability of security. The amount of provision required to be made on the asset portfolio of a bank depends on its classification into the four categories of standard, sub standard, doubtful and loss.

♦Willful Defaulters

The default in payment as per agreed terms could be intentional or due to the reasons beyond the control of the borrower. The intentional default is referred to as willful default. As per RBI guidelines, a ‘willful default’ would be deemed to have occurred if any of the following events is noted:

  • The unit has defaulted in meeting its payment or repayment obligations to the lender even when it has the capacity to honour the said obligations.
  • The unit has defaulted in meeting its payment or repayment obligations to the lender and has not utilized the finance, borrowed for the specific purposes for which the finance was availed of but has diverted the funds for other purposes.
  • The unit has defaulted in meeting its payment or repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
  • The unit has defaulted in meeting its payment or repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank or lender.

♦Options Available To Banks for Stressed Assets

Every credit default does not necessarily result in loss to the bank.  In many cases, bank may be able to recover its dues fully. In other cases, the recovery may be with some loss or, in the worst scenario there may be no recovery at all.

The timely   action and an appropriate strategy play very important role in achieving the best recovery for any stressed asset. While formulating the strategy, the bank has to keep in mind the legal system as also the social aspects prevailing in the country. Normally, a   bank follows the following steps in case of a stressed asset:

  • Exit from the account
  • Rescheduling or Restructuring
  • Rehabilitation
  • Compromise
  • Legal action
  • Write off

Legal Action: In cases where even the compromise does not materialize, banks have to initiate recovery proceedings. The forums available to the banks are as under;

  • Government Machinery
  • Civil Courts
  • Lok Adalats
  • Debt Recovery Tribunals (DRTs)
  • SARFAESI Act, 2002

♦Corporate Debt Restructuring (CDR)


The CDR Mechanism has been designed to facilitate restructuring of advances of borrowers enjoying credit facilities from more than one bank/Financial Institution (FI) in a coordinated manner. The CDR Mechanism is an organizational framework institutionalized for speedy disposal of restructuring proposals of large borrowers availing finance from more than one bank/Fl. This mechanism will be available to all borrowers engaged in any type of activity subject to the following conditions:

  1. The borrowers enjoy credit facilities from more than one bank or F l under multiple banking or syndication or consortium system of lending.
  2. The total outstanding (fund-based and non-fund based) exposure is Rupees 10 crores or above. C D R system in the country will have a three tier structure
  • C D R Standing Forum: The C D R Standing Forum would be the representative general body of all financial institutions and banks participating in C D R system. All financial institutions and banks should participate in the system in their own interest. C D R Standing Forum will be a self-empowered body, which will lay down policies and guidelines, and monitor the progress of corporate debt restructuring.
  • CDR Empowered Group: The individual cases of corporate debt restructuring shall be decided by the CDR Empowered Group, consisting of E D level representatives of  Industrial Development  Bank of India Ltd., ICICI Bank Ltd. and State Bank of India as standing  members,  in  addition to E D level representatives of financial institutions and banks who have an exposure to the concerned company.
  • CDR Cell: The CDR Standing Forum and the CDR Empowered Group will be assisted  by  a CDR Cell in all their functions. The CDR Cell will  make  the  initial  scrutiny  of  the proposals received from borrowers/creditors, by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible.

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