Unit 3: NPAs, securitisation & the Basel framework

• NPA definition: interest or instalment overdue for more than 90 days (term loans); cash credit/overdraft out of order for 90 days; bills overdue for 90 days; agricultural loans overdue for two crop seasons (short duration) or one season (long duration).
• Expected credit loss (ECL) framework to replace incurred-loss provisioning (RBI draft, from 2027).

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act — lets secured creditors enforce security without court intervention.

• Applicability: secured debts of ₹1 lakh and above; not for agricultural land; at least 60% of secured creditors (by value) must agree in consortium cases.
• Asset Reconstruction Companies (ARCs) registered with RBI buy NPAs and resolve them; NARCL (bad bank) set up in 2021.
• Central Registry (CERSAI) records security interests.

• Bank for International Settlements (BIS), Basel, Switzerland (1930) — the "central bank of central banks"; hosts the Basel Committee on Banking Supervision (BCBS).

• India: RBI requires CRAR of 9%, CET1 5.5%, CCB 2.5% — stricter than Basel minimums; leverage ratio 4% for D-SIBs, 3.5% for others.

• Special features of the debtor–creditor relationship: the customer must demand repayment; at the branch where the account is kept; demand in writing (cheque).
• Obligations of the banker: honour cheques (if funds available), maintain secrecy of accounts (exceptions — law, public duty, bank's interest, customer's consent — Tournier v. National Provincial Bank, 1924), follow customer's mandate, give notice before closing accounts.
• Who is a customer: a person who has an account with the bank (Great Western Railway v. London and County Banking Co.); duration of dealing is not essential.

• Banker's lien: a general lien — right to retain goods and securities of the customer that come into the bank's possession in the ordinary course of banking, for any balance due (Section 171, Contract Act); it is an implied pledge — the banker can sell after reasonable notice. No lien on safe-custody items, securities given for a specific purpose, or trust accounts.
• Right of set-off: combine a debit balance in one account with a credit balance in another account of the same customer in the same capacity — after notice; automatic on death, insolvency, insanity or garnishee order.
• Right of appropriation (Sections 59–61, Contract Act): the debtor may specify which debt a payment is for; if not, the creditor (banker) may appropriate; if neither, payment applies to debts in order of time. Clayton's case — in a running account, the first item on the debit side is discharged by the first item on the credit side.

Obligations under the Negotiable Instruments Act

• Duty to honour cheques (Section 31): the paying banker must pay a cheque if sufficient funds are available and it is properly drawn; wrongful dishonour makes the banker liable to compensate.
• Payment in due course (Section 10): payment in good faith, without negligence, according to the apparent tenor, to the person in possession.
• Section 138 — criminal liability of the drawer for dishonour due to insufficient funds (bank returns the cheque with a memo).
• Crossing (Sections 123–131) must be followed; collecting banker's protection (Section 131).