PARA

PARA in the context of banking in India stands for “Pre-Approved Repayment Agreement”. It is a concept related to the management of stressed loans and the recovery process in banks. Let’s break down PARA in detail, including its significance, features, and an illustrative example.

Overview of PARA

1. Definition:

• Pre-Approved Repayment Agreement (PARA) refers to a pre-negotiated or pre-approved plan that allows a borrower to repay a stressed or distressed loan in a structured manner. It is designed to provide a solution for borrowers facing difficulties in servicing their loans while offering banks a mechanism to recover dues more efficiently.

2. Purpose:

• Debt Management: PARA aims to manage stressed loans by offering borrowers an agreed-upon repayment plan, which is pre-approved by the bank.
• Avoid NPAs: By providing a structured repayment agreement, PARA helps in preventing loans from becoming Non-Performing Assets (NPAs).
• Mutual Benefit: It offers a win-win solution where borrowers get a manageable repayment plan, and banks are able to recover the loan amount without resorting to lengthy legal processes.

Features of PARA

1. Pre-Approval:

• Negotiated Terms: PARA involves a pre-negotiated agreement between the borrower and the bank, detailing the terms and conditions of the repayment.
• Flexibility: The agreement may include flexible terms such as extended repayment periods, revised interest rates, or rescheduled payment schedules.

2. Structured Repayment:

• Payment Schedule: The PARA outlines a structured repayment schedule, which may involve periodic payments, lump-sum payments, or a combination of both.
• Revised Terms: The agreement may also revise the terms of the original loan, such as altering the interest rate or extending the tenure.

3. Monitoring and Compliance:

• Regular Monitoring: Banks monitor the borrower’s adherence to the PARA to ensure compliance with the agreed repayment terms.
• Reporting: The borrower may be required to provide regular updates on their financial status and repayment progress.

4. Legal Framework:

• Documentation: PARA is documented as a formal agreement, and both parties (borrower and bank) must adhere to its terms.
• Enforcement: In case of non-compliance, the bank may have legal recourse to enforce the terms of the PARA or take other recovery actions.

Example of PARA

Scenario:

Company X is a medium-sized manufacturing firm that has taken a loan of ₹10 crore from Bank Y to finance its expansion project. Due to a recent economic downturn and operational challenges, the company is struggling to meet its monthly loan repayments. The loan has not yet become an NPA, but there are concerns about potential default.

Steps in PARA Implementation:

1. Assessment:
   • Bank Y assesses the financial situation of Company X and recognizes the potential risk of default. They initiate discussions with the company to find a feasible solution.
2. Negotiation:
   • Bank Y and Company X negotiate a Pre-Approved Repayment Agreement. They agree on a revised repayment plan that includes extending the loan tenure from 5 years to 8 years and reducing the interest rate from 12% to 10%.
3. Agreement:
   • The PARA is formalized and documented, outlining the new repayment schedule. Company X will now make quarterly payments of ₹30 lakh instead of the previous monthly payments of ₹25 lakh. The revised schedule helps the company manage its cash flow more effectively.
4. Implementation:
   • Company X starts following the new repayment plan as per the PARA. Bank Y monitors the company’s compliance with the agreement, ensuring that the revised payments are made on time.
5. Monitoring:
   • Regular updates and financial statements from Company X are reviewed by Bank Y to ensure that the company remains on track with the revised repayment plan.
6. Outcome:
   • By adhering to the PARA, Company X avoids default and manages to recover its financial stability. Bank Y also avoids the need for more drastic measures such as legal recovery actions or asset liquidation.

Summary

The Pre-Approved Repayment Agreement (PARA) is a valuable tool for managing stressed loans in the banking sector. It provides a structured approach to handling distressed loans by offering a pre-negotiated repayment plan that benefits both the borrower and the bank. By avoiding NPAs and facilitating a manageable repayment process, PARA helps maintain financial stability and improve recovery rates for banks.