Answer to Question #199082 in Management for Peter Masih

Question

Non-Performing Assets (NPAs) in the Indian Banking sector has become the subject of

much discussion and scrutiny. Bank’s lending capacity has been severely eroded by

mounting NPAs, net worth of many banks have declined and a number of banks have

reported huge losses. In recent year’s plethora of rules and regulations have come from

RBI, Government, IMF, BASEL recommendations, etc to keep a tab on stressed assets

and timely resolution.

In light of above statements:

a. Write the major reasons for increase on NPAs since last 10 years (5 Marks)

b. According to you what would be the mitigating factors/solutions for NPA management.

(5 Marks)

Answer 1

A Non-Performing Asset refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. 

Major reasons for increase on NPAs

1. Relaxed lending norms especially for Corporates when their financial status and credit rating is not analyzed properly.
2. Five sectors Textile, aviation, mining, Infrastructure contributes to most of the NPA, since most of the loan given in these sector are by PSB’s.
3. NPAs in the corporate sector are far higher than those in the priority or agriculture sector. However, even the PSL sector has contributed substantially to the NPAs.
4. Banks did not conduct adequate contingency planning, especially for mitigating project risk.
5. Policy Paralysis and key economic decisions were delayed which affected the macroeconomic stability
6. Companies with dwindling debt repayment capacity were raising more & more debt from the system.

 The mitigating factors for NPA management

1.  Debt Recovery Tribunals

Brought into being existence in year 1993 by the Indian Parliament, the Act allows financial institutions to speedily recover dues of ₹10 lakhs and above. DRTs are capable of handling larger number of cases as compared to regular courts by cutting down delays in the initial proceedings.

2.   Lok Adalat

Small loans of ₹5 lakhs and less can be recovered through the Lok Adalat as per the guidelines issued by RBI in year 2001. This alternative for dispute redressal mechanism covers both suit and non-suit filed cases.

3.    Compromise Settlement

This scheme helps in recovery of NPAs up to ₹10 crores through a simplified non-discretionary mechanism.

4.    Credit Information Bureau

Third party agencies such as CIBIL helps banks with data on the financial health of the borrower. The Credit Information Bureau maintains records of individual defaulters and shares it with the respective banks to aid them in making effective lending decisions. For this, banks may be charged a fee.

5. SARFAESI ACT, 2002

The SARFAESI empowers banks to deal with NPAs, without the involvement of court, through three alternatives:

• Asset Reconstruction
• Enforcement of Security
• Securitization

Any outstanding amount of more than ₹1 lakh can be dealt under SARFAESI. However, an amount that is less than 20% or principal and the interest amount is not considered under the Act. The Act also allows banks to:

• To release a notice to borrower (and their guarantor) asking them to release the payment within 60 days from the receipt of notice.
• To release notice to anyone who acquires the borrower’s secured assets to produce the same to the bank.
• To advice any of the borrower’s debtors to pay off the loan due with the bank.

In case of failure from the borrower’s end with respect to the issue notice, the bank may:

• Take possession of the secured assets of the borrower
• Sell or lease the security
• Manage the borrower’s security or appoint someone to manage the same.