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Npas Reduction Strategies For Commercial Banks in India: G.V.Bhavani Prasad, D.Veena
Npas Reduction Strategies For Commercial Banks in India: G.V.Bhavani Prasad, D.Veena
Abstract
A healthy banking system is essential for any economy
striving to achieve growth and remain stable in competitive
global business environment. Indian banks are favorable on
growth, asset quality and profitability; RBI and Government
have made some notable changes in policies and regulation
to help strengthen the sector. These changes include
strengthening prudential norms, enhancing the payments
system and integrating regulations of commercial banks. In
terms of quality of assets and capital adequacy, these banks
have clean, strong and transparent balance sheets relative
to other banks in comparable economies in its region. PSBs
need to strengthen institutional skill levels especially in sales
and marketing, service operations, risk management and the
overall organizational performance ethic & strengthen human
capital.
Structural weaknesses such as a fragmented industry
structure, restrictions on capital availability and deployment,
lack of institutional support infrastructure, restrictive labour
laws, weak corporate governance and ineffective regulations
beyond Scheduled Commercial Banks (SCBs), unless industry
utilities and service bureaus. One of the major drawbacks of
SCBs is its NPAs.
The best indicator for the health of the banking industry in
a country is its level of Non-performing assets (NPAs). NPAs
are one of the major concerns for banks in India. It reflects
the performance of banks. Reduced NPAs generally gives the
impression that banks have strengthened their credit appraisal
processes over the years and growth in NPAs involves the
necessity of provisions, which bring down the over all profitability
of banks.
The Indian banking sector is facing a serious problem of NPA.
The magnitude of NPA is comparatively higher in public sectors
banks. To improve the efficiency and profitability of banks the
NPA need to be reduced and controlled.
This paper deals with understanding the concept of NPAs,
its magnitude and major causes for an account becoming
non-performing and strategies for managing NPA in Indian
banks.
Keywords
Banking System in India, Commercial Banks, PSB, SCB, NPS
I. Banking industry in India
The Indian Banking industry, which is governed by the Banking
Regulation Act of India, 1949 can be broadly classified into
two major categories, scheduled banks and non-scheduled
banks. Scheduled banks comprise commercial banks and the
co-operative banks. In terms of ownership, commercial banks
can be further grouped into nationalized banks, the State
Bank of India and its associate banks, regional rural banks
and private sector banks (the old/ new domestic and foreign).
These banks have over 67,000 branches spread across the
country.
During the first phase of financial reforms, there was a
nationalization of 14 major banks in 1969. This crucial step
led to a shift from Class banking to Mass banking. This in turn
resulted in a significant growth in the geographical coverage of
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I S S N : 2 3 3 0 - 9 5 1 9 (O n l i n e ) | I S S N : 2 2 3 1-2463 ( P r in t)
utilized for purposes other than those for which finance was
granted. The list of willful defaulters is required to be submitted
to SEBI and RBI to prevent their access to capital markets.
Sharing of information of this nature helps banks in their due
diligence exercise and helps in avoiding financing unscrupulous
elements. RBI has advised lenders to initiate legal measures
including criminal actions, wherever required, and undertake
a proactive approach in change in management, where
appropriate [16].
B. Curative Management
The curative measures are designed to maximize recoveries so
that banks funds locked up in NPAs are released for recycling.
The Central government and RBI have taken steps for controlling
incidence of fresh NPAs and creating legal
and regulatory environment to facilitate the recovery of existing
NPAs of banks. They are:
1. One Time Settlement Schemes
This scheme covers all sectors sub standard assets, doubtful
or loss assets as on 31st March 2000. All cases on which the
banks have initiated action under the SRFAESI Act and also
cases pending before Courts/DRTs/BIFR, subject to consent
decree being obtained from the Courts/DRTs/BIFR are covered.
However cases of willful default, fraud and malfeasance are not
covered. As per the OTS scheme, for NPAs up to Rs. 10crores,
the minimum amount that should be recovered should be 100%
of the outstanding balance in the account.
2. Lok Adalats
Lok Adalat institutions help banks to settle disputes involving
account in doubtful and loss category, with outstanding
balance of Rs. 5 lakh for compromise settlement under Lok
Adalat. Debt recovery tribunals have been empowered to
organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh
and above. This mechanism has proved to be quite effective
for speedy justice and recovery of small loans. The progress
through this channel is expected to pick up in the coming years
[17].
3. Debt Recovery Tribunals (DRTs)
The Debt Recovery Tribunals have been established by the
Government of India under an Act of Parliament (Act 51 of
1993) for expeditious adjudication and recovery of debts
due to banks and financial institutions.The Debt Recovery
Tribunal is also the appellate authority for appeals filed
against the proceedings initiated by secured creditors under
the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act.
The recovery of debts due to banks and financial institution
passed in March 2000 has helped in strengthening the function
of DRTs. Provision for placement of more than one recovery
officer, power to attach defendants property/assets before
judgment, penal provision for disobedience of tribunals order or
for breach of any terms of order and appointment of receiver with
power of realization, management, protection and preservation
of property are expected to provide necessary teeth to the DRTs
and speed up the recovery of NPAs in the times to come. DRTs
which have been set up by the Government to facilitate speedy
recovery by banks/DFIs, have not been able make much impact
on loan recovery due to variety of reasons like inadequate
number, lack of infrastructure, under staffing and frequent
adjournment of cases. It is essential that DRT mechanism is
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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 / lenders, 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, if so, the CDR Cell will
proceed to prepare detailed Rehabilitation Plan with the help of
lenders and if necessary, experts to be engaged from outside.
If not found prima facie feasible, the lenders may start action
for recovery of their dues.
IX. The Mechanism of the CDR
CDR will be a Non-statutory mechanism. CDR mechanism will
be a voluntary system based on debtor-creditor agreement
and inter-creditor agreement. The scheme will not apply to
accounts involving only one financial institution or one bank.
The CDR mechanism will cover only multiple banking accounts
/ syndication / consortium accounts with outstanding exposure
of Rs.20 crore and above by banks and institutions. The CDR
system will be applicable only to standard and sub-standard
accounts. However, as an interim measure, permission for
corporate debt restructuring will be made available by RBI on
the basis of specific recommendation of CDR "Core-Group", if a
minimum of 75 per cent (by value) of the lenders constituting
banks and FIs consent for CDR, irrespective of differences in
asset classification status in banks/ financial institutions. There
would be no requirement of the account / company being sick
NPA or being in default for a specified period before reference
to the CDR Group.
This approach would provide the necessary flexibility and
facilitate timely intervention for debt restructuring. Prescribing
any milestone(s) may not be necessary, since the debt
restructuring exercise is being triggered by banks and financial
institutions or with their consent. In no case, the requests of
any corporate indulging in willful default or misfeasance will
be considered for restructuring under CDR [21].
X. Circulation of Information of Defaulters
The RBI has put in place a system for periodical circulation of
details of willful defaulters of banks and financial institutions.
The RBI also publishes a list of borrowers (with outstanding
aggregate rupees one crore and above) against whom banks
and financial institutions in recovery of funds have filed suits
as on 31st March every year. It will serve as a caution list
while considering a request for new or additional credit limits
from defaulting borrowing units and also from the directors,
proprietors and partners of these entities [22].
XI. Recovery Action against Large NPAs
Among the various channels of recovery available to banks
for dealing with bad loans, the SARFAESI Act and the Debt
Recovery Tribunals (DRTs) have been the most effective in terms
of amount recovered. The amount recovered as percentage
of amount involved was the highest under the DRTs, followed
by SARFAESI Act. The RBI has directed the PSBs to examine
all cases of willful default of Rs. One crore and above and
file criminal cases against willful defaulters. The board of
directors are requested to review NPAs accounts of one crore
and above with special reference to fix staff accountability in
individually.
The gross NPAs of the banks is gradually declined from Rs.
70861 crores in 2001 - 02 to Rs. 50552 crores in 2006 07,
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Perspective?
[11] M. Karunakar, Mrs. K.Vasuki, Mr. S. Saravanan [Online]
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Performing Assets Of Private and Public Sector Banks ,
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[17] [Online] Available : http://www.scribd.com/
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[19] [Online] Available : http://www.drt.co.in/
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[22] [Online] Available : http://www.cdrindia.org/
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