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PRIORITY SECTOR LENDING AND RECOVERY

A clear picture about the priority sector l ending and


recovery i s given in this chapter.
Though India has one of the oldest banking sectors
in the world yet the growth of the sector has been

very

lops ided. The main reason for such an imbala nce d growth was
that the comme rc ia l banks were in the hands of t h e private
sector. As such, they provided short - term finance to trade and
industry based on the security offered by the borrowe rs. This
security - oriented approach resulte d in a large chunk of bank
credit being utilised only by
raders.

Banks

e ntre pre ne urs,


and

host

were

unknown

a gric ulturis ts,


of

big industrial houses and t

people

with

ins titutions

to

small

a rtisa ns, trans port ope ra tors


small means. These vital

sectors, which made the l arrest contribution to the Gross


National Product [GNP] and provided the bulk of e mployme nt,
we re totally ignored

by the banking sector. Hence, after

indepe nde nce , it was felt that in order to achieve balanced


regional growth in

the

country, it is esse ntia l to develop these ne glected sectors, for


which

it

is

esse ntia l

to

cha nne lize

the

necessary f

inancial resources.
For a t t aining the goal of self - suffic ie ncy and for
ensuring sus ta ine d economic growth, the All India

Rural

Credit Survey Committee in 1954 , rec omme nde d for the


de ve lopme nt of a State sponsore d comme rc ia l

banking

system. I t was in this ba ckground that the

Bank of

State

India was formed, which set up m ore than 400 branches

in

rural areas. This was followed

by

14

banks

control

in

introduce d.

1969

and

social

na tiona liza tion


over

of

banks was

The main objective of na tiona liza tion of commercial


banks was to provide f inance to the
sectors

hitherto

of the economy l ike agriculture,

small - scale

industries, small entre pre ne urs , a rtisa ns, e t c .


sectors received priority in availing f inancial
they were known as priority

neglec te d

As these
ass istance,

sectors.

The concept of priority sector l ending was evolved


to ensure that assis ta nce f rom the banking system f lowed

in

an increasing measure to the vital sectors

of the economy

and acc ording to national prioritie s. The desc ription of the


priority sectors was forma lize d in 1972 on the basis of the
report submitted by the Informal Study Group on Sta tistics
relating to

advances

to

the

priority

sector.

Priority

sectors include agric ulture [ both direct and indirec t], small
scale indus trie s, small road and water t ra nsport,
business, retail t rade,

profe ssiona l and

persons, s t a t e sponsore d

small

s elf- employed

orga nisa tions

for

sc hedule d

castes/ sche duled t r ibes, educa tion, housing [ both direct


and indire ct], c ons umption loans, micro - credit, loans to software and food and agro - process ing sector.

Initially, there were no targets f ixed on the priority sector l ending. I t was just emphas ize d

that

comme rc ia l

banks should increase their involve ment in the f inancing of


priority sectors. In November

1974 , public

sector

banks

were advised that their priority sector l ending should reach


a l evel of not l ess than one - third of the outstanding credit
by March 1979 . In November 1978 , the private sector banks
were a l so advised to l end a minimum of 33 1 / 3 per cent of
their total advances to the priority sector by the end

of

March 1980 . Sub se que ntly, the t arget was enhanced


per cent of aggregate advanc es. In achieving this

to 40

overall

t arget, sections were a l so s t ipulated for the banks.

At

present, res pe c tive ly, of their Net Bank Credit [ NBC] to


the agric ultural sector and weaker sections of the society,
re s pec tive ly. Foreign banks ope ra ting in India were a l so
advised to progre s s ive ly increase their advances to

the

priority sector to reach a l evel of 15 per cent of their net


bank credit by the end of March 1992 . In April 1993 , this
ratio was further raised to

32

per

cent

of

NBC

to be

achieved by March 1994 . Within the enhanced t arget of

32

per cent, two sub - t argets of 10 per cent in respect of Small


Scale industries and 12 per cent for exports were f ixed. On
the basis of the

revised

priority

the

- t argets

sector,
have

now

guidelin es

priority
been

sector

l inked

on

l ending

l ending

to adjusted

to the

t arget/ sub
net

bank

credit [ ANBC] or credit equivale nt amount of off - balance


sheet exposures,

w hic he ver

i s higher, with effect f rom

April 30 , 2007 .
During

the initial

period,

only

agric ulture,

scale indus trie s, small and marginal farmers and

smallartisans

and exports were included in the priority sector. Later on,


based

on

the

re c omme nda tions

of

the

Narasimham

Committee Report, 1991 , housing, educat ion, cons umption,


profe ssion, I . T sector and food proce ssing not falling under
SSI were a l so included under the category priority

sector.

In 1991 , the Narasimham Committee pointed out many


problems

relating

to priority

sector

l ending,

the

most

importa nt one being that a l arge part of the non - performing


assets come f rom priority sector l ending.

Thus,

the

committee rec omme nde d reduction of priority sector t arget


to 10 per cent and expansion of

the

coverage

sector to include more sectors. However , the


priority sector was
priority

was

not

expanded

reduced
to

but

include

the
more

of

priority

t arget

of

definition

of

sectors

l ike

educa tion, consumption, profess ion, I . T sector and food


process ing not falling under SSI.

Also , a provis ion

was

made such that, banks that cannot meet the priority sector
t argets can deposit funds in the f inancial institutions l ike
National

Bank

for

A gric ulture

and

Rural

Development

[ NABARD] under Rural Inf ras truc ture De ve lopme nt Fund


[ RIDF] or some banks can do so in the Small

Industries

Bank of India [ SIDBI] for l esser interest rates, which in


turn will be l ent out to the priority

sectors.

The broad ca tegorie s of priority

sector

for

a l l

sc hedule d c ommercial banks are as under:


[i] A griculture ( Direct and Indirect Finance)
Direct f inance to agriculture

includes

short

and long t erm loans given for agric ulture


ac tivities

directly

to

individua l

and

farmer s ,

medium
a l l i ed
self- help

groups ( SHGs) or joint l i ability groups ( JLGs) of individua l


farmers without l imit and to others ( such as corpor ate
pa rtne rs hip

f i rms

and

ins titutions)

up

to

Rs.

20

l akh

for t aking up agric ulture a l l i ed ac tivities. Indirect f inance to


agriculture includes loans given for agriculture and a l l i ed
ac tivities.
[ i i ] Small- scale industries ( Direct and Indirect Finance )
Direct

f inance

to small

scale

industries

( SSIs)

includes a l l loans given to SSI units which are engaged in


manufa cture, proces sing
whose inves tme nt

are

or

prese rvation

in plant

cost) exc luding l and and building.

and

of

goods

machinery

and

( original

[ a] Small Scale Industries


Small-

scale

indus trie s

manufa cture, process ing

or

are u nits

engaged

prese rvation

of

in

goods

the
and

whose investment in plant and mac hinery ( original cost)


excluding l and and building does not exceed Rs. 5 crore.
[ b] Micro Ente rprises
Small

scale

units

whose

inves tme nt

in

plant

and

machine ry ( original cost) excluding l and and building i s up


to Rs. 25 l akh, i r respective of the location of the unit, are
t reated as Micro Ente rprise s.
[c] KVI Sector
All

advances granted

i r res pec tive of their s i ze

to units
of

in the

ope ra tions,

KVI

s ector,

location

and

amount of original investment in plant and machinery come


under the category small - scale sector. Such advances will
be e l igible for c ons ide ra tion under the sub - t arget ( 60 per
cent) of the SSI se gment within the priority

sector.

Indirect f inance
Indirect f inance in the small - scale
will include credit to:

indus tria l sector

[ a] Persons involved in assisting the de centralise d sector in


the supply of inputs

to

and

ma rketing

of

outputs

of

a rtisa ns, vil l age and cottage industries.


[ b]

Advances

de ce ntra lis e d

to

coope ra tives

sector

viz.

of

produce rs

artisans

village

and

in

the
cottage

industries.
[c] Subsc ription to bonds i ssued by NABARD with

the

objective of f inancing exc lus ively non- farm sector ( not


eligible for c l assification under priority sector

l ending

with effect f rom April 1 , 2007 ) .


[ d] Loans granted by banks to NBFCs for on l ending to SSI
sector.
[iii] Small busine ss/ service e nterprises

and

I t includes small business, retail

t rade,

self- employed

road

persons,

small

profess ional
and

water

ransport ope ra tors and other ente rprises.


[ a] Small Business
Small business would include individuals and f i rms
managing

a business

providing

any

service

ente rprise
other

esta blished

than

mainly

profe ssiona l

for

services

whose original cost price of the equipment used for the


business does not exceed Rs. 20 l akh.
[ b] Retail Trade
Advances granted to retail t raders dealing in essential
commoditie s

( fair

price

shops),

consumer

co - ope ra tive

s tores and private retail t raders with credit l imits

not

exceeding Rs. 10 lakh.


[ c] Profes s ional & Self - employed Persons
Loans to profe ssiona l and self - employed
include loans for the purpose of purc has ing
repa iring

or renova ting

existing

persons

equipment,

equipme nt

and/ or

ac quiring and repa iring business premises or for purc has ing
tools and/ or for working capital re quirements to medical
pra c titione rs inc luding de ntis ts, cha rtered acc ountants, cost
acc ountants,
solicitors,
contra ctors

practic ing

engineers,
or

company

secreta ry,

l awyers

architec t s , surveyors,

mana gement

category priority sector loans.

consultants

come

or

cons truc tion


under

the

[ d]

Small

Road

and

Water

Transpor t

Oper ators

( SRWTO)
Advances to small road and water t ransport ope ra tors
owning a f l eet of vehicles not exceed ing t en ve hicle s,
inc luding the one proposed to be

f inanced

cons titutes

priority sector loans. Loans advanced by comme rc ia l banks


to NBFCs for the purpose of providing f inance to t ruck
operators and SRWTOs

other

than

t ruck

operators

sa tis fying the e l igib i l i ty criteria i s a l so included under the


category priority sector loans.
[ iv] Micro credit
Provis ion of credit and other f inancial services and
products of very small amounts not exceeding Rs. 50 , 000
per borrower to the poor in rural, semi - urban and

urb an

areas, e i ther directly or through a group mecha nism,


enabling

them

to

improve

their

l iving

for

s t andards,

cons titutes micro credit.


[ v] Education loans
Educa tion loans include loans and advances

granted

to individua ls for educa tional purpose, up to Rs. 10 l akh

for s tudies in India and Rs. 20 l akh for s tudies abroad


and this does not include those granted sc holarship by the
ins titutions.
[ vi] Housing loans
Loans up to Rs. 15 l akh provided for construction of
houses by individuals, ( exc luding loans granted by banks to
their own e mployees ) and loans given for repairs to the
damaged houses of individua ls up to Rs. 1 l akh in rural and
semi- urban areas and up to Rs. 2 l akh in

urban

areas

cons titute priority sector loans .


[ vii]

State

s pons ored

or ganization

for

scheduled

castes/ scheduled tribes


Advances

sa nctione d

to

State

Spons ored

O rga nisa tions for Sche dule d Castes/ Sche dule d


the specific purpose of purchase

and supply

Tribes

of inputs

for
to

and/ or the ma rketing of the outputs of the be ne fic ia rie s of


these orga niza tions cons titute priority sector loans .
[ viii] Cons umption Loans
Pure consumption

loans

granted

to

the

sections of the community under the C ons umption

weaker
Credit

Scheme should be included

in this

i t em.

These

include

loans f inancial assis ta nce provide d to NGOs and Self help


groups.
[ ix] Food and Agro - based Proces sing Sector
Food and

agro

based

process ing

sector

would be

e l igible for c l assification as priority sector loans by banks


l ike f ruit and vegeta ble processing industry, food grain
milling industr y , dairy products, process ing of poultry and
eggs,

meat

produc ts,

f i sh proce ssing,

bread,

oilsee ds,

meals ( edible), breakfas t foods, bisc uits, confe c tione ry (


inc luding cocoa
extract,

proce ssing

and

chocolate),

malt

protein i solate, high protein food, weani ng food

and extruded/ other ready to eat food produc ts, aerated water/
soft drinks and other proce ssed foods, special Pac ka ging for
food proce ssing

indus trie s

and t echnical

assis ta nce

and

advice to food process ing indus try. With regard to the s i ze


of the units within this sector, i t i s c l arified that food and
agro - based process ing units of small and medium s i ze with
investment in plant and machinery up to Rs. 5 crore would
be included under priority sector l ending.

[ x] Softw are Industry


Loans to software ind ustry with credit l imit up to
Rs. 1 crore f rom the banking industry

i s

cate gorise d as

priority sector loans.


[ xi] Venture Capital
Investme nt in Venture Capital will be e l igible for
inc lus ion in priority sector, subject to the condition

that

the venture cap i t a l funds/ compa nie s are registered with


SEBI. However, f resh investments that may

made

by

banks on or after July 1 , 2005 shall not be e l igible

for

c l ass ifica tion

the

under

priority

sector

be

l ending

and

investments, which have already been made by banks up to


June 30 , 2005 shall not be e l igible for c l ass ifica tion under
priority sector l ending with effect f rom April 1 , 2006 .
[ xii] Leasing and Hire purchase
Para- banking activities such as l easing and
purchase f inancing

unde rtaken

de pa rtme nta lly

by

hire
banks

will be c l assified as priority sector adva nces, provided the


ultimate benefic iary sa tis fies the criteria l a id down by
RBI for t reating such advances as
sector
200

advances to

priority

[ xiii] Loans to urban poor indebted to non ins titu tional


Lenders
Loans to dis tresse d urban poor to prepay their debt
l enders

in the

informal

sector

would

to

be e l igible

for

c l assification under priority sector. Urban poor for this


purpose may include those families in the urban

areas

who

are below the poverty l ine. Such loans t o urban poor may
be c l assified under weaker sections within

the

priority

In order to ensure that more under - privile ge d

sections

sector.
[ xiv] Weaker Sections

in the priority sector are given

proper

a t t ention

in

the

matter of a l location of credit, i t should be ensured that the


advances to weaker sections reach a l evel of 25 per cent of
priority sector advances or 10 per cent

of net bank credit.

The weaker sections under priority sector shall include the


following:
(a)

) Small and

marginal farmers with

acres and l ess

l and

and l andless l abours, t enant

share croppers

20
1

holding

of

farmers and

(b) )

Artisans,

village

and

cottage

indus trie s

where

individua l credit l imits do not exceed Rs. 50 , 000 / - ,


(c)

) Be nefic ia ries of Sw a rnj ay anthi Gram Sw arojga r Yojana (


SGSY),
(d) ) Sc heduled Castes and Sche dule d Tribes,

(e)

) B e ne fic ia rie s of Differentia l

Rate

of

Interest ( DRI)

Scheme,
(f)

Be ne fic ia ries

under

Swarna

under

the

Jayanti

Shahari

Rojgar

Yojana ( SJSRY),
(g) )

Be nefic ia ries

Scheme

for Libe ra tion

and

R e ha bilita tion of Scavangers ( S LRS),


(h) ) Advances to Self Help Groups,
(i)

) Loans to distre ssed urban poor to prepay their debt to


non- ins titutiona l l enders against appropriate collate ra l or
group sec urity, subject to the guidelines to be approved by
their Boards of D irectors

(i) ) Loans to

distre ssed urban/ rural p oor to prepay

debt to

l enders,

non- ins titutiona l

collateral or group security.

their

against appropria te

[ xv] Export Credit


This category will form part of priority sector

for

foreign banks only.


C ommercial banks
special bonds
As

per

the

attaining

target s by

rec omme nda tions

of

investing

the

Committee report, the comme rc ia l banks can

in

Narasimham
fulfil

their

t argets by making investments in special bonds i ssued by


specified ins titutions as a part of priority sector advances
subject to the following conditions:
[ i ] State Financial C orpor ations ( SFCs)/ State Industrial
De ve lopme nt Cor porations ( SIDCs)
The

commercial

banks

can

ubs cribe

exclusive ly f loated by SFCs and SIDCs for

to

bonds

f inancing SSI

units and this will be e l igible to be included under priority


sector as indirect f inance to SSI.
[ii] Rural E lec tr ific at ion Cor poration ( REC)
Subscription
exclusive ly

for

to special
f

bonds

inancing

i ssued

pump

set

by

REC

energisa tion

programme in rural and semi - urban areas and the System


Improveme nt Programme
A gric ulture ( SI - SPA)

under

i t s

Special

Projects

will be e l igible for inclusion under priority sector l ending


as indirect f inance to agric ulture.
[iii] NABARD
The banks can subs cribe to bonds i ssued by NABARD
with

the

objec tive

of

f in ancing

exclusive ly

agriculture / a l l i ed ac tivities and the non - farm sector will be


e l igible for being included under the priority sector

as

indirect f inance to agric ulture/ SSI, as the case may be.


[ iv]

Small

I ndus tr ies

Developme nt

Bank

of

India

( SIDBI)
C ommercial banks can s ubsc ribe to bonds exclusive ly
f loated by SIDBI for f inancing of SSI units and will
e l igible to be

included under priority sector as

be

indirect

f inance to SSIs.
[ v] The

National

Small

I ndus tr ies

Cor poration

Ltd.

( NSIC)
Subscription to bo nds i ssued by NSIC exclusive ly for
f inancing of SSI units will be e l igible for inclusion under
priority sector as indirect f inance to SSIs.

[ vi] National Housing Bank ( NHB)


Subscription to bonds i ssued by NHB exclusive ly for
f inancing of housing, i r respect ive of the loan s ize per
dwelling unit, will be e l igible for inc lus ion under priority
sector advances as indirect housing f inance.
[ vii]

Housing

and

Urban

De ve lopme nt

C orpor ation

( HUDCO)
Subscription to bonds i ssued by HUDCO

exclusive ly

for f inancing of ho using, i r respective of the loan s i ze per


dwelling unit, will be e l igible for inc lus ion under priority
sector advances as indirect housing f inance. Inves tment in
special bonds i ssued by HUDCO for providing f inance

to

a rtisa ns, handloom weavers, e t c . under t iny sector will

be

c l assified as indirect l ending to SSI ( Tiny) sector.


Recovery of Priority sector loans by comme rcial

banks

The two primary functions of commercial banks are to


accept deposits f rom the public and l end money to the
borrowe rs. The deposi t s are to be repaid on the due dates
or on demand de pe nding

on

the

nature

of

de posits.

Likew ise, the money l ent should be repaid on the due dates

or on demand depending on the nature

of adva nces.

In the

pre- na tiona lisa tion period, that too before 1969 , rec overy
of loans was not much a problem for the bankers. This was
because the t raditiona l bankers were conse rvative in their
approach

and

they

knew

their

custome rs

pe rs onally.

Howeve r, recovery of loans during the post - na tiona lis a tion


period has not been smo oth for the commercial

bankers

es pecially due to priority sector l ending. This i s because


priority sector loans are

granted

to

borrow ers

of

means who are not usually in a position to offer

small

adequate

security to the bankers.


The success of any Gover nment sponsore d scheme
should be measured not by 100 per cent dis burs al but

by

100 per cent recove ry. The motto of 100 per cen t recovery
i s meant for bankers, Government

servants

and

borrowe rs as well. In case of priority sector l ending


100 per cent recovery i s a must. I t

should

not

the
too,
be

misc ons true d as a press uriz ing act to demand 100 per cent
recovery for even priority sector adva nces. Priority i s for
giving

the

recove ry.

loans
This

and

not

chapter

for

exempting

throws

them

an insight into

f rom
t he

various a l t ernatives ava ilable to

the

banker

for

recovery of loans advanced by him. I t highlights

the
the

following i ssues:
[ i ] importance of recovery of loans.
[ i i ] factors contribu ting to poor recove ry.
[ i i i ] s t eps in recovery of loans.
[ iv] suggestio ns for improving recovery of loans.
I mportanc e of recovery of loans
The importance of recovery of loans need not be over e mphasis ed. There i s a general saying that in a bank,

any

person can grant advances but

can

only

wise

person

recover the loans. Fol lowing are some of the reasons


the importance accorded to recovery of

for

loans:

[ i ] Non- recovery of loans erode profi ta bility of

l ending

banks.
[ i i ] The funds, which have been provided as loan, cannot
be recycled and to

that

extent,

the

custome rs will be deprived of bank credit.

more

de serving

[ i i i ] A bank saddled with huge overdue loans portfolio will


suffer in i t s image a nd may lose public confide nce.
[ iv] A loan, which has been considered as

bad,

when

recove re d increases the profi ta bility of the bank .


[ v] Overdue advances

results

in a lot of

c orre s ponde nc e

and paper work. A good recovery perce nta ge will avoid this
wastage of t ime and energy.
[ vi] A good recovery pe rc entage qua lifies the branch for a
better inspection rating.
Factors contr ibuting to poor recovery of loans
Innumerable factors contribute to the poor recovery
of loans by banks. [ See Diagram No. 3 . 1 ]

All these factors can be broadly c l assified as follows:


[ i ] Borrow e r- oriente d: The following

factor s result

non- recovery of loans and these factors are

in

borrower

oriente d:
[ a] Poor gener ation of revenue: The ina bility

of the

borrower to effect payment of dues due to

poor

ge ne ra tion and/ or

i t indus try,

failure of

the

project, be

cash

t rade or agric ulture, res ulting f rom influence of exte rnal or


internal factors.
[ b] U nw illingne ss of the borrow er : The borrower may not
be willing to repay the loans because of divers ion of funds
borrowed to other avenues of inves tme nt.
[ c] Wilful default: The borrow e r, for no valid reason,
not be willing to repay the

loans

in

spite

of

may

having

suffic ie nt funds a t his dis posal.


[ d] Political influence : The borrower may be politica lly
influenced not to repay the

loans

in

the

expectation of

waiver of loans, which often t akes place in case


agricultura l lo ans.

of

[ e] M is util is ation of funds borrow e d: The borrowe rs with


a false optimism of earning s i zable sum out

of

interme dia te inve stment, may mis utilise the borrowed

an
sum

and divert the loan procee ds. When the loan borrowed i s
not

ultima te ly

utilised

for

the

concerne d

project,

the

borrowe rs f ind i t diffic ult to repay, espec ia lly when their


es timation of yield f rom a l t ernate source fails.
[ f ] Lack of interes t: The borrower

may

personal

which

interest

in the

project

for

not

have any

the

loan

i s

borrowe d.
[g] Other personal reasons: The

borrow ers may

not repay

the loan properly because of gross neglige nce and defiant


l ine of the thinking, ques tionable c haracter of borrowe rs,
l ack of expe rtise and the burden of ma intaining the self

and

the family.
[ i i ] Banker- or ie nted: The bankers, on their part should
disc harge their obliga tions properly failing which i t results
in non- recovery of loans. The below - me ntioned
contribute to poor recovery of loans:

factors

[ a] Lack of follow - up by banks: After providing the loans


, i t i s the duty of the bankers to follow - up a t periodica l
interva ls and a t t imes of difficulty for the borrowe rs, l end
a helping hand to solve their problems.
[ b] Inadequate project appr aisal by

banks: The

banks

a t t empt half- he arte dly in the matter of app raising a project,


be i t

agriculture

or industry

leading

to

sub - s t andard

l ending. The project becomes improperly imple mente d and


insuffic ie nt f inance ends in total

failure

of the

project.

Poor or ina dequate apprais al of the project rega rding


f inancial feasibility, t echnical feas ibility and

the

economic

via bility results in non - recovery of loans.


[ c] Under- f inanc ing: The bankers have to provide loans in
acc orda nce with the

f inancial

re quirements

of

the

borrowe rs. I f the bankers resort to under - f ina ncing, th e


borrowe rs may borrow the balance amount f rom outside
sources a t exorbitant rate of interest. This may be another
reason for non - recovery of loans.
[ d] U nrealistic repay me nt sc he dule s: The bankers, before,
deciding the repay ment sc hedule s for the borrowe r s should

make an in depth s tudy about the borrowe rs re payme nt


ca pacity. I f the repay ment sche dules

are

unrealis tic,

recovery of loans becomes diffic ult for the borrower s .


[ e] Delayed initiation of recovery measures: The banker
should take immediate reme dial action once he notices any
warning s ignals. I f there i s any delay in

initiating the

recovery measures, i t will result in non - recovery of loans.


[ f ] Other factors: Apart f rom these factors, factors l ike
handling

l arge

number

of

advance s,

poor

s taff

in

volve ment and other cons traints and indiscreet l ending under
G ove rnme nt schemes a l so contribute to poor recovery of
loans.
[ i i i ] Project - oriente d: Non- recovery of loans may
because of the project chosen by

the

borrowe r.

be
The

following factors contribute to poor recovery of loans:


[ a] Project failure: When a project

i s not

Indian conditions, the project

Failure

results in non - recovery of loans.

fails.

suitable
of

to

project

[ b] Technic ally unviable: I f a project i s not t echnic ally


viable, i t will be a to t a l failure. This contributes to poor
recovery of loans.
[ c] Lack of

exper ie nce

in

mar ke ting:

Many

products fail not because of sub - s t andard

of

the

quality

but

because of ine xpe rienc e of the ma nufa c ture r/ borrower in


marke ting the products. I f the borrower i s ineffic ie nt

in

marke ting the product he produce s, he

to

will

be

unable

repay his dues.


[ d] Severe compe tition: I f the borrower i s unable to face
severe c ompe tition, he will not be able to repay his

loans.

[ e] Other factors: Problems l ike erosion of i nve ntorie s and


sec uritie s,

acc umula te d

losses,

wrong

se lection

products, external factors beyond the control


borrowe rs

and

subs ta nda rd

products

are

other

of

of
the

factors

contributing to poor rec overy.


[ iv] Governme nt- orie nted: G ove rnme nt i s a l so respons ible
for non- recovery of loans. The under - me ntioned factors
contribute to poor recovery of loans:

[ a] Target approac h: The Government f ixes certain t


argets to be a t t a ined by the bankers which the bankers a t t
a in without making proper appra isa l of loans. Thi s results in
non- recovery of loans.
[ b] Waiver of loans: The G ove rnme nt, in order to create a
good image about i t s party,

waives

the

loans

borrow ed.

This results in non - recovery of loans.


Steps in Recovery of loans
Recovery of loans, that too a t the r i ght t ime, plays
a vital role in credit ma nage me nt as i t

s t re ngthens the

resource position through recycling of funds and exercises


favoura ble impacts on the cost of funds and profi ta bility.
Recovery of the

loans

granted

has,

therefore,

managed e ffec tive ly so as to ensure continuous


credit, without which banks l iquidity would be in

to

be

f low

of

jeopardy

as a l so production cycles, income generation, employment


opportunitie s e t c . would be adve rse ly affected.

There are three s t eps, the bankers used to follow in


order to recover the loans
depicted in Diagram No. 3 . 2 :

advanced .

These

s t eps are

[ i ] Pers uasion: Pe rs uasion i s the f i r s t s t ep in the process


of rec overy. The rec alc itra nt borrowe rs

are persuade d

by

the bankers to repay the

This

by

loan

amount.

i s done

means of sending pr oper notices to the borrowe rs. I f the


borrowe rs ignore notices, registered notices are sent to the
borrowe rs. Still, i f there i s no reply f rom the borrow ers,
the next s t ep i s to contact the borrowe rs pe rs ona lly or over
phone.

After

this,

the

banker

contact

s the

borrowe rs

informally with the e l i t e of the place of the defaulting


borrowe rs to create psy c hologic a l pressure s.

Next,

the

banker t r i es to convince the borrower to obtain a new loan


as against full re payme nt of the existing loan, which i s
overdue over a period of t ime.
[ i i ] N e gotiatio n: The l ending banker adopts the next s t
ep i f pe rs uas ion fails to
the l ending banker

and

evoke the desired result. Both


borrower

have to

make certain

sac rifices in their mutual inte res t. The banker may have to
accept

revision

in

the

repay ment

concess ions and margin re duc tion


can be ne gotiated across the t able.

sc hedule,

and waivers.

All

interest
these

[ i i i ] Litigation: The l ast resort for the l ending banker to


effect recovery i s to initiate l egal actions
suits in the court of law.

Such

by f i l ing c ivil
s t ep

i s

t aken

pa rtic ularly with incorrigible borrow ers with whom a l l the


other t echniques of recovery are exha uste d. When i t i s
confirmed that recovery i s imposs ible, suit

may be f i l ed

after consulting the bank s appr opriate authority and the


l egal adviser because each case needs a separate t rea tment.
The proce dure followed may differ f rom bank to bank
but general guidelines are given below:
[ a] Prepare the case history.
[ b] Extract the balances f rom the l edgers and p repare

s t a t ement of account.
[ c] See that a l l docume nts are in order.
[ d] Decide upon the l imita tion period,

i.e.

whether

docume nts are not t ime barred.


[ e] Consult the l egal adviser after having

obtained

pe rmis sion f rom the appropriate authority of the bank.


[ f ] Serve l egal notice on the borrowe r.

[ g] File a suit in the court through the l egal


[ h] File c l a im with the DI and CGCI.
Legal measures adopted by comme rcial

advise r.

banks

Indian banks suffer f rom l arge debt arrears, which


adve rse ly affect their current cash f low position and reduce
profits.

10

[i] E s tablis h me nt of Debt Recovery Tribunals [ DRTs]


To recover

bad

debts,

new

Act

known

Recovery of Debts due to banks and f inancial


Act,

1993 has

been

passed

ce ntres.

ins titutions

to set up Debt

Tribunals. Such t r ibunals have been

set

as, the

up

R ecovery
a t

major

11

For recovery of debts of Rs. 10 l akhs and above, banks


can approach DRTs under the Recovery
and Financia l

Ins titutions

of Debts

Act, 1993 . For recovery

adva nces, 75 per cen t of the debt

in dispute

Debt Recovery A ppe llate Tribunal ente rtains


against DRT s order.

to Banks
of

i s depos ite d.
no

appeal

[ii] The Sec ur itis atio n and Re c ons tr uc tion of Financ ial
Assets

and

Enforce me nt

of

Security

Interest

[ SAR FAE SI ]
Banks have adopted multi - pronged s t rategies to bring
down the volume of bad loans. These inte ra lia
aggress ive

provis ioning,

[ CDR], write - offs and

Corporate
rec overies.

Debt
The

include

Re s truc turing
SARFAESI Act,

2002 enabled banks to quicken recovery process by

directly

a t t aching assets of de fa ulte rs.


The Act empowers cre ditors to i ssue notices to the
de fa ulting borrow ers/ gua ra ntors under Sec 13 [ 2 ] calling
upon them to disc harge their l i abilities in full on failure to
disc harge the dues, the secured cre ditors can t ake

recourse

to one or more of the measures under Sec 13 [ 4 ] .


The Lok Sabha c l eared the enforcement of Security
Interest and Recovery of Debts

Laws

[ Ame ndme nt] Bill to

arm banks to recover dues f rom defaulting borrow ers on


December 7 , 2004 .

[ i i i ] Setting

up

of

Asset

R e c ons tr uc tion

Companies

[ ARCs]
SARFAESI Act enables to set up ARCs under
Companies Act, 1956 . Of the three

proposed

ARCs,

the
one

ARC of India Ltd [ ACRIL] i s a l ready func tioning . NPAs of


the banks can be t ra nsferre d to ARCs a t a price for further
recovery by them. I t i s expected that the process of price
de te rmina tion
The

of

le gis lation

NPAS

would

provides

be

for

more

t ra nsparent.

setting

up

12

Asset

R ec ons truc tion C ompanies, which will t ake poss ession of


secured assets of the borrowe rs. They will have t he r ight to
l ease out, sell and realise the
borrowe rs
borrowe r.
[ iv]

and

t ake

over

secured
the

assets

of

the

mana gement

of

the

13

Setting

up

National

Company

Laws

Tribunal

[ NCLT]
By amending the Companies Act, NCLT has been set
up to look after

restructur ing

of

adva nces.

replace Board of Indus tria l and Financia l

NCLT will

R ec ons truc tion

[ BIFR], which was looking after res truc turing of advances


for s i ck companies under SICA.

References
1. Jyotsna Sethi and Nishwan Bhatia, Elements of Banking and Insurance, PHI
Learning Private Limited, New Delhi-1, 2008, p.83.
2. Agarwal, H.C., Banking Law and Practice, Swan Publications, Agra-4,
2006, pp.369-370.
3. ibid, p.83.
4. Report on Trend and Progress of Banking in India, 2006-07, p.72.
5. Report on Trend and Progress of Banking in India, 2005-06.
6. Kallapiran, T.R., Slogan for the Decade:100 per cent recovery, Indian
Overseas Bank Monthly News Review, Vol.IV, No.8, August, 1990.
7. ibid, p.271.
8. ibid, p.274.
9. Ajit Singh, Rural Development and banking in India-Theory and practice,
Deep and Deep Publications, New Delhi-27, pp. 365-378.
10.
Jhingan, M.L., Monetary Economics, Vrinda Publications [P] Ltd.,
Delhi-91, 2004, pp. 669-672.
11. ibid, 669-672.
12. Janardhan G.Naik, NPAs Management Challenges before banking sector,
The Management Accountant, Vol.41, No.5, May 2006, pp.355-360.
13. Rajendra Singh, Improving Recovery Climate of banks dues through
SARFAESI Act, 2002, Professional Banker, December 2005, The ICFAI,
pp.48-52.

Diagram No. 3 . 1
FACTORS C ONT RIB UTIN G TO POOR RECOVERY
Borrower oriented
Banker oriented
Project oriented

S o u r c e : P a r t h o P r a t i m R o y ,M a n a g e m e n t
of
Urban
CooperativeBanks, Himalaya Publishing house, M
umbai-4, 2001, p.272.

Diagram No. 3 . 2
STEPS IN THE RECOVERY PROCESS

PERSUASION
BANKER

BORROWER
NEGOTIATION

Source: Partho Pratim Roy, Ma nage me nt o f Urban


C ooperativeBANKER
Banks, Himalaya Publis
hing house, Mumbai - 4
BORROWER
, 2001 , p . 273 .

LITIGATION

BANKER

BORROWER

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Banking - Nature
and
Proble ms, Himalaya Publis hing House, Bombay - 4 , 1991 , pg.
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D, I t s l ike breathing
in and out,
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572 - 575 .

K.,

and

R a nga na dhac ha ri,

A. V.,

opcit,

pp.

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Gordon, E., and Na ta rajan, K., opcit, pp. 327 .

67

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Srivas ta va,
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Mana gement
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D harma raj, E., loc. c i t .

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C ommercial
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Mail Ram, Currency and Banking, p . 296 .

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Suraj B. Gupta, op. c i t .

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