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Dharmalingam Venugopal

The Sarfaesi Act, brought into force in 2002, brings in an element of non-conventional warfare to the battle against NPAs, as it empowers banks to dispose of defaulters' securities to recover its dues. Public sector banks have been criticised for failing to make effective use of the law but these charges do not reveal the true picture of their recovery performance, says Dharmalingam Venugopal.

A MEMBER of a Parliamentary Committee on Banking reportedly has stated that public sector banks (PSBs) have failed to make effective use of the Sarfaesi Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002), the latest addition to the banks' arsenal to recover bad debts.

It was pointed out that the actual recovery, between June 21 last year, when the Act was passed, and March 31 this year, was a mere 0.5 per cent, or Rs 450 crore of the total non-performing assets with the banking system amounting to over Rs 1,00,000 crore.

Meanwhile, there have been reports that the Reserve Bank of India's Compromise Settlement schemes to recover bad debts have also not fared much better. Again, the Debt Recovery Tribunal (DRT), set up in 1993 to speed up bank default cases, has come under blame for tardy progress.

Criticisms such as these do not reveal the true picture of the recovery performance of public sector banks. Besides, they tend to undermine the efficacy of new debt recovery measures such as the Sarfaesi Act.

Bad debts

Banks incur bad debts or non-performing assets (NPAs) due to various reasons, wilful defaults being just one of them. Major reasons include diversion of funds, time or cost overruns in project completion, supply bottlenecks in raw materials and infrastructure, market failure, poor recovery of receivables, industrial recession and the liquidity crunch.

NPAs are a common feature of banking everywhere and India, in fact, appears to be relatively better placed in managing its bad debts.

India's net NPA as a percentage of net advance of banks, at 7 per cent in 2001, compared favourably with, for instance, 18.9 per cent in Mexico, 18.7 per cent in Finland, 23.1 per cent in Philippines and 10.8 per cent in Sweden. Of course, these figures are not strictly comparable in view of the different definitions of NPA followed in different countries.

In any case, bringing down the level non-performing assets has assumed great importance in the post-reforms period in public sector banks. The strict enforcement of prudential norms has made the successful management of NPAs a necessary precondition for sustained growth of these banks.

The government, the central bank and the public sector banks are equally keen on bringing the level of NPA within manageable and internationally acceptable limits. Unlike in the pre-reform period, when recovery got little or no attention, today, banks accord the highest priority to recovery of NPAs. Recovery targets are monitored very closely.

Recovery

Soon after reforms began, an exclusive Debt Recovery Tribunal (DRT) was set up in 1993 to speed up cases involving bank defaults of Rs 10 lakh or more. Alongside, the RBI actively promoted the Compromise Settlements or One Time Settlements (OTS) to encourage out-of-court settlements of bad debts.

Despite organisational and infrastructural bottlenecks and overload of cases (against an ideal workload of 800 cases, a DRT on an average is burdened with 2,000 cases) the DRTs have provided a relatively fast track means for the banks to recover hardcore NPAs.

In the last ten years, the 29 DRTs among them have disposed of over 23,000 cases (of banks and FIs) involving Rs 18,000 odd crore. However, the actual recovery is only around Rs 5,000 crore due to the delays in disposing of the assets of the defaulters.

Four categories of OTS have been tried so far. The OTS scheme for small loans up to Rs 25,000 ran for a year ended June 2002. Against Rs 239 crore from 35.98 lakh eligible accounts, Rs 157 crore from 26,000 accounts were recovered. Settlements have been approved for 2.88 lakh accounts involving Rs199 crore against 2.95 lakh applications aggregating to Rs 207 crore NPAs.

The OTS scheme for outstanding NPAs up to Rs 50,000 ran for a year up to March 31, 2003. Rs 61 crore from 68,000 accounts were recovered against aggregate defaults of Rs 1,364 crore from 14.36 lakh eligible accounts. Settlements have been approved in 76,000 cases involving Rs 79 crore out of a total 97,000 applications received involving Rs 90 crore defaults.

Under the OTS scheme for big defaulters (outstanding up to Rs 10 crore), banks could recover only Rs 168 crore from 31,000 accounts till March 31, 2003 against a total default of Rs 22,355 crore from under 40.70 lakh accounts amounting to a third of PSBs' bad debts.

Banks had collectively received only 53,000 applications for settlement till March end involving Rs 519 crore, with settlements having been approved in 34,000 accounts involving Rs 335 crore.

Under the fourth scheme instituted by the banks themselves, against 1.96 lakh applications received for settlement during 2002-03 with aggregate defaults of Rs 4,036 crore, recoveries amounted to Rs 1,583 crore from 1.62 lakh accounts.

Banks have also approved settlements in 1.84 lakh application accounts with total NPAs of Rs 3,331 crore. Banks have extended the scheme up to March 2004. Defaulters probably prefer this scheme because of the lower interest rate applicable from the date of an account becoming NPA to the date of final settlement. All these OTS schemes have now been consolidated under two broad heads.

While the RBI scheme covers those accounts that have been classified as NPA prior to March 2000, banks scheme covers those that became NPAs after that date. The RBI scheme covers amounts up to Rs 10 crore while banks scheme cover NPAs of above Rs 10 crore, besides all suits decreed and RC-issued cases.

Sarfaesi

The Sarfaesi Act, dramatically brought into force in mid-2002, added an element of non-conventional warfare to the battle against NPA, thereby impressing on both the bankers and the defaulters the urgency involved in the matter.

The Act empowered the banks to sidestep the courts and dispose of the defaulters' properties given as securities to recover the dues after giving due notice. Though the Act sent the defaulters scurrying in panic, its progress has been plagued by one hurdle or the other.

Expectedly, in the initial stages there was a lot of confusion over who were, by definition, defaulters under the Act, the modus operandi of issuing notice, taking possession and disposing of such securities, and so on.

Subsequently, sale of security under the Sarfaesi Act was stayed by the Supreme Court in the case of Mardia Chemicals, following which scores of big and small defaulters obtained similar stays in various courts.

In some States such as Maharashtra, Gujarat, Rajasthan and Madhya Pradesh borrowers took advantage of certain state legislations which prevented banks from enforcing the act. In some cases, the DRT itself is said to be standing in the way of Sarfaesi, being reluctant to let go of the cases. Moreover, the Act itself is inherently limited in its reach.

According to a Crisil study, about 36 per cent of the outstanding NPAs are outside the jurisdiction of the Act on account of the exemptions provided by it. Agricultural loans and loans below Rs 1 lakh are outside its purview.

Specifically, the Crisil study says, banks can apply the Act only to one-third of the gross outstanding NPAs.

Despite these hurdles, apart from the Rs 450 crore recovered so far, action has been initiated under Sarfaesi in another 1547 accounts involving Rs 476 crore.

Public sector banks have sent notices to 28,866 entities for recovering Rs 10,171 crore under the Act. While these recoveries may seem insignificant in comparison to the overall level of NPAs in the banking system, the substantial amounts recovered in such a short time from long pending sticky loans is indeed commendable.

Besides, the credit for the increasing response to OTS settlements mainly goes to the fear instilled in the hearts of the defaulters by the Sarfaesi Act.

However, the true success of these recovery measures, particularly the Sarfaesi Act, is best gauged by the marked change they have brought about in the repayment/recovery culture in the banks. Even the most intractable of defaulters have come to realise that banks mean business at last in demanding their money back.

Defaulters who lost touch with the banks for several years are rushing back anxious for a compromise settlement. Long pending and complicated cases, which may take years if taken to court, are resolved amicably at the OTS meeting. One major factor slowing down compromise settlements is the subdued property prices. Most defaulters understandably want to settle the accounts by disposing of some property or the other. But they prefer to wait a while in the hope that property prices would look up. There is no disputing the fact that various debt recovery measures including the Sarfaesi Act have had a salutary effect on the huge NPA burden of the banks.

A recent study shows aggregate accretion of NPA in top public and private sector banks has declined for the first time in 2002-03. Which means the NPA level has probably peaked for these banks and is likely to come down gradually.

Recoveries are likely to surge once the Sarfaesi Act is cleared in the Supreme Court. There is now a growing consensus among the bankers and borrowers alike that more stringent debt recovery measures will follow in the future. This augurs well for the backlog of NPAs with the banks; more importantly, it will have a healthy deterrent action on on fresh slippage also.

(The author is an economist with Indian Overseas Bank, Chennai. He can be contacted at dvenu@vsnl.net)

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