Money & Banking

For banks, recovery of bad loans remains a challenge

T. S. Krishnamurthy | Updated on March 12, 2018 Published on October 23, 2011

The downgrading of State Bank of India (SBI) by credit rating agency Moody's and the consequent turmoil in the stock market is a much-talked-about issue currently.

The downgrading is mainly due to SBI's Tier-1 capital adequacy ratio coming down to 7.6 per cent against the norm of 8 per cent.

This is a direct consequence of the increase in gross non-performing assets (NPAs) to 3.52 per cent and the consequent higher provisions to be made.

Though the case of SBI is the talking point now, the rise in NPAs is a phenomenon afflicting all banks.

In an earlier article ( Business Line, September 4, 2011), the broad reasons for the spurt in NPAs and the difficulties faced by banks in recovering bad loans through the SARFRAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act were highlighted.

DRT ineffective

Another well-intentioned measure of the Government which has turned awry is the Debt Recovery Tribunal (DRT) Act.

DRTs were established in 1993 by an Act of Parliament for expeditious recovery of debts in excess of Rs 10 lakh due to banks and financial institutions (FIs).

They were expected to dispose of the cases within a maximum period of six months. But, in practice, it takes years to realise the dues through DRTs.

The reasons for such delay are broadly as follows:

The number of cases handled by DRTs has increased manifold, but sufficient number of DRTs have not been established.

In many DRTs, the posts of presiding officers have been vacant for quite while, resulting thereby in a large pendency of cases.

Often, the borrowers and guarantors raise frivolous issues leading to prolonged hearing and, consequently, delays.

Once the case is decided by the DRT, the presiding officers issue recovery certificates which are to be executed through recovery officers appointed by the DRT.

Sufficient number of recovery officers is not available to handle the large number of cases.

The execution of recovery certificates by the recovery officers often gets delayed following disputes by various claimants, problems in identifying properties, and so on.

It is time the authorities concerned plugged these loopholes, set up more DRTs, and appoint sufficient number of presiding and recovery officers to handle the large number of pending cases.

BIFR bugbear

Another bugbear for banks is the large number of cases registered with the BIFR (Board for Industrial and Financial Reconstruction) under SICA (Sick Industrial Companies Act) Special Provisions, 1985.

This was a special legislation enacted in public interest for:

timely detection of sick and potentially sick companies; and

speedy enforcement of remedial measures.

Under the Act, any manufacturing company whose accumulated losses exceed its net worth has to compulsorily register itself with the BIFR, a quasi-judicial body, so that with the assistance of the operating agency (OA) appointed by it, the unit can be revived by sanctioning a rehabilitation scheme and pass orders for winding up if found unviable.

The process is quite time consuming involving several steps such as registration, admission of the registration, appointment of OA, preparation of Draft Rehabilitation Scheme (DRS), circulating the scheme among various stakeholders, sanctioning the rehabilitation scheme and implementation of the scheme through a monitoring agency (MA).

At every stage, there are litigations galore and the whole process takes years. The earliest case pending with the BIFR is that of Aluminium Industries Ltd, registered a quarter century back in 1987.

Even now, the status of the case recorded in the BIFR Web site is ‘DRS awaited'. According to Section 22 of the Act, once a unit is registered with the BIFR it enjoys immunity from legal and other recovery proceedings by the creditors.

This provision has emboldened many units to use this as an escape route by registering with the BIFR by forcibly making the net worth negative by creative accounting — writing off fixed assets, writing off debtors, and so on — resulting in losses to creditors and mounting NPAs.

Even if finally the unit is found unviable and winding up orders are passed by the BIFR, it is often too late by that time to realise anything out of the assets of the company.

Whatever order is passed by the BIFR, it is invariably challenged before the Appellate Authority and the whole process starts all over again.


Realising the difficulties faced by the creditors as well as genuine sick companies due to the delay in the process, SICA 1985 was repealed by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 by an Act of Parliament.

The Act attempted to remove the bottlenecks in SICA and curb the practice of turning an operationally fit company into a sick unit. Many provisions of SICA were incorporated in Chapter 6A of the Companies Act, 1956.

A National Companies Law Tribunal (NCLT) was to be formed for hearing the references and the appellate authority was the National Companies Law Appellate Tribunal (NCLAT).

However, for reasons unknown the repeal of SICA and the formation of NCLT and NCALT have not been given effect to yet and SICA and BIFR are still in force.

It is time the authorities concerned initiated necessary steps in the matter.

(The author is a former Deputy General Manager of State Bank of Travancore, Mysore.)

Published on October 23, 2011
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