The story of dwindling loan recovery cases

Have the courts helped banks accelerate the recovery of bad loans? That banks could not create enough confidence in their classification of ‘wilful defaulter’ is correct.

Recent representations to the ministry of MSMEs and the Reserve Bank of India, and agitations by the federations of SMEs prove the point.

If, on the basis of such classification, the list of wilful defaulters is made public, it would certainly damage not just the prestige of the person or institution involved but also permanently close the doors for further economic activity by such entities.

Secondly, the Bankers’ Book of Evidence Act clearly spells out the information that could be disclosed by banks. Thirdly, as RBI Governor Raghuram Rajan has repeatedly said, it hurts the financial system of the country.

A look at the BSR data (see table) shows the speed with which courts have responded to closing the bad debt cases referred to them. The loans recovered through judicial processes are dwindling year after year — it’s just less than 20 per cent of the amount involved.

The number of cases referred to courts increased tenfold between 2012 and 2015. The number of cases settled through any of the three available legal options of recovery of bad loans to banks has been on the decline. The amount involved in legal process of recovery is nowhere near the amount of NPAs declared for the year.

Lok Adalats look like small causes courts where lakhs of cases involve small amounts and the percentage of cases settled was less than 5 per cent in 2014-15. If we look at the DRTs, a highly expensive and time-consuming process, only 14 per cent of the amount involved is settled.

The much touted recovery mechanism through the Sarfaesi Act has not even touched 25 per cent during 2014-15. Its decline year after year is more alarming. Most cases referred under this Act are collateralised MSME loans and not big corporate advances.

Some public sector banks have separated the recovery function from credit origination and monitoring. The officials in such outfits whose job is only to recover the bad loans, have already developed a negative mindset and would be averse to lending for development activities.

The questions that arise are: 1. Are the processes wrong? 2. Are the powers not being exercised properly in accordance with the law? 3. Are the properties overvalued at the time of loan origination? 4. Do all these cumulatively contribute to the failure under this Act?

A thorough study is required to go into these issues to fix them properly and make the necessary amendments to the laws and rules in the public interest. Banking reforms must address these core areas.

It is highly desirable that the Supreme Court does all that is required to accelerate the legal recovery process as evidence in most cases is writ large in banks’ accounting books.

DRTs are supposed to resolve the cases within six months. But hardly any instances of this are evident. No purpose would be served by just making the defaulters’ names public unless there are quick exemplary legal punishments meted out to the errant.

The writer is an economist and risk management specialist

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