Non-performing assets (NPAs) are a bane to the profitability and operational efficiency of commercial banks. They corrode the quality of their assets, adversely impacting their lending capacity and long-term sustainability. Unchecked, they erode confidence in the banking system and, thus, impede macroeconomic performance by adversely impinging on saving behaviour and capital formation through financial intermediation.
The Gross NPAs (GNPAs) of the Scheduled Commercial Banks (SCBs) in India grew from Rs. 57,396 Crores in 2004-05 to Rs. 69,953.75 Crores in 2008-09, a jump of 21.87% over a period of 5 years. By 2013-14, the GNPA had crossed Rs. 2.63 lakh Crores. However, the Gross NPAs as a percentage of Gross Advances (GNPA Ratio) during the same period of time came down from 4.9% to 2.3%.
Over the next five years, the GNPAs of SCBs rose rapidly to break an all-time record of Rs. 10.35 Lakh Crores or 11.2% of the Gross Advances (GA) in 2017-18. Since then, the numbers have come down to Rs. 8.29 Lakh Crores or 7.6% of GA during 2020-21 and further to 6.9% by the end of the 2022 fiscal. This ratio is estimated to fall to a 10-year low of 3.9% by the end of the 2023 fiscal. RBI’s Financial Stability Report (FSR) predicts the GNPA ratio will improve to 3.6% by March 2024.
Much of the recent decline in GNPAs is attributable to the massive write-off. RBI data indicates that the public sector banks alone wrote off bad loans worth Rs. 10 Lakh over the past five years. Taking NPAS off their balance sheet may make banks look better and may, in fact, enable them to make enhanced lending, but this may be fraught with dangers. NPAs and deterioration of asset quality due to delay and default risks, thus, continue to remain major concerns and a focus for reforms in the banking sector.
Lending is integral to commercial banks and necessary for their growth and profitability. Yet, due diligence in lending and efficient assets side management is critical for continuing the defaults to a bare minimum and within the norms. Also, taking prompt and necessary actions within the bounds of the law to recover and realise the interest and principal with minimum delay and default is no less important.
Besides the routine recovery processes, commercial banks in India presently resort to recovering loans and advances through multiple modes and channels. This article analyses recoveries by the Lok Adalats, Debt Recovery Tribunals (DRTs), Assets Reconstruction Companies (ARCs) established under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and Insolvency Bankruptcy Code (IBC).
National Asset Reconstruction Company Ltd. (NARCL) and India Debt Resolution Company Ltd. (IDRCL), popularly called the Bad Banks, have also been established to recover large-sized loans. While the last one is too recent an initiative to permit meaningful evaluation of their performance, the performance of the first four has not been encouraging.
Lok Adalats have been encouraged by RBI to recover loans up to Rs. 10 Lakh. Going by the data, the Lok Adalats do not appear to have been effective. During the past 12 years, from 2010-11 to 2021-22, a total of 3.84 lakh cases involving a sum of Rs. 4.9 Lakh Crores were referred to the Lok Adalats. Of these, only 4.36% or Rs. 21.34 thousand crores could be recovered. The highest proportion of pending loans that could be recovered through Lok Adalats was 11.76% in 2011-12. Since then, the recovery rate has only declined and was as low as 2.33% in 2021-22.
Provided by the Recovery of Debt and Bankruptcy Act 1993, the country today has 39 Debt Recovery Tribunals (DRTs) and 5 Debt Recovery Appellate Tribunals (DRAT). Following the enactment of the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI Act), securitisation appeals (SAs) may also be filed with the DRTs.
As in 2008-09, the recoveries through the DRTs were quite encouraging as 81.1% of the NPAs referred to it were realised. Since then, the recovery rates have been sip sliding. From 2010-11 to 2021-22, a total of 3.19 lakh cases involving a sum of Rs. 12.34 Lakh Crores were referred to the DRTs, of which Rs. 86.6 thousand Crores or a mere 7.02% could be recovered. The recovery rate through the DRTs, which was 27.66% in 2010-11, declined to 3.60% in 2020-21. Surprisingly, the DRT recovery rate increased to 25.68% in 2021-22.
The SARFAESI provides that commercial banks could auction commercial or residential properties to recover secured loans from defaulting borrowers. From 2010-11 to 2021-22, banks initiated the process under the Act to recover pending loans from 19.32 Lakh defaulting borrowers. These involved a total sum of Rs. 13.34 Crores. They could only recover Rs. 2.85 Lakh Crores or a mere 21.35% of the loans under default.
Data on recoveries under the Insolvency and Bankruptcy Code (IBC) is available for five years from 2017-18 to 2021-22. It began with an optimistic note, recording a recovery rate of 49.61% in 2017-18. Since then, the recovery rate has declined to 23.80% in 2021-22. Over the quinquennial, 5,263 cases involving Rs. 7.15 Lakh Crores were brought under IBC. Of these, Rs. 2.50 Lakh Crores or 35% were recovered. It is unclear if the recoveries are still in the process for some cases or if the banks had to bear a haircut of 65%. According to the Press Information Bureau (PIB), release recoveries through the IBC mechanism had reached Rs. 3 lakh crore, marking the highest number of resolutions since the enactment of IBC in FY 2022-23.
Taken as a whole, a total of 4.06 Lakh cases involving 37.73 Lakh Crores were referred to various recovery channels. During the period 2010-11 to 2021-22. Of these, a sum of only Rs. 6.43 Lakh Crores or a mere 17.04% could be realised. What is all the more disquieting is that the overall recovery rate has come down from 31.40% in 2010-11 to 18.41% in 2021-22.
Clearly, while the write-off and provisions make NPAs look significantly lower, the continued generation of new NPAs and their low-paced recoveries by different channels do not augur well for the health of the banking sector. Regulations provide for all the enabling conditions which banks must leverage to intensify their efforts. Targeting zero NPA may be utopian, but zero tolerance for NPAs is necessary to tame the menace of the rising NPAs.
Furqan Qamar is Professor of Management; Samreen Fatima Siddiqui is pursuing PhD in Management Studies at Jamia Millia Islamia, New Delhi.