India: "Non-Performing Asset (NPA)" – A Real Menace To Banks And Financial Institutions

Last Updated: 23 August 2019
Article by Ujjal Chattopadhyay

In the recent times, the main thrust in the Indian Economy is about the alarming increase in the Non-Performing Assets (NPAs) of Banks. Increase in the number of bad loans and frauds in large scale is being reported everyday by Banks pertaining to the loans given, resulting in a critical imbroglio in Indian Banking System. The Government has shown agility and has taken preventive measures for mitigating the risk involved in the stalled loans like induction of the Insolvency and Bankruptcy Code, setting up of Asset Reconstruction Firms and Companies, Instant Corrective Actions etc. for faster resolution of stressed assets. In order to address the deep turmoil through which the Sector is currently going, all the Banks and Financial Institutions must be on proactive footing and enhance their layer of compliances and appraisals if they are looking for a happy ending in the lending-borrowing story. Indian economy is mostly the replication of what has been dictated in our sacrosanct "Arthashastra", the brainchild of Kautilya and even today the crux of "Arthashastra" stands and holds good on the footing of its applicability. The message which Kautilya wanted to spread over is that every economy must have a transparent and system- oriented accounting procedure where every miniscule detail must be stored and maintained and should legibly be written without corrections (overwriting). Failure to do so is a crime and is punishable with utmost harshness.

STATUTORY STRICTURES

Various legislative mechanisms such as Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) are in force to provide relief in recovering dues and values from the stressed accounts. Banks are free to choose the relief route with due intervention of the Debts Recovery Tribunals to recover the outstanding loans and even the secured creditors are free to enforce their security interests for getting debts realised through the tunnel of SARFAESI Act without intervention of courts or tribunals.

Besides this legislative prescription there are multiple voluntary mechanisms that have proven effective for Banks to recover their dues such as Corporate Debt Restructuring and Strategic Debt Restructuring which primarily allow the Banks to collectively restructure the debts of all the Borrowers which includes changing repayment schedule of loans and taking over management of the Borrower-Company.

FUNDAMENTALS

Since Banks are the backbones of Indian Economy and their contribution can largely make the economy more robust as such a solid plank is required to be set for them for bringing numerous innovative ideas followed by solutions. Banks should increase the criteria level and validation checking points on the financial health of the borrowers before converting any loan proposal to the recorded assets which will thoroughly ensure that the assets should go to the pockets of right borrowers who actually deserve it and the Government should act as a watchdog and control meter with a facility to provide periodical alert and warning in the incidence of large assets disbursement. In a stable economy system, the centre piece of document is "Balance Sheet" which must be regarded as 'Horoscope of a Company' and if one really knows how to analyse and digest it then probably he is addressing various early warning signs available in such accounts which can help, to a great extent, in reducing the trauma of NPA and its menace to the Indian Banking System as well.

FACTORS LEADING TO NON PERFORMING ASSET

In a recent debate, the issue which really stormed the house of Public Accounts Committee (PAC) of Parliamentary Panel is the root cause of increasing Non Performing Asset and how to curb the rise. And finally, PAC has highlighted six key ingredients amongst the other causes for the recent spurt in NPA. The reasons they have cited include the following:

  1. Inaccurate and lazy Credit Risk Appraisals and loan monitoring in Banks.
  2. Delay in obtaining statutory and other necessary approvals for the projects under implementation.
  3. Desperate and aggressive lending practices during the upturn as are evident from high individual and corporate relaxations and leverages.
  4. Improper Due Diligence of the prospective Borrowers at the entry level pertaining to their credit worthiness.
  5. Irregular compliances and scattered exercises in judging the nature and character of the Borrowers and their willingness and capacity to repay the loan amounts.
  6. Improper valuation of the collateral which has been pledged in the process which often leads to a non-recovery or lesser recovery of loan amount.
  7. Wilful default, loan fraud or corruption in some cases.

REMEDY METER AND PANACEA

Agitation, movements, discussions and implementations are all taking place to make the existing relief route more result-oriented and creditors-centric. Everyone is attempting to take a complete holistic approach towards making a damage and loss proof Banking System, be it Government, Regulatory Authorities, Banks, Financial Institutions, Investors, Shareholders, Stakeholders and every citizen of India by and large because it is ultimately the public money which is going into the Bad Debts or loss claims.

We already have an active and trustworthy credit information platform established which is giving the sector a lot of pragmatic mechanisms to implement. CIBIL, CRISIL, ICRA, Experian, Equifax are all continually researching and analysing the records of all individual defaulters and acting as a repertoire of all highly confidential and critical data which they provide to the Banks to assist them in taking firm and effective lending policies in lieu of certain charges.

Banks should also publish the name of at least top-thirty wilful defaulters in the public domain. This mechanism will create fear in the mind of other defaulting borrowers and would act as deterrent for the others and the sector will invariable witness a notable drop in NPA rate.

I can't resist my temptation to share the five-pronged resolution routes strongly recommended by Mehta Panel (led by Mr. Sunil Mehta, Non-Executive Chairman of Punjab National Bank) to make the resolution process unimaginably speedy and amazingly time bound. SME Resolution Approach is suggesting us the way to concentrate on the smaller assets with exposure up to Rs.50 Crore which would be resolved through a template and specific guidelines and supported by a steering committee. This resolution process should be non-discretionary and completed in a time-bound manner within 90 days.

Bank-led Resolution Approach is considered highly fertile for any mid-category assets ranging between Rs.50 Crore and Rs.500 Crore where Banks usually get into an internal arrangement amongst all the creditors and the lead Bank is authorised and has the power to formulate and implement an efficacious resolution plan.

For loans above Rs.500 Crore, a composition has been suggested comprising of Asset Management Companies (AMC), Asset Reconstruction Companies (ARC) and Alternate Investment Fund (AIF) where multiple options can be exploited and played to ensure operations turnaround in the Banks and Stressed Companies to stabilise and retain the value of assets.

Asset Trading Platform is probably the most innovative remedial wing which the industry can add to its belt for using the same in shorter spell and for motivating and galvanizing the smaller Public Sector Banks (PSBs) to rejig their loan portfolios. This wing will help and allow the smaller PSBs to offload and unburden some of their large corporate exposures and focus more on specific arenas in retail to medium and small enterprises to agriculture segments also.

There is no shortfall of any initiatives taken by the Government over the past five years to address every possible grey facet and angle and each Forum is well concerned and conscious about the upward trend in NPA and it has become a general woe as it is hitting hard our economy. The issues have been pinpointed and we need only a booster and panacea to inject in the system for a robust, responsible and clean Indian Banking System.

That time is not too far to reach!!!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions