a challenge for today’s banking : npa’s thinker/issue i vol iv/8.pdf · securitization act...

Vol I Issue IV, Aug. 2014 To Jan. 2015Half yearly Research Journal

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IntroductionBusiness is an economic activity. It is influenced by economic and non economic

environment. The non economic environment of business can be broadly classified into

political, legal, socio-cultural, demographic, technological and natural. The government

set the legal framework within which a business firm operates. From a business

organizations point of view, all legislations are not relevant. Legislations which define

business organizations and their activities, properties, laws of contracts, mutual

obligations of labour and management and a multitude of laws and regulations constraining

the way in which business activities are carried out, constitute the legal environment of

business.

Review of Literature:1 Dharmalingm Venugopal, Economist, Indian Overseas Bank opines that….”

no doubt the quantum of NPAs is still high by international standards, but under the

combined pressure of debt recovery tribunals, one time settlement scheme and, of late

the SARFAESI Act both the gross and net NPAs of banks have been steadily coming

down. With more teeth, the SARFAESI Act, can have a salutary effect on managing

NPAs, and instilling a repayment culture among the various classes of borrowers.

2 “M. Y. Khan Chairman and CEO Jammu and Kashmir Bank feels that” The

Securitization Act gives shape to Indian experiment with a global trend. The setting up to

the Asset Reconstruction Companies (ARCs), which is one component of the ordinance,

A Challenge For Today’s Banking : NPA’s

Padmapani Sawai Millennium Institute of Management,

Dr Rafiq Zakaria CampusAurangabad.

Research Paper - Mgt. Sci. 8


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should help banks clean their books of stress assets by selling them to the ARCs at a

discounted price. The other part enables banks to take over the assets of a defaulter and

recover bad money without restoring to the long drawn legal procedures. They can also

generate funds locked in existing assets through securitization. Banks can no longer

blame the government for legal infirmities in the system or for lack of an exit route on

their bad loans. However, the success to an ARC will depend on the empowerment it

enjoys.”

3 M.B.N. Rao, Chaiman and Managing Director, Indian Bank, is hopeful for

speedier solution of NPAs problems and unlocking of productive capacities in the industry,

which will lead to healthier / cleaner balance sheets for banks and will allow them to

raise resources globally.

4 V.N. Sexena, Executive Director, Central Bank feels that the securitization

Act is a potent weapon for disciplining defaulters. Who escape other means to recovery.

5 According to G. Krishnamurthy, Chaiman and CEO, Bharat Overseas Bank,”Securitization Act in its present form has armed banks with the power to sell assets

without court intervention; the Act also contains provisions to unable borrowers to approach

DRTs / Courts and seek relief and this has to some extent, slowed down the recovery

process of banks.”

Indian Banking SectorThe Indian banking sector had made remarkable progress. Since the economic

reforms in 1991. development of the Indian banking sector can be classified into four

phases:

(i) Foundation phase (1950-1969): Enactment of banking companies Act and

nationalization of 14 major banks.

(ii) Rapid expansion phase (1970-1984): Branch expansion, deposit mobilization

credit accretion. International of Lead Bank Scheme, establishment of Regina Rural

Banks, nationalization of another 6 banks, stipulation of priority sector credit etc.

(iii) Consolidation phase (1985-1990): Special emphasis on better control and

enhancement of profitability through newer activities.

(iv) Reforms phase (1991- onwards) : Introduction of economic reforms. New private

sector banks came into existence and brought necessary competition into the industry


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and spearheaded the changes towards higher utilization of technology, improved customer

service and innovative products.

NPA—ChallengeDuring the post 1980’s the problem of Non-Performing Assets (NPAS) has been

a big challenge before Indian banking sector. An asset becomes non performing, when it

ceases to generate revenue of the bank. As per RBI notification dated March 31, 2001.

a non performing asset is an advance where:

(i) Interest and / or installment of principal remains over due for a period of more

than 180 days in respect of term loan.

(ii) The account remains out of order for a period of more than 180 days, in respect

to an overdraft / cash credit.

(iii) The bill remains over due for a period of more than 180 days in the case of bills

purchased and discounted.

(iv) Interest and / or installment of principal remains over due for two harvest seasons

but for a period not exceeding two half years in the case of an advance granted

for agricultural purposes, and

(v) Any amount to be received remains over due for a period of more than 180 days

in respect of other accounts.

With a view to moving towards international best practices and to ensure greater

transparency, it has been decided that the 90 days over due norms for identification of

NPAs from the year ending 31st March, 2004 should be adopted. NPAs are classified

into three categories: (i) Sub-standard assets, (ii) Doubtful assets and (iii) Loss assets.

based on the period for which the asset has remained non-performing and the reliability

of the dues.

Regulatory: Issues and NPA ManagementProper enforcement of security interest is a prerequisite for successful NPA

management. Some of the securities (e.g. pledge. Assignment of insurance policy etc.)

can be invoked without the intervention of courts, Whereas others (like hypothecation

and mortgage) can be enforced only through the court of law. Several measures like Lok

Adalats, Debt Recovery Tribunals (OATs), strengthening of credit appraisal and monitoring

system, establishment of Credit Information Bureau India Ltd. (CIBIL) etc. have been


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initiated to tackle the problem of accretion flow of NPAs. As per the RDDBF Act., Dept

Recovery Tribunals have to pass on award within 6 months. The DRTs have been over

burdened with a number of cases as a result of which obtaining a final order takes more

than 2 to 3 years. This period can be further extended on the appeal of the parties. The

borrowers also sometime adopt delaying tactics right from the summons stage only to

postpone the passing of the final order and issuing of the recovery order by the DRTs. As

per the RDDBR Act provision for entertaining the appeal, 75% of the dept amount is

deposited. But in most of the cases borrowers get exemption from this deposit. All

these have been proved time consuming and delaying measures.

Sarfaesi Act 2002To check the accumulation of NP As, the Government of India has taken a

proactive step and enacted the ‘Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest (SARFAESI) Act 2002.’ This Act empowers banks

to enforce their security interests and further improve their lending capacities. The main

features of this act are as under:

1. A securitization company or reconstruction company should have minimum funds

of Rs. 2 crore or such other amount not exceeding 15 per cent of total assets

acquired or to be acquired.

2. It should get a certificate of registration.

3. The company so constituted can acquire assets of any bank or financial institution

by issuing a debenture or bond or any other security for consideration agreed

upon between the company and the bank or the financial institution.

4. Notice of acquisition of a financial asset may be sent by bank or financial

institution to an obligation who on receipt of such a notice will make payment to

securitization company.

5. The securitization company con raise funds from qualified institutional buyers

by formulating schemes of acquiring financial assets.

6. A securitization company may provide for the proper management of the business

of the borrower, sale or lease of a part or whole of the business of the borrower

settlen; lent of dues payable by the borrower and taking to possession of secured

assets within the guide lines framed by the RBI.


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7. The company can also act as an agent for any bank or financial institution for

the purpose of recovery of their dues.

Hopes And FearsThe enforcement of security interest has undergone a substantial change after

the SARFAESI Act came into force on June 21, 2002. The Act enabled banks to enforce

security without waiting for court orders. This has forced borrowers to opt for a one time

settlement, which would have, in the normal course, taken a number of years to recover

the dues. Bank Economics, Finance Experts, Chief Executive Officer’s, Managing

Directors of various Banks have positive experience and are hopeful of achieving of the

Act objectives.

The Act is no without its share of loopholes, The Act is not as per the expectations

of the banks. Banks want the Act to be fine-tuned so as to further empower them in debt

recovery. In the Mardia Chemicals Ltd. Vs ICICI Bank case. The supreme court had

adjusted Section 17(2) of the SARFAESI Act 2002 as invalid. Indian Bankers Association

(IBA) has also submitted a report to the Finance Minister in which they have recommended

amendments to section 18 of the Act, and made request to classify the role to DRTs and

Appellate Tribunals in handling cases related to securitization.

The Securitization Act, though not without loopholes, is paving the way for the

better. NPAs which were hovering around 19.5% in recent years have come down sharply

to about 5% now. In the wake of the rising cases of default and growing disenchantment

of banks with the Securitization Act, it is imperative that necessary amendments are

made in the existing Act.

ConclusionIn the initial stage of economic reforms in India growing NPAs was a big problem

before Indian banks. Lok Adalats, OATs, strengthening of credit appraisal and monitoring

system and establishment of CIBIL etc. have been helpful to tackle the problem of

NPAs, but these were found time consuming and delaying measures. In this series,

enactment of SARFAESI Act 2002 is a mile stone, which has enabled a speedier resolving

of the NPAs problem. The Act enabled banks to enforce security without waiting for

court orders. With sweet and better experiences, the Act is paving the way for the better.


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1. Mishra S.K., Puri V.K.: Economic Environment of Businss, Himalaya Publishing

House, 2002, P. 28.

2. Jain P.C., Verma S S : Money & Financial System, Sahitya Bhawan Pulications,

2003, P. 31-32.

3. Dorai Rai, N.P. : Banking Sector Reforms: Effects and Emerging Challenges,

National Seminar on Financial Sector Reforms Dec. 2001. P. 19.

4. Chartered Financail Analyst, 2004.-2011

5. Kaur Harpreet, Passicha JS : Management of NPAs in Public Sector Banks,

IJC Vol. 57, 2008 P. 14-15.

6. www.rbi.org.in

Reference

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