priority sector lending and recovery

7/21/2019 Priority Sector Lending and Recovery

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PRIORITY SECTOR LENDING AND RECOVERY

A clear p ic tu re a bout t he p ri or it y s ec to r l e nd ing a nd

reco very i s given in this chap ter.

Though India has one of the oldest banking sectors

in the world yet the growth of the sector has been very

lopsided.The main reason for such an imbalanc ed growth was

t ha t the c omme rc ia l banks w ere in t he hands o f t h e p ri va te

sector. As such, they provided short - term finance to trade and

industry based on the security offered by the borrowe rs. This

security - oriented approach resulted in a large chunk of bank

c red it being u tili se d only by big i nd ust ri al houses and t

r ad er s. an ks were u nk no wn i ns ti tu ti on s to sma ll

entrepreneurs , agriculturis ts , art isans, t ransport operators

and a hos t of people with smal l means . These vi ta l

s ec to rs , wh ic h m ade the l a rr es t c on tr ib ut io n to the !r os s

"ational #roduct $!"#% and provided the bulk of employment,

were total ly ignored by the banking sec tor . &ence , a ft er

indepe ndence , it was felt that in order to achieve balanced

regional growth in the


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country, it is essentia l to develop these neglected sectors, for

which i t i s essential to channeli 'e the necessary f

inancial resources.

(or a t t a in in g the goa l of sel f - s uff ic ie nc y and for

e ns ur in g s us ta in ed e co no mi c g ro wt h, the All I nd ia ) ur al

* redit +urvey * omm itte e in / , r ec om me nd ed for the

d ev elo pme nt of a + tate sp on so re d c omme rc ia l ba nk in g

sys tem. I t was in this background that the +ta te ank of

Ind ia was formed, which se t up m ore than /00 branches in

rural a reas. Thi s was fo llowed by na t iona li 'at ion of /

banks in 1 and social control over banks was

introduced.3

The mai n ob2 ec ti ve of na ti ona li 'a t ion of c omme rc ia l

banks was to provide f inance to the hitherto neglected

sectors of the economy l ike agriculture, small - scale

i ndus tr ie s, s ma ll e nt re p re ne urs , a rt is ans, e t c . As t he se

sectors received priori ty in avail ing f inancial assis tance,

they were known as prio rity sectors.

The concept of priority sector l ending was evolved

to ensure that assi stan ce f rom the bank ing system f lowed in


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an increasing measure to the vi tal sectors of the economy

and a cc ordi ng to nat iona l p ri or it ie s. The des cr ip ti on of t he

priori ty sectors was formali'ed in 34 on the basis of the

report submitted by the Informal +tudy !roup on +tatistics

re lat ing to advances to the pr ior i ty sector.4

#riority

sectors include agricultu re $ both direct and indir ect%, small

scale in dustries, small road and water t ra nsport, small

business, retail t rade, professional and s elf- employed

persons, s t a t e sponsored organisa t ions for scheduled

castes5 scheduled t r ibes, educati on, housing $ both direct

and indirect %, consu mption loans, micro - credit, loans to soft-

ware and food and agro - processi ng sector.5

Initially, there were no targets f i6ed on the priority -

s ec to r l e nd ing. I t was 2 us t e mpha si 'e d t ha t c omme rc ia l

banks should increase their involvement in the f inancing of

priori ty sectors. In "ovember 3/ , public sector banks

were advised that their priority sector l ending should reach

a l evel of not l ess than one - third of the outstan ding credit

by 7arch 3 . In "ovember 38 , the private sector banks

were a l so advised to l end a minimum of 99 5 9 per cent of

their total adva nces to the prio rity sector by the end of


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7arch 80 . +ub se:uently, the t arget was enhanced to /0

per cent of aggregate advances. In achieving this overall

t a rg et , se ct io ns wer e a l so s t ip ul at ed for the b an ks. At

present, respectively, of their "et ank *redit $ "*% to

t he a gr ic ul tu r al s ec to r a nd w ea ke r s ec ti ons of the s oc ie ty,

r es pe ct iv el y. ( or ei gn ba nk s o pe ra ti ng in In di a we re a l so

advised to p rog ressive ly increase their advances to the

priori ty sector to reach a l evel of per cent of their net

bank credit by the end of 7arch 4 . In April 9 , this

rat io was further rai sed to 94 per cen t of "* to be

achieved by 7arch / . ;ithin the enhanced t a rget of 94

per cent, two sub - t argets of 0 per cent in respect of +mall

+cale ind ustries and 4 per cent for e6p orts were f i6ed.


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and e 6por ts we re i nc lude d in the p ri or it y s ec to r. >at er on,

based on the recommendations of the "arasimham

*ommittee )eport, , housing, educat ion, consumpt ion,

profession, I . T sector and food processing not fal ling under

++I were a l so inclu ded under the categ ory priority secto r.

In , the "aras imham *ommit tee pointed out many

problems relating to priority sector l ending, the most

imp orta nt one being that a l arge part of the non - perf orm ing

assets come f rom priori ty sector l ending. Thus, the

committee recommen ded reductio n of priority sector t arget

to 0 per cen t and e6pansion of the coverage of pr ior ity

s ec to r t o i nc lu de mo re s ec to rs . & o we ve r , th e t a rge t of

priori ty sector was not reduced but the def init ion of

priori ty was e6panded to include more sectors l ike

e duca ti on , c onsumpti on , p ro fe ss ion, I . T s ec to r and food

processing not fall ing under ++I. Also , a provision was

made such that, banks that cannot meet the priority sector

t argets can deposit funds in the f inancial institut ions l ike

"ational ank for Agriculture and )ural =evelopment

$ "AA)=% under ) ural I nfrast ructu re =evelopme nt (und

$ )I=(% or some banks can do so in the +mall Ind ust ries


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ank of India $ +I=I% for l esser inte rest rates, which in

turn will be l ent out to the prio rity secto rs.

The bro ad ca te go ri es of p ri or ity s ec to r for a l l

schedule d commerci al banks are as under?

[i] Agricu lture ( Direct a! I!irect "iace#

=irect f inance to agr icul ture includes shor t medium

an d l on g t erm l oan s g i ven for a gr ic ul tu re and a l l i ed

act ivi t ies di rec t ly to individual farmer s , se lf - help

group s @ +&!s or 2oint l i abil ity group s @ B>!s of ind ivid ual

farmers without l imit and to others @ such as corpor ate

partnership f i rms and inst i tut ions up to )s. 40 l akh

for t aking up a gric ultu re a l l i ed ac tivi ties . Indi rect f inance to

agricul ture includes loans given for agricu lture and a l l i ed

activi t ies .

[ i i ] S$all% &cale i !u&t rie& ( Direct a! I!irect "iace#

=irect f inance to small scale industries @ ++Is

includes a l l loans g iven to ++I uni ts which a re engaged in

manufacture, process ing or preservation of goods and

whose investment are in plant and machinery @ original

cost e6cludi ng l and and buildin g.


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[ a] S$all Scale I!u &trie&

+mall- scale industr ies are u nits engaged in the

manufacture, process ing or preservat ion of goods and

whose i nv est me nt in plant and m ac hi nery @ or ig ina l cost

e6clud ing l and and building does not e6ceed )s. crore.

[ '] icr) Eter* ri&e&

+mall scale units whose investme nt in plant and

machine ry @ original cost e6clud ing l and and building i s up

to )s. 4 l akh, i r resp ecti ve of the locat ion of the unit, are

t reated as 7icro Cnterpri ses.

[c] +VI Sect) r

All adva nces gran ted to units in the DEI s ector,

i r r e spect ive of the ir s i 'e of opera tions , loca tion and

amount of o r ig ina l inves tment in p lant and machinery come

under the category small - scale sector. +uch advances will

be e l igible for considerat ion under the sub - t arget @ 10 per

cent of the ++I se gment within the prio rity secto r.

I!irect , iace

Indirec t f inance in the smal l - scale indust r ia l sector

will include credit to?


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[ a] #ersons involved in ass ist ing the decentra l ised sector in

t he s uppl y of i nput s to and marke ti ng of out pu ts of

artisans , vil l age and cottage industr ies.

[ '] Advances to cooperatives of producers in the

decentral ised sector vi'. artisans village and cottage

industries .

[c] +u bsc ript io n to bonds i ssued by "AA)= with the

ob2ectiv e of f inancing e6clusiv ely non- farm sector @ not

eligible for c l assificat ion under priority sector l ending

with e ffec t f rom Apr il , 4003 .

[ !] >oans granted by banks to "(*s for on l ending to ++I

sector.

[ i i i ] S$all 'u&ie&&- &er.ice eter*ri&e&

I t inc ludes smal l business, re ta i l t rade , profess ional

and self- employed persons, small road and water t

ransport operato rs and other enterpri ses.

[ a] S$all /u& ie& &

+mall bus iness would in clude individu als and f i rms

managing a business en terpri se established mainly for

providing any service other than professional services


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whose original cost price of the e:uipmen t used for the

business does not e6ceed )s. 40 l akh.

[ '] Retai l Tra!e

Advances granted to re ta i l t raders dealing in essent ia l

commodit ies @ fair price shops, consumer co - operativ e

s tores and private retail t raders with credit l imits not

e6ceedin g )s. 0 lakh.

[ c] Pr),e& &i) al 0 Sel, % e$*l)1e! Per&)&

>oans to pro fessiona l and self - employed persons

include loans for the purpose of pu rchasing e:uipment,

r epai ri ng or r enovat ing e 6i st ing e :u ipme nt a nd 5 or

ac:uiring and repairing business premises or for purchasing

t oo ls a nd 5 or fo r w orki ng c ap it al r e:ui re me nt s to med ic al

pract i t ioners including dentis ts, chartered accountants, cost

a cc ou nt an ts, pr act ic in g co mpa ny s ec ret ary, l awy ers or

solicito rs, engineer s, architec t s , surveyo rs, constru ction

contractor s or mana gement co nsultants come under the

category priority sector loans.


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[ !] S$all R)a! a! 2ater Tra&*)rt O*erat)r&

( SR2TO#

Advances to small road and water t r ansport opera tors

o wn in g a f l eet of veh ic les not e6ceed ing t e n ve hi cle s,

i nc lu di ng the o ne p r op os ed to be f i na nc ed c on st it ut es

priori ty sector loans. >oans advanced by commercial banks

to "(*s for the purpose of providi ng f inance to t ruck

o pe rat or s and +);T


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for s tudies in In dia and )s. 40 l akh for s tudies abroa d

and t hi s doe s not i nc lude t hose g ra nt ed s chol ar sh ip by the

inst i tut ions.

[ .i] )u&ig l)a&

>o an s up to )s. l a kh p ro vi de d for c on st ru ct io n of

houses by individuals , @ e6cluding loans granted by banks to

their own emp loyees and loans given for repairs to the

damaged houses of individuals up to )s . l akh in rura l and

semi- urban areas and up t o )s. 4 l akh in urban areas

constitu te p riority sector loans .

[ . i i] State &*)&)re! )rgaiati) ,)r &ce!ule!

ca&te&- &ce!ule! tri'e&

Adv an ces sa nc tio ne d to +tate +p on so red


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+cheme should be included in this i t em. These include

loans f inancial a s si s tance provide d to "!


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400

[ 6] S),t7are I!u&tr 1

>oans to so ftware ind ustry with credit l imit up to

)s. c ro re f rom t he banki ng i ndus try i s c at egor is ed as

priori ty sector loans.

[ 6i] Vetur e Ca*i tal

I nv es tme nt in Eent ur e * ap ita l will be e l ig ib le for

inclusion in priori ty sector, sub2ect to the condit ion that

t he ven tu re cap i t a l f unds5 c ompa ni es a re r eg is te re d w it h

+CI. &owever , f resh inves tments tha t may be made by

banks on or after Buly , 400 shall not be e l igible for

c l assif ica tion under priority sector l ending and the

i nves tmen ts , w hi ch have a lr ea dy bee n made by banks up to

Bune 90 , 400 shall not be e l igible for c l assif icat ion under

priori ty sector l ending with effect f rom April , 4001 .

[ 6ii] Lea&ig a! ire *urca&e

#ara- banking act ivit ies such as l easing and hire

purchase f inancing undertaken departmental ly by banks

wil l be c l a s si f ied as pr ior ity sec tor advances , p rovided the

ultimate benefici ary satisfies the criteria l a id down by

)I f or t r ea ti ng suc h a d va nc es as a dv an ce s to p ri or it y

sector


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20

[ 6 i ii ] L)a& t) u r' a * ))r i ! e' te ! t) ) i &t itu ti ) a l

Le!er&

>oans to distre ssed urban poor to prepay their debt to

l ender s in the info rmal sector would be e l igible for

c l a ss if ic at io n u nde r p ri or it y s ec to r. Frb an po or for t hi s

purpose may include those famil ies in the urban areas wh o

are below the poverty l ine. +uch loans t o urban poor may

be c l assif ied under weaker sect ions within the priority

sector.

[ 6i.] 2ea8er Secti)&

In order to ensure that more under - privi leged sect ions

in the pr ior i ty sec tor are g iven proper a t t ent ion in the

matter of a l locat ion of credi t , i t should be ensured that the

advances to weaker sec tions reach a l evel of 4 per cen t of

priori ty sector advances or 0 per cent of net bank credit.

The w ea ke r s ec ti ons under p ri or it y s ec to r s ha ll i nc lude the

following?

@a +mal l and marginal farmers wi th l and holding of

acres and l ess and l andl ess l abou rs, t enant farme rs and

share croppers


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@b Art isans , vi l lage and cot tage indust r ies where

ind ivid ual credit l imits do not e6ceed )s. 0 , 000 5 - ,

@c enef ic iar ies of +warn2ayanthi !ram +waro2gar Go2ana @

+!+G,

@d +cheduled *astes and +cheduled Tribes,

@e enef iciar ies of =ifferent ia l )ate of Interest @ =)I

+cheme,

@f enef ic iar ies under +warna Bayanti +hahar i )o2gar

Go2an a @ +B+ )G,

@g enef ic iar ies under the +cheme for >ibera t ion and

)ehab ilita tion of +cavange rs @ + >)+,

@h Advances to +el f &elp !roups ,

@i >oans to dis t ressed urban poor to prepay thei r debt to

non- inst i tut ional l enders against appropriate collateral or

group s ecurity, sub2ect to the guidelines to be approved by

their oards of =irecto rs

@i >oans to dis t ressed urban5 rura l p oor to prepay thei r

debt to non- ins t i tut ional l enders , agains t appropria te

collateral or group security.


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[ 6.] E6*)r t Cre!it

This cat eg ory will form part of pr io rity sec to r for

foreign banks only.

C)$$ercial 'a8& attaiig target & '1 i.e&tig i

&*ecial ')!&

As per the recommendations of the "arasimham

*ommittee report, the commerci al banks can fulfil their

t a rget s by mak ing i nves tmen ts in s pe ci al bonds i s sued by

s pe ci fi ed i ns ti tu t ions as a par t of p ri or it y s ec to r a dvance s

sub2ect to the followi ng conditions?

[ i ] State "ia cial C) r*)rati) & ( S"C- State I!u &trial

De.el)*$et C)r*)rati)& ( SIDC

The commercial banks can s ubscribe to bonds

e6clusively f loa ted by +(*s and +I=*s for f inanc ing ++I

units and this wi ll be e l ig ible to be included under pr iori ty

sector as indi rect f inance to ++I.

[ i i ] Rural Electri, icati) C)r*)rati) ( REC#

+ubscription to special bonds i ssued by )C*

e6clusi vely for f inancing pump - set energisati on

programme in rural and semi - urban areas and the +ystem

Improvement #rogramme under i t s +pecial #ro2ects

Agr icul ture @ +I - +#A


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will be e l igible for inclusio n under priority sector l ending

as indirect f inance to agricultu re.

[ii i] NA/ARD

The banks can subscribe to bonds i ssued by "AA)=

w it h the ob2 ec ti ve of f in a nc ing e 6c lusi ve ly

agricul ture5 a l l i ed activities and the non - farm sector will be

e l igib le for being in cl ude d under the p ri ori ty sec to r as

indi rect f inance to agri cul tur e5 ++I, as the case may be.

[ i.] S$all I!u&trie& De.el)*$et /a8 ), I!ia

( SID/ I#

*ommerci al banks can s ubscrib e to bonds e6clusi vely

f loated by +I=I for f inanc ing of ++I units and will be

e l igible to be included under priority sector as indirect

f inanc e to ++Is.

[ .] Te Nati)al S$all I!u&tr ie& C)r*)rati) Lt!9

( NSI C#

+ubscrip tion to bo nds i ssued by "+I* e6clusiv ely for

f inanc ing of ++I uni ts wil l be e l igib le for inclusion under

priori ty sector as indirect f inance to ++Is.


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[ .i] Nati)al )u&ig /a8 ( N/#

+ubscrip tion to bonds i ssued by "& e6 clusivel y for

f ina ncin g of h ous ing , i r r es pe ct ive of the loan s i 'e per

dwel l ing uni t, w il l be e l ig ible for inclus ion under pr ior ity

sector ad vances as indirect housing f inance.

[ .ii] )u&ig a! :r'a De.el)*$et C)r*)rati)

( :DC O#

+ubscript ion to bonds i ssued by &F=*< e6clusively

for f inancing of ho us ing, i r respect ive of the loan s i 'e per

dwelling unit, will be e l igible for inclusio n under priority

sec tor advances as indi rec t hous ing f inance. Inves tment in

s pe ci al bonds i ss ue d by & F= *< for p rovi di ng f i na nc e to

artisans , handloom weavers, e t c . under t iny sector will be

c l assif ied as indi rect l ending to ++I @ Tiny secto r.

Rec).er1 ), Pri)rit1 &ect)r l)a& '1 c)$ $ercial 'a8&

The two pr imary funct ions of commerc ial banks a re to

accept deposits f rom the public and l end money to the

borrowers. The deposi t s are to be repaid on the due dates

or on demand dependi ng on t he nat ure of depos it s.

>ik ewise , the money l ent should be repaid on the due dates


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or on demand depending on the nature of advances. In the

pre- nat ionalisat ion period, that too before 1 , rec overy

of l oa ns wa s no t much a p robl em for the banke rs . Thi s was

because the t radit ional bankers were conservative in their

a pp ro ac h a nd t hey k ne w t he ir c us to me rs p er so na ll y.

&owever, recovery of loans during the post - nation alisa tion

period has not been smo oth for the commercial bankers

e spec ia ll y due to p ri or it y s ec to r l e ndi ng . Thi s i s bec ause

priori ty sector loans are granted to borrowers of small

m ea ns who are not u su al ly in a p o si ti on to o ffe r ad e: ua te

security to the bankers.

The s uc ce ss of any ! over nme nt s pons ored s cheme

should be measured not by 00 per cent disbursal but by

00 per cen t re cov ery. The motto of 00 per cen t recover y

i s meant for ban kers , !o ver nm en t ser va nts and the

borrowers as well. In case of priority sector l ending too,

00 per c ent r ecovery i s a must. I t should not be

m is co ns tr ue d as a p re ss ur i' in g act to d ema nd 00 per ce nt

r ec overy fo r e ve n p ri or it y s ec to r a dvance s. # ri or it y i s f or

givin g the loans and not for e6e mpti ng them f rom

recovery.;

This chap ter throws an insi ght into t he


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var ious a l t e rnat ives a va il ab le to the banke r fo r the

recovery of loans advanced by him. I t highlights the

followi ng i ssues?

$ i % im port anc e of recov ery of loa ns.

$ i i % facto rs co ntr ibu tin g to poor reco very.

$ i i i % s t eps in re cove ry of loan s.

$ iv% suggesti o ns for improvi ng recovery of loans.

I$*)rt ace ), rec).er1 ), l)a&

The importan ce of recovery of loans need not be over -

e mpha si se d. The re i s a ge ne ra l s ay ing t ha t in a ba nk , a ny

person can grant advances but only a wise person can

recover the loans. (ol lowing are some of the reasons for

the importan ce accorded to recover y of loans?

$ i % "on- recovery of loans e rode profi t abi l ity of l ending

banks.

$ i i % The funds, which have been provided as loan, cannot

be recycled and to that e6tent, the more deserving

customer s will be de prived of bank credit.


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$ i i i % A bank saddled with huge overdue loans portfol io will

suffer in i t s ima ge a nd may lose public con fide nce.

$ iv% A loan, which has been considered as bad, when

recove red increases the profi tabil ity of the bank .

$ v%


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All these fact ors can be broa dly c l assif ied as f ollo ws?

[ i ] /)rr)7er% )r iete!< The fol lowing factor s result in

non- recovery of loans and these factors are borrower

oriented?

[ a] P))r geerati) ), re.eue< The i na bi li ty of the

borrower to effect payment of dues due to poor cash

genera tion and5 or failure of the pro2ect, be i t industry,

t rade or agr icul ture, resul t ing f rom inf luence of e6te rnal or

internal factors.

[ '] :7il l ige&& ), te ')rr)7er< The borrower may not

be will ing to repay the loans because of diversion of funds

borrowed to other avenues of investment.

[ c] 2il ,ul !e ,au lt < The borrower, for no valid reason, may

not be w il li ng to re pay the lo an s in sp ite of h av in g

sufficien t funds a t his disposal.

[ !] P )l it ic al i , lu e ce < The bor rowe r ma y be pol it ic al ly

influenced not to repay the loans in the e6pec ta t ion of

waiver of loans, which often t akes place in case of

agricultural lo ans.


23/42

[ e] i&uti l i&ati) ), ,u!& ')rr)7e!< The borrowers with

a false optimism of earning s i 'able sum out of an

intermedia te inves tment , may mis ut i li se the borrowed sum

and divert the loan proceeds. ;hen the loan borrowed i s

not ul timately util ised for the concerned pro2ect, the

borrowers f ind i t difficult to repay, especially when their

esti mati on of yield f rom a l t ernate s ource fails.

[ , ] L ac8 ), i te re& t< The borrower may not have any

personal interest in the pro2ect for which the loan i s

borrowed.

[g] Oter *er&)al rea&)&< The borrowers may not repay

the loan properly because of gross negligence and defiant

l ine of the thinkin g, :uestion able charact er of borrowe rs,

l ack of e6pert i se and the burden of mainta ining the se l f and

the family.

[ i i ] /a8 er% )ri e te !< The bankers , on the ir par t should

discharge their obligat ions properly failing which i t results

in no n- r ec ov er y of l oa ns. The be lo w - m e nt io ne d f ac to rs

contrib ute to poor recovery of loans?


24/42

[ a] Lac8 ), ,)ll)7 % u* '1 'a8 &< After providing the loans

, i t i s t he duty of the banke rs to fol low - up a t pe ri od ic al

int erva ls and a t t imes of diff icu lty for the bor rowe rs, l end

a helping hand to solve their problems.

[ '] Ia!e=uate *r)>ect a**rai&a l '1 'a8&< The banks

a t t empt half- heartedly in the matter of app raising a pro2ect,

be i t agriculture or industry leading to sub - s t andard

l ending. The pro2ect becomes imprope rly implemen ted and

insuff ic ient f inance ends in tota l fa i lure of the pro2ect .

#oor or inade: uate appraisal of the pro2ect regard ing the

f i na nc ia l f ea si bi li ty, t e ch ni ca l f ea si bi li ty and e co no mi c

viabili ty results in non - recovery of loans.

[ c] :!er% , iac ig< The bankers have to provide loans in

a cc or da nce with the f in an cial re :u ir em en ts of the

borrowers. I f the bankers resort to under - f inancing, th e

borrowers may borrow the balance amount f rom outside

s ourc es a t e 6o rb it an t r at e of i nt er es t. Thi s may be a no ther

reaso n for non - reco very of loans.

[ !] :reali&t ic re*a1$et &ce!ule&< The bankers, before,

deciding the repayme nt schedule s for the borrowe r s should


25/42

make an in depth s tudy about the b or ro we rs H r epa yme nt

c ap ac it y. I f the r e pa ym en t s ch ed ul es are u nr ea li st ic ,

recovery of loans becomes difficult for the bo rrower s .

[ e ] Del a1e! i i ti at i) ), r ec ).er 1 $ea&u re &< The banker

should t ake immedia te reme d ia l act ion once he no ti ces any

w ar ni ng s i gn al s. I f th er e i s any d elay in i ni ti at in g the

reco very meas ures , i t will result in non - reco very of loans .

[ , ] O t er ,ac t)r& < Apart f rom these fac tors , factors l ike

hand ling l arge numbe r of adv ance s, poor s taff in

volvement and other constraints and indiscreet l ending under

! overnmen t s chemes a l s o c on tr ibut e to poor r ec overy of

loans.

[ i i i ] Pr)>ect % )riete!< "on- recovery of loans may be

because of the pro2ect chosen by the borrower. The

followi ng factors contrib ute to poor recovery of loans?

[ a] Pr)>ec t ,a ilure < ;hen a pro2ect i s not sui table to

Indian condi tions , the pro2ect fai ls . (a ilure of p ro2ect

resu lts in non - recov ery of loans.


26/42

[ '] Tecica ll1 u.ia 'le< I f a pro 2ec t i s not t ech nic al ly

v iab le , i t wi ll be a to t a l f a ilu re . Thi s cont r ibu tes to poor

recovery of loans.

[ c] Lac 8 ), e 6* er ie c e i $ar 8e ti g < 7any of the

products fail not because of sub - s t andard :uality but

because of ine6perience of the manufacturer5 borrower in

m ar ke ti ng the p ro du ct s. I f the b or ro we r i s i ne ff ic ie nt in

marke ting the product he produces , he wil l be unable to

repay his dues.

[ !] S e.er e c )$*e ti ti ) < I f the borrower i s unable to face

severe compe titio n, he will not be able to repay his loans.

[ e] Oter ,act)r&< #roblems l ike erosion of i nventories and

secur it i es , accumula ted losses , wrong se lec tion of

products , e6ternal factors beyond the control of the

borrowers and substandard products are other factors

contrib uting to poor recovery.

[ i.] G).er$et% )riete!< !ove rnme nt i s a l so respon s ib le

for n on - r ec ov er y of l oan s. The u nd er - m e nt io ne d f ac to rs

contrib ute to poor recovery of loans?


27/42

[ a] Target a**r )ac < The !over nment f i6es certain t

arge ts to be a t t a ined by the ban ker s whic h the ban ker s a t t

a in without making proper appraisal of loans. Thi s results in

non- recovery of loans.

[ ' ] 2ai .er ), l )a & < The !overnment , in order to c reate a

good image about i t s party, waives the loans borrowed.

This resu lts in non - recov ery of loans .

Ste*& i R ec).er1 ), l)a&

)eco very of loans, that too a t the r i ght t ime, plays

a v it al ro le in c re dit m an ag em en t as i t s t r en gt he ns the

resource position through recyclin g of funds and e6ercises

f av ou ra bl e i mp ac ts on the co st of f un ds and p ro fi ta bi li ty.

)ecovery of the loans gran ted has , the re fore , to be

m an ag ed e ffe ct iv el y so as to e ns ur e c o nt in uo us f low of

credit , without which banks l i:uidi ty would be in 2eopardy

as a l so produ ction cycles, income generat ion, employmen t

oppo rtuni ties e t c . would be adverse ly affected. ?

There are three s t eps , the bankers used to follow in

o rder to re cove r the l oa ns a dvance d . The se s t eps are

depi cted in =iagra m "o. 9 . 4 ?


28/42

[ i ] Per&ua&i) < #ers uasi on i s the f i r s t s t ep in the proce ss

of recovery. The recalci trant borrowers are persuaded by

the bankers to repay the loan amount . This i s done by

m ea ns of se nd in g pr o per n ot ice s to the b or ro we rs . I f the

borrowers ignore notices, regis tered notices are sent to the

borrowers. +til l, i f there i s no reply f rom the borrowers,

the ne6t s t ep i s to contact the borrowers personal ly or over

phone. After this, the banker contact s the borrowers

i nf or ma ll y wi th th e e l i t e o f the p lace of the d ef au lt in g

borrowers to create psychological pressures. "e6t, the

banker t r i es to convince the borrower to obtain a ne w loan

as against full repaymen t of the e6isti ng loan, which i s

over due over a period of t ime.

[ i i ] Neg )ti ati )< The l ending banke r adopt s the ne6t s t

ep i f persuasio n fails to evoke the desired result. oth

the l ending banker and borrower have to make certain

s ac ri fi ce s in t he ir mut ua l i nt er es t. The banke r ma y have to

accept revision in the repayment schedule, interest

concess ions and margin reduct ion and waivers. All these

can be neg otia ted across the t able.


29/42

[ i i i ] Li t igat i)< The l ast resor t for the l ending banker to

effect recovery i s to ini t iate l egal act ions by f i l ing c ivi l

suits in the court of law. @

+uch a s t ep i s t aken

part icularly with incorrigible borrowers with whom a l l the

other t echn i:ue s of recov ery are e 6ha uste d. ;hen i t i s

confirmed that recovery i s impossible, suit may be f i l ed

after consult ing the bankH s appr opriate authorit y and the

l egal adviser because each case needs a separate t reatmen t.

The proc edu re foll owed may differ f rom bank to bank

but general guidel ines are given below?

$ a% #repa re the case hist ory.

$ b% C6tr act the bala nces f rom the l edgers and p repare a

s t a t emen t of acc oun t.

$ c% +ee that a l l d ocu men ts are in order.

$ d% =ecide upon the l imitation period, i.e. whether

doc umen ts are not t ime barr ed.

$ e% *onsult the l egal adviser after having obtained

permission f rom the appropriate authority of the bank.

$ f % +erve l egal notice on the bor rowe r.


30/42

$ g% (ile a suit in the court through the l egal advi ser.

$ h% (ile c l a im with the =I and *!*I . B

Legal $ea&ure& a!)*te! '1 c)$$erci al 'a8&

Ind ia n banks s uf fe r f r om l a rge deb t a rr ea rs , w hi ch

adverse ly affec t thei r current cash f low pos it ion and reduce

profi ts.

[i] E&ta 'li& $et ), De't Rec).er 1 Tri'ual& [ DRT&]

To reco ver bad deb ts, a new Act known as, the

)ecovery of =ebts due to banks and f inanc ial inst i tu t ions

Act, 9 H has been passed to set up =ebt ) ecovery

Tri buna ls . +uch t r i buna ls have be en set up a t ma2 or

centres .

(or recovery of debts of )s. 0 l akhs and above, banks

can approach =)Ts under the )ecovery of =ebts to anks

and (in an cia l Insti tutions Act, 9 . (or recovery of

advances , 3 per cen t of the debt in dispute i s deposi ted.

=e bt ) ec ov er y A pp el la te Tri bu na l e nt er ta in s no a pp ea l

agai nst =)TH s ord er.


31/42

[ii] Te S ec ur it i& at i) a! R ec ) &t ru ct i) ), " ia c ia l

A&&et& a! E,)rce$et ), Securit1 Itere&t

[ SAR"AESI]

anks have adopted multi - pronged s t rategies to bring

down the volume of bad loans. These intera lia include

aggressive provisioning, *orporate =ebt )estructuring

$ *=)%, write - offs and recover ies. The +A)(AC+I Act ,

4004 enabled banks to :uicken recovery process by directly

a t t achin g asset s of defa ulte rs.

The Act e mp owers cr edi to rs to i ssue n ot ices to the

defau lt ing borrowers5 guarantors under +ec 9 $ 4 % ca ll ing

upon them to discharge thei r l i abi li t ies in ful l on fa ilure to

discharge the dues, the secured creditors can t ake recourse

to one or more of the mea sur es under +ec 9 $ / % .

The >ok +a bh a c l ea re d th e e nf or ce me nt of + ec ur ity

Interes t and )ecovery of =ebts >aws $ Amendment% i l l to

arm b an ks to r ec ov er d ues f r om d ef au lt in g b or ro we rs on

=ecem ber 3 , 400/ .


32/42

[ i i i ] Settig u* ), A&&et R ec)&tructi) C)$*aie&

[ ARC& ]

+A)(AC+I Act enables to set up A)*s under the

*ompanies Act , 1 . td $ A*)I>% i s a l ready func tio ni ng . "#As of

the banks can be t ran sfer red to A)*s a t a price for furth er

reco very by them. I t i s e6pe cted that the proc ess of price

deter minat ion of "#A+ would be more t ranspar ent.

The legis lat ion provides for set ting up Asset

)econ struc tion * ompanies, which will t ake possession of

secur ed assets of the bo rro wers . They will have t he r ight to

l ease o ut, sell and r ea li se the s ec ur ed a sse ts of the

borrowers and t ake over the mana gement of the

borrower.3

[ i.] Settig u* Nati)al C)$*a1 La7& Tri'ual

[ NCLT]

y amending the *ompanies Act, "*>T has been set

up to look a ft er rest ruc tur ing of advances . "*>T wil l

replace oard of Ind ustrial and (inancia l )econ struc tion


33/42

$ I()%, which was looking after restru cturi ng of advances

for s i ck comp anie s under +I*A.


34/42

References

. Byotsna +ethi and "ishwan hatia, Clements of anking and Insurance, #&I

>earning #rivate >imited, "ew =elhi-, 4008, p.89.

4. Agarwal, &.*., anking >aw and #ractice, +wan #ublications, Agra-/,4001, pp.91-930.

9. ibid, p.89.

/. )eport on Trend and #rogress of anking in India, 4001-03, p.34.

. )eport on Trend and #rogress of anking in India, 400-01.

1. Dallapiran, T.)., +logan for the =ecade?00 per cent recovery, Indian


35/42

Diag ra$ N)9 3 9

"ACTORS CONTRI /:TIN G TO POOR RECOVERY

/)rr)7er )riete!

/a8er )riete!

Pr)>ect )riete!

S ) u r c e < # a r t h o # r a t i m ) o y ,7 a n a g e m e n t o f F r b a n

* o o p e r a t i v e

a n k s , & i m a l a y a # u b l i s h i n g h o u s e , 7

u m b a i - / , 4 0 0 , p . 4 3 4 .


36/42

PERSUASION

BANKER BORROWERNEGOTIATION

BANKER BORROWER

LITIGATION

BANKER BORROWER

Diag ra$ N)9 3 9

STEPS IN TE RECOVERY PROCESS

S)urce< #artho #ratim )oy, 7anagement o f Frban

*ooper ative anks, &imalaya #ublishi ng house, 7umbai - /

, 400 , p . 439 .


37/42

67

References

. . !ordon, C, and "atara2an, D., anking Theory, >awand #ractice H, &imalaya #ublishin g &ouse, 7umbai, 400 , p .

91 .

4. . Easant =esai , Ind ian anking - "ature and#roblems, &imalaya #ubl ishing &ouse , ombay - / , , pg.

9// - 9/1 .

9. . i bid .

/. . Eenugopal , =, I t H s l ike breathing in and outH ,India n


38/42

4. . +ara van avel , +., ank ing l aw and #ract ice in Indi aH,

Deda r "ath )am "ath , 7eer ut - 0 , 89 - 8/ , p . .

9.. =harmara 2, C., anking Theory, >aw and #ractice, +citech

#ub lic ati ons $ India% #riva t e >imit ed, *h ennai - 3 , p . .

/. . +r ivas tava, ). 7., 7anagement of Indian

(inancial Inst i tut ionsH, &imalaya #ublishing &ouse, 7umbai -

/ , p . 39 .

. . =harmara2 , C., loc. c i t .

1. . +en !up ta, ". *., 7odern ank ing in Indi aH, Cdited byD. ". +ubrahmanya, =eep and =eep #ublicat ions, "ew =e lhi-

43 , p . 3 .

3. . +anth anam , ., ank ing Theory, >aw and #rac tice H,7argha m #ub lic ati ons , *hen nai - 3 , 4001 , p. . 9 .

8. . !arhwal, + ., *ommercia l anking and

Cconomic =evel opmen tH, #ointer #ublisher s, Baipur - 9 , 9 ,

p. .

.. )eddy, G. E., Cconomic =evelopme nts in IndiaH, Cdited by

)a2 Dapila and Fma Dapila, Academic foundation, "ew

=elh i- 4 , 4000 , pp. /9 - 1/ .

40. . !arhwal, +., l oc. c i t .

4. . >eela dha r, E., The Cvo luti on of ank ing )eg ulat ion in

India- A )etrospe ct on some aspectsH, )eserve ank of India

ul leti n, =ece mbe r, 4 003 , Eol. >JI, "o. 4 , pp. 4448 - 444 .

44. . ! arhw al , + ., op. c i t , pp. - 1.


39/42

49. . Dapoo r, !. #., *omm erc ial an kin gH, A. #. &. #ubl ishi ng

*or por atio n, "ew =elhi, 4 , 400/ , pp. / - 4.

4/.. +ura2 . !upta, 7onetary Cconomics Instit ution s, Theory

and #olic yH, +. *hand K *omp any >td. , "ew =elhi, 8 .

4. . 7 ai l )a m, *ur re nc y and anki ng H, p . 41 .

41.. +undhar am, D. #. 7., 7oney, anking, Trade and (inanceH,

+ul tan *ha nd and +ons, =elh i - 1 , 18 , p . / .

43. . 7ithani, =. 7., The Anatomy of Indian

ankin gH, &imalaya #ublish ing &ouse, 8 , p . /8 .

48. . +ura2 . !upta, op. c i t .

4. . )aman and #andey, *ommercial ank and

)ural =evelopmentH, =eep and =eep #ublicat ions, "ew

=elh i, 8 , pp. 13 - 30.

90. . +und har am, D. #. 7., and Earshn ey, #. "., ank ing Theor y,>aw and #racticeH, +ultan *hand and +ons, "ew =elhi- 4 ,

400/ , pp. . 34 - . 39 .

9. . )a2ula =evi, A. D., 7odern ank ing in IndiaH , Cdited by

+ubrahm anya, D. "., =eep and =eep #ublic ation s, "ew

=elh i- 43 , p . 49 .

94. . + undharam, D. #. 7., op. c i t , p . / .

99. . )angaswami, ., #ublic +ector anking in

Indi aH, !ove rnm ent of In dia, "ew =elhi, 8 , pp. 8 - .


40/42

9/.. *h andras ekhe r, D., Trends and #rogress of anking in

IndiaH, =eep and =eep #ubli cation s, "ew =elhi - 43 , 81

, p . 9 .

9. . ! ar hw al, +., op. c i t , p . 1 .

91. . + undharam, D. #. 7., op. c i t , p . / .

93. . ibid.

98. . + undharam and E ar shne y, op. c i t , p .

. 3 .

9. . ! ar hw al, +., op. c i t , p . 3 .

/0. . )akes h +inha, Cmergi ng Trends in India n an kin g,

7anorama Gear ook, 7alayala 7anorama #ress, Dottayam -

, 4001 , pp. /3 - 4 .

/. . !arhwal, +., l oc. c i t .

/4.. 7ahesh, &. #. and 7eenakshi )a2eev, #roducti vity

of Indian *ommerci al anks in the pre and post li be ral i' at ion per iods H, The I cf ai B ou rnal of ank

7ana geme nt, Eol. EI, "o. 1 , "ove mber 4003 , pp. 8 - .

/9. . !ar hwa l, +., opc it, pp. 3 - 8 .

// . ibid, pp. /3 - 4 .

/. . )adhakrishnan, )., A =ecade of (inance +ector ) eforms

in IndiaH, Indian anking in the "ew 7 illenni umH, edited by


41/42

7. #. +hrivast ava and +. ). +ingh, Anmol #ublica tions #rivate

>imit ed, "ew =elh i - 4 , p . 8 .

/1. . #ai, =. T.,


42/42

. . ibid.

1 . . ibid.

57. . #une et Eerma and " itin Duma r, #. , A s tudy of *re dit=eposit )atio in selected +tates of ;estern IndiaH, The Icfai

Bour nal of ank 7a nag emen t, Eol. EI, "o. / , "ovem ber 4003 , p

. 94 .

priority sector lending and recovery

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