Appraisal Of Recovery Mechanism Of Npas Finance Essay

A healthy banking system is indispensable for any economic system endeavoring to accomplish growing and remain stable in competitory planetary concern environment. Banks plays an of import function in the mobilisation and allotment of resources in an economic system. The sound fiscal place of a bank provides the warrant non merely to its depositors but besides to the economic system. Today the Indian banking system is among the best in the universe because the public presentation of Indian Bankss is favorable in footings of growing, plus quality and profitableness. RBI and Government have made some important alterations in policies and ordinance to beef up the banking sector since 1991. In footings of quality of assets, these Bankss have clean and crystalline balance sheets relative to other Bankss in comparable economic systems in its part. The best index for the wellness of the banking industry is its degree of Non-performing assets ( NPAs ) . Reduced NPAs by and large gives the feeling that Bankss have strengthened their recognition assessment system over a period of clip. On the other manus, the growing in NPAs shows the necessity of extra commissariats, which bring down the overall profitableness of the Bankss. The Indian banking sector is confronting a serious job of NPAs. The magnitude of NPAs is relatively higher in public sectors Bankss. Therefore to better the efficiency and profitableness of Bankss, the degree of NPAs is required to be reduced and controlled. In this paper, an effort has been made to measure the recovery mechanism of NPAs of the SCBs in India since 2004 particularly through Lok Adalats, Debt Recovery Tribunals and SARAFRASI Act.

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Cardinal Wordss: Prudential Norms, NPAs, Lok Adalats, Debt Recovery Tribunals, SARAFRASI Act.



The Indian Banking industry, which is governed by the Banking Regulation Act, 1949 can be loosely classified into two major classs, scheduled Bankss and non-scheduled Bankss. Scheduled Bankss comprise commercial Bankss and the co-operative Bankss. In footings of ownership, commercial Bankss can be farther grouped into nationalized Bankss, the State Bank of India and its associate Bankss, regional rural Bankss and private sector Bankss ( domestic and foreign ) . During the first stage of fiscal reforms, there was a nationalisation of 14 major Bankss in 1969. This important measure led to a displacement from Class banking to Mass banking, which in bend resulted in a important growing in the geographical coverage of Bankss. Every bank had to allow a minimal per centum of their loan portfolio to sectors identified as “ precedence sectors ” . The following moving ridge of reforms saw the nationalisation of 6 more commercial Bankss in 1980. Since so the figure of scheduled commercial Bankss and their subdivisions increased many crease. After the 2nd stage of fiscal sector reforms and liberalisation of the sector in the early 1890ss, the Public Sector Banks ( PSBs ) found it highly hard to vie with the new private sector Bankss and the foreign Bankss. The new private sector Bankss foremost made their visual aspect after the guidelines allowing them were issued in January 1993. New private sector Bankss, due to their late start, have entree to state-of-the-art engineering, which in bend helps them to salvage on work force costs and supply better services. Since so the growing of the banking industry in India has been a uninterrupted procedure. Equally far as the present scenario is concerned the banking industry is in a passage stage. The Public Sector Banks, which are the foundation of the Indian Banking system history for more than 80 per cent of entire assets of banking industry. Unfortunately, they are burdened with inordinate Non-performing assets, monolithic work force and deficiency of modern engineering. The Indian banking system witnessed a series of reforms over the past few old ages like the deregulating of involvement rates, dilution of the authorities interest in public sector Bankss and the increased engagement of private sector Bankss but Indian Bankss ( both populace and private ) have non able to vie in the planetary market topographic point. New foreign Bankss are really enthusiastic to derive in the Indian market. There are several challenges that Indian Bankss will hold to confront as they look to vie in a globalize environment such as hazard direction, consolidation, abroad enlargement, engineering, non-performing assets, skilled work force and consumer protection.


There exist a figure of surveies on fiscal wellness and plus quality of Bankss. Taori ( 2000 ) has dealt with NPAs direction of Bankss and stated that the surest manner of incorporating NPAs is to forestall their happenings. He suggested proper hazard direction, strong and effectual recognition monitoring, co-operative working relationship between Bankss and borrowers, etc. as dogmas of NPAs direction policy. In order to root out the job of NPAs, Banmali ( 2001 ) has suggested a multi-frontal onslaught affecting all concerned staff members in the field up to the grass root degree every bit good as in the controlling points. A figure of surveies viz. , Ranjan and Dhal ( 2003 ) , Harpreet and Parricha ( 2004 ) , Ramkrishna and Bhargavi ( 2004 ) and Singh ( 2007 ) agreed that the plus quality of commercial Bankss has improved well in the post-reform period. Raul ( 2004 ) suggested that an appropriate set of significant fiscal sector ordinance lucidity, including alterations in revenue enhancement Torahs, is imperative for the banking system to acquire rid off NPAs. Chaudhury ( 2007 ) has analyzed the methods adopted by China to unclutter out the backlog of NPAs. The survey observed that recapitalization, sale of NPAs to Asset Management Companies ( AMCs ) , amalgamation, corporatization, acceptance of hazard direction techniques, etc are followed by the banking system of China to incorporate the NPAs. Rangarajan ( 2007 ) pointed out that bettering the quality of loan assets is the true trial of improved efficiency of banking system. Rajender and Suresh ( 2007 ) examined the quality of loan assets of Indian banking and suggested some practical schemes to do Indian Bankss more feasible by pull offing the degree of NPAs. An appraisal on the causes and effects of NPAs of commercial Bankss by Rajesham and Rajender ( 2007 ) has concluded that a strong political will is necessary for satisfactory solution to the job of mounting NPAs. Ahmed ( 2008 ) examined the NPAs of PSBs in Indian surroundings. He observed that PSBs have been committed towards the decrease and direction of NPAs. The quality of plus portfolio has improved rather imposingly over the period. In order to last and vie with private and foreign Bankss, it is important for PSBs to clean up their balance sheets by increasing the equity capital. In the aftermath of impairment in the overall economic clime, Lele ( 2009 ) observed that out of 27 PSBs, 16, including SBI, reported higher degree of gross NPAs than the mark set for the year-ended March 2009. Singh and Singh ( 2009 ) examined the recovery public presentation of Manipur Rural Bank and observed that refund of loans chiefly depends on proper use of the loan sum, supply of quality assets, coevals of sufficient income from strategies, handiness of substructure and selling installations, willingness to refund, uninterrupted supervising and follow up visits, etc. Akhan ( 2009 ) attempted to analyze the NPAs direction of Non-Banking Financial Companies ( NBFCs ) in India during 2002-2007 and suggested that pre-sanctioned examination and post-sanctioned supervising, effectual recovery stairss and full conformity with the prudential norms of RBI aid to command NPAs.

From the above reappraisal of literature, it is clear that there are non many surveies based entirely on the recovery mechanism of NPAs of Bankss. Most of the surveies relate to the quality of bank assets. However, the surveies associating to recovery of NPAs remain un-researched country.


The chief object of the survey is to analyze the function of Lok Adalats, Debt Recovery Tribunals and SARFARESI Act in the recovery of Non-performing assets in Indian commercial Bankss. The present survey is chiefly of analytical nature and consequently the usage is made of secondary informations for a period of eight old ages i.e. 2004-20011 collected chiefly from Report on Trends and Progress of Banking in India and Performance high spots of Public, Private and Foreign Bankss in India.


Lok Adalats

With the passage of Legal Services Authorities Act 1987, Lok Adalats were conferred a judicial position and have emerged as a convenient method for colony of differences between Bankss and little borrowers. The Government has revised the pecuniary ceiling of instances to be referred to Lok Adalats organized by Civil Courts from Rs.5 hundred thousand to Rs. 20 hundred thousand. Lok Adalats establishments help Bankss to settle differences affecting history in “ dubious ” and “ loss ” class.

Table-1: New people’s army of SCBs Recovered through Lok Adalats

( Amount in Rs. crore )


No. of Cases Referred

Amount Involved

Sum Recovered

Percentage of Amount

Recovered to Amount Involved


186100 ( 100 )

1063 ( 100 )

149 ( 100 )



185395 ( 99 )

801 ( 75 )

113 ( 76 )



181547 ( 98 )

1101 ( 104 )

223 ( 150 )



160368 ( 86 )

758 ( 71 )

106 ( 71 )



186535 ( 100 )

2142 ( 202 )

176 ( 118 )



548308 ( 295 )

4023 ( 379 )

96 ( 64 )



778833 ( 419 )

7235 ( 681 )

112 ( 75 )



616018 ( 331 )

5254 ( 494 )

151 ( 101 )


Beginning: RBI ‘s Report on Trend and Progress of Banking in India.

Table-1 shows the recovery of NPAs of SCBs through Lok Adalats, which shows that figure of instances referred to Lok Adalats, has increased from 186100 to 616018 i.e. by 231 per cent, but the sum involved increased about five times. However no important alteration is observed in the sum recovered. On the other manus, the per centum of sum recovered to amount involved besides has non been satisfactory during the period under survey.

Debt Recovery Tribunals ( DRTs )

The demand for DRTs was felt in the visible radiation of troubles in recovery of loans in the normal class due to legal proceedings involved in the recovery of suit filled loans as besides the high cost of judicial proceeding. On the footing of recommendations of the Narsimham Committee ( 1991 ) , the GOI promulgated an regulation called RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS on 24th June 1993. The same regulation was replaced by an Act on 27th Aug. 1993. The Act envisages the constitution of RECOVERY TRIBUNALS for expeditious adjudication of recovery of debts due to Bankss and fiscal establishments. The Act provided for two-tier construction of DRTs and an APPELLATE TRIBUNAL. This Act is extended to the whole of the state except J & A ; K. These commissariats apply when debts due to any bank or fiscal establishment or to a pool of banks/institutions exceed Rs.10 hundred thousand. However, the Cardinal Government can cut down this bound up to Rs. 1 hundred thousand by publishing presentment. The debt, which is to be recovered with the aid of DRTs has to be consequence of concern activities. Courts are to be headed by a individual of the rank of HIGH COURT JUDGE to be called as Continuing Officer. Along with the Proceeding Officer, a Recovery Officer and other officers are employed by the Cardinal Government. The regulations for the behavior of the Courts have been framed under the Act. The courts have to make up one’s mind the claim within six months and after that the presiding officer issues a certification under his signature as order of the Tribunal to the recovery officer for the recovery of the debt specified in the certification. The recovery certification is conclusive and parties can non challenge or do expostulations. The recovery officer, thenceforth, returns to retrieve the sum by manner of an fond regard and sale of movable or immoveable belongings. He may name a receiving system for direction of movable and immoveable belongingss of the suspects. The recovery officer is authorized to retrieve the sum of debt due and sale of the belongings in the mode laid down in the Income Tax Act. The recovery officer has been vested with the powers as exercised by the income revenue enhancement officer for the intent of recovery of the due sum. The DRTs have got more power including directing the suspect to subject the sum committed by him to the bank within a month. If the suspect fails to make so, so the DRTs are empowered to publish certifications enabling the Bankss to retrieve the committed sums. Such new amendment will assist the Bankss in retrieving their dues rapidly.

Table-1 shows the recovery of NPAs of SCBs through DRTs, which shows that figure of instances referred to DRTs hold decreased from 7544 in 2004 to 2004 in 2009, which farther increased to 12872 in 2011. However, the sum involved in the instances referred to DRTs increased to 115 per centum, but addition in the sum recovered is more than that of the sum involved in the instances referred to DRTs. On the other manus, per centum of sum recovered to amount involved scopes from 17.20 per cent ( 2004 ) to 81.10 per cent ( 2009 ) during the period under survey.

Table-2: New people’s army of SCBs Recovered through Debt Recovery Tribunals

( Amount in Rs. crore )


No. of Cases Referred

Amount Involved

Sum Recovered

Percentage of Amount Recovered to Amount Involved


7544 ( 100 )

12305 ( 100 )

2117 ( 100 )



4744 ( 63 )

14317 ( 116 )

2688 ( 127 )



3524 ( 47 )

6123 ( 50 )

4710 ( 223 )



4028 ( 54 )

9156 ( 74 )

3463 ( 164 )



3728 ( 49 )

5819 ( 47 )

3020 ( 143 )



2004 ( 27 )

4130 ( 34 )

3348 ( 158 )



6019 ( 80 )

9797 ( 80 )

3133 ( 148 )



12872 ( 171 )

14092 ( 115 )

3930 ( 186 )


Beginning: RBI ‘s Report on Trend and Progress of Banking in India.

It is besides observed that DRTs which have been set up by the Government to ease rapid recovery by banks/DFIs, have non been able do much impact on loan recovery due to assortment of grounds like unequal figure, deficiency of substructure, under staffing and frequent dissolution of instances. It is indispensable that DRT mechanism is strengthened and vested with a proper enforcement mechanism to implement their orders. Non-observation of any order passed by the court should amount to contempt of tribunal, the DRT should hold right to originate contempt proceedings. The DRT should be empowered to sell the plus of the debitor companies and frontward the returns to the winding-up tribunal for distribution among the loaners. Provision for arrangement of more than one recovery officer, power to attach suspect ‘s property/assets before judgement, penal proviso for noncompliance of court ‘s order or for breach of any footings of order and assignment of receiving system with power of realisation, direction, protection and saving of belongings are expected to supply necessary dentitions to the DRTs and rush up the recovery of NPAs in the times to come.


The authorities issued the SARFARESI Act 2002, which provides for enforcement of security involvement for realisation of dues without the intercession of the tribunals. The authorities has besides notified the Security Interest ( Enforcement ) Rules, 2002 to enable secured creditors to authorise their functionaries to implement the securities and retrieve the dues from the borrowers. The PSBs and FIs have been advised to take action under the Act and describe conformity to the RBI. The Act provides for sale of fiscal assets by banks/FIs to Securitization Companies ( SCs ) / Reconstruction companies ( RCs ) . These guidelines prescribe the fiscal assets, which can be sold to SCs/RCs by the banks/FIs, process for such gross revenues, prudential norms for the sale minutess and related revelations. The RBI issued the concluding guidelines and waies to securitization companies ( SCs ) and Reconstruction companies ( RCs ) in April 2003 after taking into history the feedback received from Bankss, FIs and others. The ordinances would ease the smooth formation and operation of SCs/RCs. The guidelines and waies cover the facets refering plus Reconstruction and securitization as besides those associating to enrollment, owned financess, allowable concern of securitization and plus Reconstruction, deployment of excess financess, internal control systems, prudential norms and revelation demands for these companies. In footings of the commissariats of the SARFARESI Act 2002, SCs are required to raise financess through the instrument of security grosss. However, the RBI clarified that the SCs/RCs can raise financess through the instrument of security grosss by the trusts set up by them. In add-on the guidelines and waies, which are compulsory, the RBI has besides issued counsel notes of recommendatory nature covering facets associating acquisition of assets, issue of security grosss, etc.

Table-3: New people’s army of SCBs Recovered through SARFAESI Act

( Amount in Rs. crore )


No. of Notices issued

Amount Involved

Sum Recovered

Percentage of Amount

Recovered to Amount Involved


2661 ( 100 )

7847 ( 100 )

1156 ( 100 )



39288 ( 1476 )

13224 ( 169 )

2391 ( 207 )



38969 ( 1464 )

9831 ( 125 )

3423 ( 296 )



60178 ( 2261 )

9058 ( 115 )

3749 ( 324 )



83942 ( 3155 )

7263 ( 93 )

4429 ( 383 )



61760 ( 2321 )

12067 ( 154 )

3982 ( 345 )



78366 ( 2945 )

14249 ( 182 )

4269 ( 369 )



118642 ( 4459 )

30604 ( 390 )

11561 ( 1000 )


Beginning: RBI ‘s Report on Trend and Progress of Banking in India.

Table-3 shows the recovery of NPAs of SCBs through SARAFESI Act during the period under survey. There is a multiplex addition in the figure of notices issued to the clients, but the addition in the sum recovered is more than that of the sum involved in the instances referred. On the other manus, the per centum of the sum recovered to amount involved scopes from 14.73 per cent ( 2004 ) to 61.0 ( 2008 ) and registered a fluctuating tendency during the period under survey. With certain loopholes still staying in the Act, the experiences of Bankss were that the Act in its present signifier did non function the envisaged aim of optimal recovery of NPAs, peculiarly with the hard-core NPAs borrowers dragging the Bankss into eternal judicial proceeding to detain the recovery procedure. The Supreme Court determination in respect to certain commissariats of the SARFAESI Act besides vindicated this position. Securitization, hence, is seen to be an effectual and vivacious tool for capital formation for Bankss in future.


To sum up, it can be said that the public presentation of Lok Adalats with respects to the recovery of NPAs has non been satisfactory. On the other manus, DRTs besides could non play an of import function as expected due to their built-in failings. However, the recovery of NPAs under SARFARESI Act has been satisfactory to some extent. But there is a desperate demand to beef up the system to do it effectual. NPA being an of import parametric quantity for measuring fiscal public presentation of Bankss, decrease is necessary to better the profitableness of the Bankss and conformity with capital adequateness norms. The quality assessment, supervising and proper follow up doubtless will assist in work outing the job of NPAs. The judicial system needs to be restored to hold a smooth recovery of dues from the defaulters. The pre-credit and post-credit assessments should be done objectively. The Banking Secrecy Act must be amended to enable the publication of defaulters ‘ names and wilful default has to be treated as condemnable offense. The mounting New people’s army of Bankss affect their fiscal wellness in footings of profitableness, liquidness and economic sciences of graduated table of operation. Banks have to take timely action against debasement of executing assets. The direction of NPAs has been an huge undertaking before the bankers because it challenges the Bankss ‘ opposition capacity. The happenings of NPAs may non be evitable wholly but they can be managed efficaciously. The fresh incidence of NPAs should be avoided but non at the cost of fresh deployment of recognition.


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