CHAPTERIII

REVIEWOFLITERATURE

3.1Introduction
3.2Background
3.3Concept
3.4ReserveBankofIndiaGuidelines
3.5ViewsonRBIInstructions
3.6ReasonsforNPAs
3.7ImpactofNPAs
3.8PreventionofNPAs
3.9RecoveryMeasuresLegalMeasures
3.10NPAManagement
3.11RecoveryManagementinRuralCredit
3.12RecoveryThoughLegalProcess
3.13SignificanceReschedulingandOther
3.14CompromiseProposal
3.15Research
 CHAPTERIII
REVIEWOFLITERATURE

3.1Introduction:
Reviewofliteratureisimportantpartofthescientificresearch.Itenables
theresearchertounderstanddifferentaspectofthestudyortheproblemstobe
investigated.OnthisbackgroundabriefreviewofliteratureonNonPerforming
Assetsistakeninthefollowingpages.
The concept of Non Performing Assets was introduced following
introductionofIncomeRecognitionandAssetClassification(IRACnorms),in
theyear1993.Inviewoftheimportanceofthematterintermsoftheconcept
whichwasnew,introductioninIndianbankingindustryforthefirsttime,its
impactonprofitabilityandimageofthebanks,needtotakeurgentstepsto
switch over to international norms particularly to move to Basel II norms,
variousauthorities/authors/researchershavecontributedtotheliteratureonthe
subject.Inordertounderstandvariousaspectofthesubjectandtoavoidthe
duplication the review is divided in different aspects of the subject and the
authorsarelistedtopicwise.Views,whicharecommon,aregivenundereach
head.Specificviewsoftheauthors,whichneedaspecialmention,aregiven
separately.Thedifferentaspectscoveredinthereviewofliteratureareasunder:
Background
Concept
RBIGuidelines
ViewsonRBIInstructions
ReasonsforNPAs
ImpactofNPAs
PreventionNPAs
NPAsinruralcredit
Recoverymeasures
LegalAspects
Compromisesettlement
Research/studiesonNPAs
34
3.2Background:
Y.V.Reddy(2009),inhisarticleReformingIndiasFinancialSector
ChangingDimensionsandEmergingIssueshasdescribedthebackgroundfor
financialsectorreformsasunder:
Indiaembarkedonastrategyofeconomicreformsinthewakeofa
balanceofpaymentscrisisin1991;acentralplankofthesewasreformsinthe
financialsectorand,withbanksbeingthemainstayoffinancialintermediation,
thebankingsector.Atthesametime,reformswerealsoundertakeninvarious
segments of financial markets to enable the banking sector to perform its
intermediationroleinanefficientmanner.Thethrustofthesereformswasto
promote a diversified, efficient and competitive financial system, with the
ultimateobjectiveofimprovingtheallocativeefficiencyofresourcesthrough
operational flexibility, improved financial viability and institutional
strengthening.Thereformmeasuresinthefinancialsectorcanbeenvisagedas
havingprogressedalongthefollowinglines.
Y. V. Reddy (2009), further states in his another article Global
Financial Turbulence and the Financial Sector in India: A Practitioners
Perspectiveasunder:
The prudential norms relating to income recognitio n, asset
classification and provisioning, introduced during 199293, are being
continuouslymonitoredandrefinedtobringthemonparwithinternationalbest
practices.Inkeepingwiththis,severalmeasureswereinitiatedin200506.The
provisionsforstandardassetswererevisedprogressivelyinstagesinNovember
2005,May2006andJanuary2007,inviewofthecontinuedhighcreditgrowth
intherealestatesector,personalloans,creditcardreceivables,andloansand
advancesqualifyingascapitalmarketexposureandahigherdefaultratewith
regardtopersonalloansandcreditreceivables,whichemergedasamatterof
concern.Thestandardassetsinthefollowingcategoriesofloansandadvances
attracta2percentprovisioningrequirement:a)personalloans(includingcredit
cardreceivables);b)loansandadvancesqualifyingascapitalmarketexposure;
c) realestate loans (excluding residential housing loans) and d) loans and
advances to systematically important nondeposit accepting nonbanking
financecompanies.Inordertoensurecontinuedandadequateavailabilityof
credittothehighlyproductivesectorsoftheeconomy,theprovisioning
35
requirementforallotherloansandadvances,classifiedasstandardassets,was
keptunchanged,viz.,a)directadvancestotheagriculturalandSMEsectorsat
0.25percentandb)allotherloansandadvancesat0.4percent.
3.3Concept:
ReportoftheCommitteeontheFinancialSystem:
TheGovernmentofIndiahadappointedaCommitteeinAugust1991onthe
financial system under the chairmanship of Shri M.Narasimham, the former
GovernorofReserveBankofIndia.
Dr.SuhasS.Sahasrabudhe(2003),inhisarticleReviewofImportantAspects
ofNPAsofBanksinIndiainThePostReformPeriodhasmentionedtheterms
ofreferenceofthecommitteeasunder:
ThetermsofreferenceoftheCommitteeincludedthefollowing
i) Examination of the existing structure of the financial system and its
various components and to make recommendations, to improve the
efficiencyandeffectivenessofthesystemwithparticularlyreferenceto
the economy of operations, accountability and profitability of the
commercialbanksandfinancialinstitutions.
ii) Recommendingmeasuresforinfusinggreatercompetitivevitalityinto
thesystemsoastoenablethebankandfinancialinstitutionstorespond
moreeffectivelytotheemergingcreditneedsoftheeconomy.
iii) Examination of the cost, composition and adequacy of the capital
structure of various financial institutions and recommendations
regarding review of relative roles of different types of financial
institution in the financial system and to make recommendations for
theirbalancedgrowth.
iv) Reviewofexistingsupervisoryarrangementsrelatingtovariousentities
in financial sector and to make recommendations for ensuring
appropriateandeffectivesupervision.
v) Reviewofexistinglegislativeframeworkandtosuggestnecessary
amendmentsforimplementingtherecommendations.
TheCommitteesubmittedthesummaryofitsReportonNovember8,1991and
its Main Report on November 16, 1991 to Government. The main
recommendationsofthecommitteewere:

36
1. Inregardtoincomerecognitionthecommitteerecommendsthatinrespectof
banks and financial institutions which are following the accrual system of
accounting,noincomeshouldberecognizedintheaccountsinrespectofnon
performing assets. An assets would be considered nonperforming assets if
interestonsuchassetsremainspastdueforaperiodexceeding180daysatthe
balancesheetdate.TheCommitteefurtherrecommendsthatbanksandfinancial
institutionbegivenaperiodofthreeyearstomovetowardstheabovenormsin
aphasedmannerbeginningwiththecurrentyear.
2. Forthepurposeofprovisioning,thecommitteerecommendsthatusingthe
health code classification which is already in vogue in banks and financial
institutionstheassetsshouldbeclassifiedintofourcategoriesnamely,Standard,
Substandard, Doubtful & Loss Assets. In regard to Substandard Assets, a
generalprovisionshouldbecreatedequalto10percentofthetotaloutstanding
underthiscategory.InrespectofDoubtfulDebts,provisionshouldbecreatedto
theextentof100percentofthesecurityshortfall.Inrespectofthesecured
portionofsomeDoubtfulDebts,furtherprovisionshouldbecreated,ranging
from20percentto50percent,dependingontheperiodforwhichsuchassets
remaininthedoubtfulcategorylossassetsshouldeitherbefullywrittenoffor
provisionbecreatedtotheextentof100percent.Thecommitteeisoftheview
thataperiodof4yearsshouldbegiventothebanksandfinancialinstitutionsto
conform to these provisioning requirements. The movements to wards these
norms shouldbe doneinaphased mannerbeginningwith thecurrentyear.
However,itisnecessaryforbanksandfinancialinstitutionstoensurethatin
respectofdoubtfuldebts100percentofthesecurityshortfallisfullyprovided
forintheshortestpossibletime.
3. The Committee believes that the balance sheet of banks and financial
institutionsshouldbemadetransparentandfulldisclosuresmadeinthebalance
sheetsasrecommendedbytheInternationalAccountingstandardsCommittee.
Thisshouldbedoneinaphasedmannercommencingwiththecurrentyear.The
ReserveBank,howevermaydeferimplementationofsuchpartsofthestandards
as it consider appropriate during the transitional period until the norms
regardingincomerecognitionandprovisioningarefullyimplemented.
4. Banksatpresentexperienceconsiderabledifficultiesinrecoveriesofloans
andenforcementofsecuritychargedtothem.Thedelaysthatcharacterizeour
37
legalsystemhaveresultedintheblockingofasignificantportionofthefundsof
banksinunproductiveassets,thevalueofwhichdeterminatewiththepassage
oftime.TheCommitteethereforeconsidersthatthereisurgentneedtoworkout
asuitablemechanismthroughwhichtheduestothecreditinstitutionscouldbe
realizedwithoutdelaysandstronglyrecommendsthatspecialTribunalsonthe
patternrecommendedbytheTiwariCommitteeonthesubjectbesetuptospeed
uptheprocessofrecovery.Theintroductionoflegislationforthispurposeis
longoverdueandshouldbeprecededwithimmediately.
3.4.RBIGuidelines:
The Reserve Bank of India has issued guideline from time to time
regarding classification and provisioning for NPA accounts. The important
circularsaregivenbelow:

No Circular
Dat Sub
. No.
e ject
RB
I/2
005 29.
05. An
06/ 200 nu Pol
1 394 6 al icy
D State
B ment forthe
O
D.
N
O.
BP
.B
C.
85/
21.
04.
04
8/
20 ye 2006
05 ar 07:
Additi
06 onal
Provisioni
ng
Requirem
ent for
Standa Ass
rd ets
2 RB 04. Mid Revie
 I/2
00
5
06/ 11.
19 200
8 5 Term w
D
B
O
D.
N
O.
BP
.B
C. of Pol
40/ Annual icy
21.
04.
04
8/
20
05 State
06 ment forthe
ye 2005
ar 06:
Additi
onal
Provisioni
ng
Requirem
ent for
Standa Ass
rd ets
RB
I/2
00 13.
5 07.
06/ 200 Guidelin
3 54 5 es on
D
B
O
D.
N
O.
BP
.B
C. purchase/
16/ sale of
21. N performin
04. o g
04 n
8/
20
05
 06
A
ss
et
s
RB
I
No
.20
04 13.
05/ 08.
11 200 Prude norms
4 8 4 ntial
D
B
O
D.
BP
.B
C.
29/
21.
04.
04
8/2
00
4 St Governme
05 ate nt
guarantee
d
expos
ures
RB
I/2 24.
00 06.
4/2 200 Prude
5 64 4 ntial Norms
D
B
O
D.
No
.B
P.
BC
10
2/2
1.0
4.0
48/
20 Agricultur
03 for al
 Advan
04 ces

38
 Cir
cul
ar
No No
Dat Sub
. .e ject
RB
I/2 21.
00 06.
4/2 200 Additi
6 61 4 onal
D
B
O
D.
No
.B 99/21.
P. 04.048 Provisioni
BC /2003 ng
Requirement
04 for
N
P
As
RB
I/2 17.
00 06.
4/2 200 Prude
7 54 4 ntial
D
B
O
D.
No
.B 97/21.
P. 04.141 Guideline
BC /2003 son
Unsec
04 ured
Expos
ures
D
B
O
D.
No 23.
.B 96/21. 04.
P. 04.048200 Guidel sal
8 BC /2002 3 ines on e
offinancial
03 assetsto
Securitiza
tion /
 reconstruc
tion
companyand
related
iss
ue
s
DBOD.No 19.
.BP.BC. 02.
71/21.04.1 200 Ri Manageme
9 03/2002 3 sk nt
20 Systemsin
03 Banks
Guidel
ines on
Count Ris
ry k
Managem
ent
DBOD.BP 10.
.BC.No. 02.
69/21.04.0 200 Upgradation
10 48/2002 3 ofloan
accou classifi
03 nts ed
as
NPAs
D
B
O
D.
BP
.B 30.
C 44/21. 11.
No 04.048200 Agricultur loa
11 . /2003 2 al ns
affectedby
03 natural
calami
ties
100
/
21. 09.
DBOD 01. 05.
No.BP 002200 Prudential
12 .BC. / 2 normson
20
01 asset
02 classification
13 DBOD 21. 22. Prudential
No.BP 04. 01. normson
 048
.BC.59 /20200
/ 01 2
inc
20 om recognitio
02 e n,
ass classificati
et on
an provisioni
d ng
agricul
tural
advan
ces
DBOD.No 11.
.BP.BC.25 09.
/21.04.048 200 Prudential
14 /2000 1 normson
inc
20 om recognitio
01 e n,
ass classificati
et on
and
provisioning
DBOD.No 14.
.BP.BC.13 06.
2/21.04.04 200 Income
15 8/2000 1 Recognition,
20 As Classificati
01 set on
and
Provisioning
for
Advan
ces

39
 D
a
No Circular
t Subje
. No. e ct
D
B
O
D
No
.B
P.
BC
.12
8/
21.
04.
04 07.
8/2 06.
00 20 SSI
16 0 01 Advances
20 Guarantee
01 dby
CGTSI
Risk
weight
and
provisioni
ngnorms
D
B
O
D.
No
.B
P.
BC
.16
1/2
1.0
4.0 24.
48/ 04.
20 20 Prudential
17 00 00 Normson
Capital
Adequacy
,
Income
Recognition,
Asset
Classificat
ion
and
 Provisioni
ng,
etc
.
D
B
O
D.
No
.B
P.
BC
.13
8/2
1.0
4.0 07.
48/ 02.
20 20 Income
18 00 00 Recognition,
As Classificati
set on
an Provisi
d oning
Export Project
Financ
e
D
B
O
D.
No
.B
P.
BC
.10
3/2
1.0
4.0 21.
48/ 10. Income
19 99 99 Recognition,
As Classificati
set on
an Provisi
d oning
Agricultural
Finance
Commerci
by al
throug
Banks h
Primary
Agricultural
 Credit
Societies
D
B
O
D.
No
.B
P.
BC
.12
0/2
1.0
4.0 29.
48/ 12. Prudential
20 98 98 Normson
Income
Recognition,
As Classificati
set on
an Provisi
d oning
Agric
ultural Loans
Affectedby
Natural
Calam
ities
D
B
O
D.
No
.B
P.
BC
.17
/21
.04
.04 04.
8/9 03. Prudential
21 8 98 Normson
Income
Recognition,
Asset
Classificat
ion
and
Provisioni
ng
Agric
ultural
 Advan
ces
D
B
O
D.
No
.B
P.
BC
.29
/21
.04
.04 09.
8/9 04. Income
22 7 97 Recognition,
As Classificati
set on
an Provisi
d oning
Agric
ultural
Advan
ces

40
 D
a
No Circular
t Subje
. No.
e ct
D
B
O
D.
No
.B
P. 1
BC 9
.14 .
/21 0
.04 2
.04 .
8/9 9 Income
23 7 7 Recognition,
As Classificati
set on
an Provisi
d oning
Agricultur
al
Advan
ces
D
B
O
D.
No
.B
P. 2
BC 9
.9/ .
21. 0
04. 1 N
04 . or
8/9 9 Pruden m
24 7 7 tial s
Capita Adequ
l acy,
Income
Recognition,
As Classificati
set on
and
Provisioni
ng
25 D 2 Classificat
B 4 ionof
 O
D.
No
.B
P.
BC
.16 .
3/2 1
1.0 2
4.0 .
48/ 9
96 6
Advances
with
Balance
Lessthan
Rs.
25,000/
D
B
O
D.
No
.B
P. 0
BC 4
.65 .
/21 0
.04 6
.04 .
8/9 9 Income
26 6 6 Recognition,
As Classificati
set on
and
Provisioni
ng
D
B
O
D.
No
.B
P. 1
BC 9
.26 .
/21 0
.04 3
.04 . Non
8/9 9 Performin
27 6 6 g
Advan
 ces
Reporting
toRBI
D
B
O
D.
No
.B
P. 1
BC 9
.25 .
/21 0
.04 3
.04 .
8/9 9 Income
28 6 6 Recognition,
As Classificati
set on
and
Provisioni
ng
D
B
O
D.
No
.B
P. 0
BC 3
.36 .
/21 0
.04 4
.04 .
8/9 9 Income
29 5 5 Recognition,
As Classificati
set on
and
Provisioni
ng
30 D 1 Income
B 4 Recognition,
O .
D. 1
No 1
.B .
P. 9
BC 4
.13
4/2
1.0
 4.0
48/
94
Asset
Classification,
Provisioni
ngand
Other
Related
Matter
s
D
B
O
D.
No
.B
P. 1
BC 6
.58 .
/21 0
.04 5
.04 .
8 9 Income
31 94 4 Recognition,
Asset
Classificat
ion
and
Provisioni
ng
and
Capital
Adequacy
Norms
Clarificati
ons
D
B
O
D.
No
.B
P. 3
BC 0
.50 .
/21 0
.04 4
.04 .
8/9 9 Income
32 4 4 Recognition,
As Classificati
 set on
and
Provisioni
ng
D
B
O
D.
No
.B
P. 0
BC 4
.8/ .
21. 0
04. 2
04 .
3/9 9 Income
33 4 4 Recognition,
Provisioni
ngand
Other
Related
Matter
s

41
 D S
a ub
No Circular
t je
. No. e ct
D
B
O
D.
No
.B
P.
BC
.19
5/2
1.0
4.0 24. Income
48/ 11. Recogniti
34 93 93 on,
As Classif
set ication
Pro
visi
an oni
d ng
Clarifi
cation
s
D
B
O
D.
No
.B
P.
BC
.95
/21
.04
.04 23. Income
8/9 03. Recogniti
35 3 93 on,
Asset
Classificat
ion,
Provis
ioning
and
Other
Relate
d
Matter
s
 D
B
O
D.
No
.B
P.
BC
.59
/21
.04
.04 17. Income
3 12. Recogniti
36 92 92 on,
As Classif
set ication
Pro
visi
an oni
d ng
Clarifi
cation
s
D
B
O
D.
No
.B
P.
BC
.12
9/2
1.0
4.0 27. Income
43 04. Recogniti
37 92 92 on,
Asset
Classificat
ion,
Provis
ioning
and
Other
Relate
d
Matter
s
38 D 07. Credit
B 11. Monit
O 85 oring
D.
 No
.Fo
l.B
C.
13
6/
C.
24
9
85
Syste
m
Introd
uction
of
Health
Code
for
Borrowal
Accounts
in
Banks
D
B
O
D.
No
.P
B.
BC
.
20/
21.
04.
04 01
8/2
00 07 Prudential
39 8 normson
Income
20 Recogniti
09 08 on,
As Classif
set ication
an Provisi
d oning
Pertai
ning to
Advan
ces

3.5InterpretationandViewsonRBIGuidelines:
 P.N.Joshi (2003), in his article NonPerforming As sets Causes,
ExtentandRemedieshasobservedconceptualirregularitiesintheguidelines
issuedbytheCentralBankasunder:
The NPA position in Indian Banking is exaggerated, although called
nonperformingassets(NPAs)theratioofnonperformingcreditisrelatedto
creditandnottoassets.Infact,theinternationallyacceptednormistorelatethe
ratiotototalassets.Inourcountryloansformbarely52percentofthetotal
creditdepositratiobeingaround54percent.Theremaining48percentofthe

42
assetsareheldinCRR(5percent)andactualSLR(38percent)5percent
beingotherassets.43percentoftheassets(CRR+SLR)arethesafestandrisk
freebeingfundswiththeRBIandingiltedgedsecurities.Iftheratioisrelated
tototalassetsthenetNPAratiointheIndianBankingSystemfallssharplyby
morethan50percentfrom5.5percent.
ItishearteningtonotethatDr.BimalJalan,Governor,ReserveBankof
India in his inaugural address at the Bank Economists Conference (in
BangaloreDecember1998),had observed, Interms ofpercentageto total
assets,grossandnetnonperformingassetshavedeclinedto7percentand3.3
per cent respectively by March 1998. I think, the present statistics are not
unfavorableforthebankingsystemasawhole.PublicSectorandOldPrivate
BanksrelatetheirNPAratiostoCreditasperRBIguidelines,whiletheNew
Private Sector Banks relate them to ingeniously invented concept viz.
Customer Credit or Credit like Instruments, whi ch include nonSLR
investments.ItisnecessarytotakeapolicydecisiontorelateNPAstototal
assets and not to credit as at present. This will facilitate international
comparisons.
NPAs are classified into (a) substandard, (b) doubtful and (c) loss
assets.LossassetsarefullyprovidedaspertheguidelinesoftheRBI.Thereis
hardlyanyneedtoshowtwodifferentratiosofgrossandnetNPAs.Banks
shouldbeadvisedtodisclosethetotalprovisionsheld(outstanding)againstthe
NPAs and not only provision made from the current years profit and loss
account.Thiswillgiveconfidencetotheshareholdersaboutthemagnitudeof
provisionsheldagainstproblemaccounts.Itisalsonecessaryforthebanksto
givedisaggregateddataofNPAssuchassubstandard,doubtfulandloss
assets,whichwillthrowmorelightonthequalityofassets.Forinstance,two
bankshavethesameNPAratioof10percent.ThedisaggregateddataofBank
Ashowsthatthesubstandardaccountsfor2percent,doubtfulfor1per
centandlossassetfortheremaining7percent.InBankB,thefiguresare8
percent,1percentand1percentrespectively.Thus,thoughtheirNPAratiois
thesame(10percent),clearlyBankBisconsiderablybetteroffthanBank
Abecauseofitslowlossassetsfigure.Therecentlyintroduceddisclosure,
MovementinNPAsconveyspreciouslittle.
43
 Dr.N.M.Bachhawat(2001)ManagementofNonPerformingAssets
inCommercialBankhasstatedasunder:
Theprudentialnormof90daysforclassifyingtheA/csasNPAisvery
muchstrictlookingtotheIndianconditionswherewholeofeconomyisstill
basedonAgricultureandAgriisbasedonMonsoonandwhichisuncertainand
erratic,insteadofthisBanksshouldrecruittechnical/fieldofficersforvigorous
followupandsupervisionofsuchaccounts.RBIshouldreassesstobringfresh
policyforrecruitmentoffieldstaffforfollowupandsupervisiontocontrol
NPAs. NPA norms foragriculture advances should be relaxed to two years
criteriaandnottwoseasonsi.e.oneyear,asinourcountryinmostoftheareas
maincropsaregrown/cultivatedonceinayear,hencethesenormsarenot
fruitfultolargesectionsoffarmerswhohaveavailedthecreditfacility.
Incaseofreliefmeasuresfornaturalcalamitiesprovidedtotheaffected
farmersonhisownrequestshouldbeprovidedinsuchamannerthatbenefitof
relief reaches to ground level in real sense and after replacement and
reschedulement of the loan the same should immediately be considered as
StandardAssetandsuchaccountsshouldnotbeputunderwatch,periodfor
whichisoneyearforsubstandardassetandtwoyearsforBad&Doubtful
assets.Banksisallowedtotreatsuchrephrased/rescheduledNPAaccountsas
standardassetsduringsamefinancialyear.
3.6ReasonsforNPAs:
(A.T.PANNIRSELVAMCOMMITTEEFINDINGS)
Any NPA Management policy has to identify the causes for the
occurrenceofNPAs.Thesecausesmaybeattributedtoeithertheborroweror
thebankitselformaybeduetofactorsbeyondthecontrolofboth.Againthese
maybeinternalorexternalforeithertheborrowerorthebank.
Causesattributabletoborrowers:
Internal:
1. Wrong/Improperborroweridentification.
2. Willfuldefaults.
3. Incompetentmanagement.
4. Financialindiscipline/diversionoffunds.
5. Nonsubmissionofrequisitedataorsubmissionofwrong/inadequate
data/information.
44
6. Time/Costoverrunsduetodelayedprojectimplementation,etc.
7. Differences/disputesamongCompanypromotersorcontrolling
familymembers.
8. Technologicalobsolescenceandlowprioritytotechnologyup
gradation.
9. InadequateattentiontoR&D.
10. PoorLocationchoice.
External:
1. Poorstake/contributionofborrower.
2. PoorInventory/Receivablemanagement(W.C.driesup).
3. DelayedsettlementofreceivablesofborrowerbylargeIndustrial
houses,Govt.Depts.,PSUs,etc.
4. Inabilitytocompeteinthemarketbecauseofsmallersizeandnew
brandname.
5. Entryintobusinessataninappropriatetimeofbusinesscycle.
6. Adverseexchangefluctuations.
7. Nonavailability/Irregularsupplyofcriticalrawmaterialsorother
inputs.
8. Transportbottlenecks.
CausesattributabletoBanks:
Internal:
1. Poorpresanctionappraisal/unrealisticprojections.
2. Poorassessmentofcommercialviability(duetolackofinadequate
data/knowledgeonmarketindustry).
3. Delayeddecisionmakingatoperativelevelitselfordueto
multiplicationofprocessingtiers(withoutrealvalueaddition).
4. Delayeddisbursements.
5. Noncomplianceoftermsofsanction.
6. Incomplete/Defectivedocumentation.
7. Inadequate supervision, absence of effective monitoring (post
disbursement) & delays in detection of symptoms & initiation of
remedialmeasures.
8. Overstressonlongrelationships/family/groupconnectionsevenat
thecostofcommercialviabilityofprojects.

45
9. Ritualisticreviews(i.e.withoutproperorobjectiveassessmentofrisks
& requirements).
10. Nonavailabilityofauditedfinancialstatementsintimeandtoomuch
relianceon provisional/unauditeddata.
11. LackofNetworking/InformationSystemsamongstbranches/Banks
enablingborrowerstomisuseBankfunds.
External:
1. Changesinregulatoryprescriptionscausingchangeinnormsfor
classification.
2. Longdrawnlegalprocessesforrecoveryofloan.
3. Delayinactionforrehabilitationofaccountsandfinalisationof
rehabilitationpackageeitherattheBanklevelorattheBIFRlevel.
4. Noncomplianceordelayincomplianceoftermsofrehabilitation
packagebyborrower.
5. Lackofexchangeofinformation/coordinationbetweenfinancial
institutions&Bank.
6. Nonavailabilityofpowersforenforcingsecurities(possession&sale)
unlikethoseenjoyedbySFCs.
CausesbeyondboththeBorrowerandtheBank:
1. GeneralslowdownintheEconomy/Recessionarytrends.
2. Depressedcapitalmarketsandconsequentdelayinarrangementoffunds
fortheproject.
3. Frequent adverse changes in the govt. policies, excise and customs
duties,decategorisationofitemsreservedforSSI,pricepreferences,
cashincentives,product reservationquotasystem,etc.
4. Changesinpoliciesregardingpollutioncontrolincludinglegaldecisions
asincaseofaquacultureandfewchemicalindustries,whichvirtually
ruinedthem,resultinginhugeNPAwithbanks.
5. Isolatedorgenerallawandorderproblemresultinginstoppageof
industrialproductionandmovementofgoods.
6. Inadequacyofinfrastructure,inparticularpowerresultinginhighcostof
productionand hencelessermarketabilityofproducts.
7. Politicaluncertainties.
8. IneffectivefunctioningofBIFR/DRT.

46
 9. Outdatedlaws,labourunrest,Riots,Lockouts,Strikes,etc.
10. CascadingeffectofdebtReliefSchemesresultinginpoorloan
repaymentenvironment.
11. InsensitivityofGovt.towardsnonpaymentofduesbyPSUsand
proceduraldelaysininvocationofgovt.guarantees.
12. Slowdisposalofrecoverycases.
13. PoorselectionofschemesandproponentsunderGovt.sponsored
schemesbythedifferentgovt.agencies.
14. Delayedrelease/NonpaymentofsubsidiesallocatedbyCentral/State
Govt.etc.whichhavebeenfactoredintotheprojectcostatthetimeof
appraisal.
15. AdverseCourtJudgment.
16. Adversemarketconditions.
CausesofNPAsunderthePrioritySector:
1. Lackofexperience/managerialexpertise/technicalcompetence.
2. Infrastructureconstraintsandnonavailabilityofadequateandtimely
extensionofsupportfromtheGovt.agenciesandpublicbodies.
3. SlowdisposalofrecoverycasesunderthepublicDebtRecoveryActor
nonenactmentoftherelevantActinsomeofthestates.
4. AdverseeffectofgeneralwaiverofloansbytheGovt.ontherepayment
culture,resultinginalargenumberofwillfuldefaulters.
5. Unrealisticallyambitioustargetssetunderdirectedprioritysector
lending.
6. Nonsettlement/RejectionofDICGC/ECGCclaimsbythecorporation
onflimsgrounds.
7. Delayinrealizationofsupplybillsbysmallunitsforsuppliesmadeto
largerunits.
CausesofNPA
P.N.Joshi(2003),inhisarticleNonPerformingAssetsCauses,Extent
andRemediesobservedthat:
A number of factors have contributed to the high level of NPAs in
bankingparticularlyinthepublicsectorbankingsystem.Theyareenumerated
below.

47
1. PSUbanksandDFIshavebeenusedasinstrumentofpublicpolicy.Landings
underpopulistschemeslikeloanmelas,directedlendingtocertainsectorslike
ministeel, mini paper, minicement units, sugar and cotton spinning co
operativeareexamples.MostoftheseloanshavejoinedtheranksofNPAs.
2. Projectsfinancedintheprereformsera,withhighearnings,lowpromote,
stakewithviabilitybasedonhightariffsandfiscalconcessionshaveturned
sick.
3. ThelargesttojointheranksofNPAswillbesomeofthelargeprojectsinthe
coresectorfinancedafteropeningtoprivateinvestments.
4. Three decades of government ownership have rendered banks
organizationally weak. Faulty appraisals, absence of effective post sanction
monitoring,lackofinitiativetotaketimelyactionagainstwillfuldefaulters,
indecisiononexistingoutofbadloansthroughOTSduetofearofinvestigation
agencieslikeCBI.
5. AllcontributedinnosmallmeasurestotheworseningsituationonNPA
front.
6. ThemandatoryreferraltoBIFRprovidesidealsanctuarytowillfuldefaulters.
7. LargecorporateusuallydelayedpaymentstoSSIandcontributedindirectly
totheNPAofSSIunits.
8. Ifanyinstallmentsorinterestisnotreceivedfromcreditorsatthattimebank
doesnotrenewedwithintimeincaseofcashcreditoroverdraftsaccounts.
9. NPAaccountsinformationisnotsentbybranchofficertotheheadoffice.As
aresultNPAfiguresoftheheadofficebecomesmaller.
10. NPAcategoriesarenotconsideredfromtimetotime.
AnyNPAmanagementpolicyhastoidentifythesuitablestrategyforrecovery.
ThesecausesmaybeduetofactorsbeyondthecontrolofbothAgainthesemay
beinternalorexternalforeitherborrowerorbanks.
3.7ImpactofNPAs:
K.H.Vora(2007)inhisstudyentitledManagementofNonPerforming
AssetsandAssetReconstructionCompanyobservedtheimpactofNPAs.
TheeffectofNPAonthebankisasunder

Thereislossofinterestincome.
Thecurrentprofitisreduced,asbankshavetomakeprovisionforNPA.

48
 Capitaladequacyratioisalsoaffectedasitisdirectlyrelatedtothe
qualityofassets.
Italsoaffectstheliquiditypositionofbankasalsorecyclingoffunds
duetoassetliabilitymismatch.
Banksattimeshavetoborrowathighcosttofulfilltheircommitment/
obligations,whichincreasesthecostoffunds.
Thehighlevelofnonperformingassetsalsoaffectstheimageofthe
bankinthepublic.Thecreditratingofthebankalsoaffectedduetohigh
NPAandconsequentlybusinessprospectsinthecountry&abroad.
TheNPAhaseffectonthemoralofthestaffandmayshyawayfrom
doingcreditbusinessduetofearofNPA.
Thebankcannotremaincompetitiveinthemarketduetovarious
adverseeffectsonthebalancesheetandprofit.
3.8PreventionofNPAs:
MonitoringandFollowUpMeasures
WiththeIncomeRecognitionandAssetClassificationNormsbecoming
stricter,Branchesarerequiredtobemorealertandproactiveinmonitoringthe
accounts.Forthispurpose,monthlyinterestapplicationhasbecomeauseful
tooltotacklepotentialdelinquenciesordefaultsinstandardaccounts.Toretain
theassetquality,itisnecessaryforbankbranchesto:

Recovertheoverduesoratleastthecriticalamountthroughactive
followupwithborrowers.
Puttheaccountsunderholdingonoperationsincaseoftemporarycash
flowmismatches.
Rescheduletherepaymenttermsasperexpectedcashflows.
Restructuretheduesinkeepingwiththeexpectedcashflowsandgapsin
cashflows,ifanyasperguidelinesofthebankintheirrecoverypolicy.
MeasuresforfollowupofNPAs/potentialNPAsforrecovery

Thevariousmeansofmonitoring/resolvingNPAsavailabletotheBanksare
listedbelow:
A)BeforetheaccountbecomingNPA
Regularmonitoringtomaintainassetquality.
Reminderstobesentwhereirregularitiescropup.

49
 Periodicinspectionoftheunitandchargedassetsalongwithanalysisof
financialdata.
In the initial stages of sickness, rescheduling, restructuring,
rehabilitation under Banks Restructuring Policy, CDR mechanism,
BIFRapprovedrehabilitationetc.schemesshallbeattemptedtoimprove
thehealthoftheunit.
3.9RecoveryMeasuresLegalmeasures:
Recoverythroughcourts
Debtrecoverytribunal
Corporatedebtrestructuring
Nationalcompanylawtribunal
Asstreconstructioncompanies
LokAdalats
RRCActofstateGovernment
RecoveryAction
Innovationsbybanks
Research/reportsetc.
AllthesemeanshavetobeeffectivelypursuedforresolutionofNPAs.
H.V.Upadhyay(1994)inRecoverythroughSEIZURE:SomeAspects
hasstatedthatthelegalactionsinvolvehighcostandlongtime.Evenafter
settlementofthecase,thedecreehastobefiledandexecutedperiodicallyasper
thetermwhichisanunpleasantanddifficulttask.Thisprocessalsoslowsdown
thespeedoffollowupandresultsinlethargicattitudebybanker.Theadvocates
alsodonotcooperateasmuchinexecutionofdecreeastheycooperateinfiling
ofsuits.
Therateofrecoveryafterinitiatinglegalactionshasremainedverylow
and,therefore,fewbanksinthestateofGujarathaveadoptedaprocedureof
seizureofthevehicles.Thesevehiclesaretrucks,matadors,autorickshawand
tractors.
The only advantage and biggest benefit is that the recovery of large
overduescouldbemadeveryspeedilyataverylowcost.Theprocedurealso
hasademonstrativeeffectandtheotherborrowersinthevillagevoluntarily
comeforwardtorepaytheirdues.

50
 RajivAggarwal(1991)inhisstudyentitledDesigningEffectiveCredit
RecoveryManagementandControlSystemToensureeffectivefollowupand
timely repayment, organizational set upand systems, the quality of existing
creditportfolio,theorganizationalcultureandthepublicimageofbanksneed
improvement.Creditrecoveryseminarswouldhavetobeorganizedwithanaim
of changing beliefs, attitudes and behavior of officers at various levels of
management.
A.Govil(2000),inhisarticleNeedforRevivalofLossMaking
BranchessaysthatRecoverymanagementisusefulinfollowingstrategies.
a) Whenweareassociatedwithlendingforgovernmentsponsoredschemes,
branches will have to insist on the government agencies to help in the
enforcementofrecovery.Ineachmeeting,wewillhavetoreinforceour
pointandinvitetheirinvolvementinrecovery.
b) ABCanalysisoftheoverduebycategorizingthequantumofoverduewhere
bymore attention canbepaidonsuchchronic accounts. Segregation of
overduewherethequantumofexpectedrecoveryishighandthebranchis
willing.
c) Therecoverydriveshouldbeplannedwellinadvance.
Dr.J.B.Kulkarni(2003),inManagementofNonPerformingAssets
statedthenonlegalRecoveryMeasuresinclude
1. RemindersVisits
2. Personalcontacts
3. Rehabilitationofsickunits/replacement
4. Loancompromise
5. RecoveryCamps
N.V.Darshan(2001),inTheSecretofRecoverystatedthattheElusive
recoverythusformsthecoretopicofthispaperincluded
i) Elicitingrelevant/requiredinformation
ii) Maintaincloserapportwiththeborrowers
iii) Database
iv) Ensuringendutilization.
Dr. K.C.Chakraborty (2005) in Management of NPAs T rends and
Challenges has stated that the banks have to face several challenges in
managingNPAs.Besidesensuringbetterscrutinyofthecreditproposalsbefore
51
sanction,banksneedtowatchcloselyandmonitortheassetsfromtheselection
ofborrowers.Acontinuousandconsistentmonitoringmechanismisamustfor
ensuringthebestqualityoftheassets.Symptomsofanysicknessshouldbe
addressedimmediatelyandappropriateremedialactionimplemented.Despite
the availability of various avenues of recovery in ultimate analysis it is the
borrowerswillingnesstorepayratherthanhisabilitytorepay.Themindsetof
theborrowersfromthebeginningshouldbetunedinsuchawaythatheis
willingtorepayratherthanturnintoawillfuldefaulter.
K.Kannan(2001)CreationofPerformingAssetsfromNPAtoPAhas
highlighted the expertise required and the mismatch of assets & liabilities,
restrainedbanksfromsteamingahead.HencethereisaneedtoworkoutaLoan
Policywithrisklimitsastorate,duration,securityandfollowupandrefinance
if needed by securitization of the assets. Special branches rather than all
branchesdealingwithallproducts,cateringtoneedsofspecializedcustomers
werefeltnecessary,helpingeneratingspecialdataaboutthecustomersandalso
helpscentralizedcontrolondelinquency.
Thestrategyshouldbedecidedbyeachbankbaseditsstrength,areaof
operation,typeofcustomerqualityofstaff.Thepolicyshoulddecidewhichare
to be financed (Industrybig / small) Trade, Individuals (housing, car, other
white goods) etc. how many customer maximum amount of loan with
repaymentandfollowupmechanismnecessary.
Dr.KumarM.K.,ReddyC.M.andMukthaK.C.(2004)intheirarticle
CausesofNPAsandRemedialMeasuresobservedthattheBanksbottom
lineimprovementlargelydependsonreductioninNPAandpreventingNPAs
wouldalsohelptoimprovetheprofitabilityofBanks.Howevergoodthecredit
dispensationprocessmaybetotaleliminationofNPAsisnotpossiblein
bankingbusinessowingtoexternalitiesbuttheirincidencecanbeminimized.
ThefollowingstepsmaybetakentoreduceNPAs
1. Massiverecoverycampaignsarelaunched.
2. Infrastructure/adequatemachineryareprovidedtobranchtorendera
helpinghand.
3. Branchmanagersareexhortedtoexerciseextraordinarycareinthe
selectionoffreshborrowerssothatnewborrowalaccountsdoesnot
enterinNPAlist.
52
 4. Lotoffunderstandingneededamongbankstaffandcustomerstoaddress
themselvestotheproblemofrecovery.
5. Promptcontrol/followup/monitoringmeasureshelptoproveborrowal
accountsbecomingirregular.
Dr.P.MohanReddyandD.L.NarayanaReddy(2004),writeintheir
paper Non Performing Assets in Regional Rural Ban ks: A Study of
Rayalaseema Grameena Bank tries to analyze the sta tus and trend of non
performing assets in Reyalseema Grameena Bank (RGB) through multi
dimensionalclassificationofNPAs.Italsoexaminestherecoverystrategyof
theRGBandofferscertainremedialmeasuresfortheeffectivereductionof
NPAsintheBank.Anewcreditinsuranceschemeforprioritysectorlending,
substantially improved legal system, meticulous loan documentation, and
gradual shift from bank based to market based system and sound credit
management skills will enable the Bank to meet the challenges in business
environmentandkeptitsnonperformingassetslow.

Sastry S.R. (1996) in Recovery Management stated that the

Recoveries are an essential / integral part of operations of all financial
institutions, withoutwhich theseget intoliquidity problems, as recycling of
funds is adversely affected. Owing to adoption of mercantile system of
accounting,whichplacedoveremphasisonsecurity,recoverydidnotgetinthe
past its duerecognitions and bankers weremorecomplacentin view ofthe
availabilityofenoughsecuritytocovertheriskofdefaultinrepayment.Itis
onlythroughconstantrecoveries(ofinterest/installment)thattheproportionof
performingassetsinthetotalportfoliocouldbekeptinhigh.Thisalonecan
ensurebetterbalancesheet.
SharmaR.(2002)inNonPerformingAssetsstatedthattheburden
beingimmense,thereductionofNPAsoftheBankingsectorshouldbetreated
asanationalprioritytomaketheBankingsystemstronger,moreresilientand
gearedtomeetthechallengesofglobalization.Thethrustofthepoliciesofthe
Government,RBIandtheBanksshouldbeonhowbesttotackleexistingNPAs,
recovery of arrears, minimizing incidence of fresh NPAs, improving asset
qualityandpreventingdeteriorationofassets.Changesinthelegalsystem
53
byintroducingstringentforeclosurelawswouldbewelcomedbyentirefinancial
sector.
Rajiv Ranjan and Sarat Chandra Dhal (2003) in Non Performing
Loans and Term of Credit of Public Sector Banks in India: Empirical
Assessment,ReserveBankofIndiahasattemptedanempiricalanalysisofthe
nonperforming loans of public sector banks in India and investigated the
responseofNPLstotermsofcredit,banksizeandmacroeconomiccondition.
Theempiricalanalysissuggestedthattermofcreditvariablehavesignificant
effectonthe banks nonperforming loans inthe presence ofbanksizeand
macroeconomicshocks.Theempiricalanalysissuggeststhatassetmeasureof
sizecouldyieldmeaningfulresults relatingtoborrowers loanresponse.The
changesthecostofcreditintermofexpectationofhigherinterestrateinduces
increaseinNPA.Ontheotherhand,factorslikehorizonofmaturityofcredit,
bettercreditcultureandfavorablemacroeconomicandbusinessconditionslead
toloweringofNPAs.Theempiricalanalysissuggeststhatpositivedeviationof
anindividualbankscreditdepositration,fromthatofindustrysaveragecould
havefavorableeffectonreducingNPAs.Appropriatecreditcultureandlending
policydesignedwithrelevanteconomicandfinancialfactorsconstitutingthe
termofcreditwillmakeasignificantimpactonbanksnonperformingloans.
Dr. M. Kiran Kumar, C.Munisekhar Reddy & K.C.Muktha(2004) in
CausesofNPAsandRemedialMeasuresobservedthattherecoverycanbe
acceleratedatamuchfasterpacethrougheffective1)Supervision2)Followup
Supervisionofadvancesbybankofficialsincludes
Ensuring proper end use of funds and creation of assets out of loan /
margin/subsidywithintheanticipatedperiodandcomplianceofallterms
andconditionsstipulatedinthesanctionletter.
Timelyandperiodicalinspectionofthesecuritieschargedtothebank.
Properwatchontheconductoftheborrowerandoperationsintheaccount
invarioussegmentssuchasLedger/Bill/Godowns.
Propermaintenanceofrequisiterecordsforlimitation.
Constanttouchwithpersonstradingwiththeborrowertoobtainmarket
reportinregardtohistradedealings,solvencyetc.

54
 Followup
1. Issueofreminders/notices.
2. Personalcontactwiththeborrowersatperiodicalintervals.
3. Ifbothstepsa)andb)donotgivedesiredresults,localpressuretactic,if
possible,maybeappliedandguarantorifanymaybepursuedtogetthe
amountdepositedbytheborrower.
4. In case of defaulter in rural areas, whose service area the borrower
resides/operatestheactivity,withcopiestothecontrollingofficerofthe
addresseebank/society,Leadbankofficerofthedistrict,Banksowndistrict
coordinator.
MarioCastelino(2005)inManagingNonPerformingAssetsStated
thattheNPAsofthecorporatesectorhavecomedowndrasticallyintherecent
past,thereisconcernoverissuesoffraudsincaseofmortgageloans&increase
inNPAsfromtheretailsectorintherecentpast.
TheimpactofNPAsontheperformanceofbankslargelydependsonthe
managementofassetsandtheprioritygiventorecoveryofNPAs.Secondlyitis
important to distinguish between NPAs, which are temporarily classified as
such,duetothestrictprudentialnormsstipulatedbyRBI,andthechronicNPAs
whereinitiationoflegalproceedingsorenforcementofsecuritiesisultimate
meansofrecovery.
IndianbankingindustrysaddledwithhighNPAs.Thereasondiversions
offundsandwillfuldefaulthavebeenfoundtobethemajorcontributingfactors
forNPAsinpublicandprivate.
3.10NPAManagement:
Effective NPA Management has become very vital in view of the
multifariousimpactNPAshaveonprofitability.NoincomeaccruesfromNPAs.
Provisioningeatsintotheprofitmadefromotheroperations.Costisinvolvedin
holdingcorrespondingcapital.Thoughnoincomeisgeneratedbankcontinuesto
incurcostonfundslent.Theimageofthebankalsogetsabeating.Effective
NPAManagementisarealchallengetodayandtheentirestaffmembersneedto
besensitizedtotheurgencyoftaskonhand.

55
Slippages
Avoidinglargescaleslippages.
Thecreditappraisalsystemshouldbeupgraded.
Effectiveriskassessmentmechanismatvariouslevels.
Annualreviewoftheaccountsshouldbetakenupseriously.
Creditmonitoringhastobedoneeffectively.
Identificationofwatchcategoryaccountsistobedoneintime.
CARE(Criticalamountrecoveryexercise)shouldbeundertakenonan
ongoingbasis.
Rehabilitation/Restructuring/Rephrasingaretobeundertakenwherever
feasiblebeforeaccountsslipintoNPAcategory.
InaccountswhereproblemsareoftemporarynatureHoldingon
Operationcanbeallowedtorestorethehealthoftheaccount.
Upgradation
AllouteffortsshouldbemadetoupgradeNPAaccountsbyrecovering
overdues.Inaccountswhereitisnotpossibletoaffectrecoveryimmediately,
rephrasing/restructuringshouldbetriedoutsoastofacilitateupgradationofthe
accountsattheearliest.
Recovery/Reduction
Recovery/Reductioncanbeaffectedbyusinganyofthefollowingmeans:
Followup/Persuasion/Psychologicalpressure
Compromise
RecoveryCamps
RevenueRecovery
LokAdalat
CivilSuit
DRT
SARFAESIACT
Writeoff
Compromisesettlements

56
3.11RecoveryManagementinRuralCredit:
TheauthorshavecarriedoutstudytitledRecoverManagementinRural
CreditandgavetheirfindingsintheoccasionalpaperpublishedbyNational
BankforAgricultureRuralDevelopment.OnvariousaspectsofNPA
managementsuchasreasonsfornonperformingassets,recoverymeasures,
legalremediesetc.Asregardsrecoverymanagementtheysaythattherecovery
andNPAmanagementstrategiesadoptedbytheRFIsmaybeclassifiedintotwo
broadcategoriesviz.1.Preventive2.Correctivestrategies1.Preventive
Methods
Thepreventivemethodsinclude
Morecarefulandresponsiblescrutinyandappraisal.Thisincludestimely
sanction,realisminfixingrepaymentscheduleandadequacyofcreditwith
efficientdelivery.
Evolvingabroadloanrecoverypolicyandimplementingthroughthecadres
withadequateaccountabilityandempowerment.
Regularandeffectivefollowupwithborrowersandtimelyactiononsensing
thelikelydefault.
Title,value,etc.andadditionalsecurityaretobeinvestigatedbeforethe
disbursementofloan.
Moredetailedinformationabouttheborrowersistobeobtainedintermsof
his / her family background such as i) size of the family ii) number of
dependentsinthefamilyiii)earningmembersinthefamilyiv)standardof
livingv)lengthofresidencyinthearea,etc.
Reviewingtheadvancesintimeandtakingappropriateimmediateaction.
Sendingdemandnoticesintime.
Propersupervisionoftheborrowalaccountthroughpersonalvisitsand
callingforperiodicalreturnstogetincipientsignalsofdefault.
EfficientMISsystemontheborrowersandonthebranches.
Creditratingofclientele.
Developinganearlywarningsystemforidentifyingpotentialweaknessin
theaccounts.
Strictobservanceoftimeschedules.

57
 Timelyextensionofperiodoflimitationthroughdebtacknowledgement,
partialpayment,renewalofdocumentsetc.
Timelyreplacementorreschedulingofloanintheeventofnatural
calamities.
2. CorrectiveMethods
Thecorrectivemethodsconventionallystartwithinitiatinglegalaction
for recovery and followed by lodging insurance claims with DICGCI
wherever possible and initiating coercive against the borrower and the
surety.However,correctivemethods,inrecentyears,havebecomemore
innovativeandparticipatory.
i) SharingtheThreatPerception
ii) StaffMotivation
iii) ConstitutionofSpecialRecoveryCellsandRelatedMeasures
iv) InvolvementofGovernmentAgencies
v) ExtraordinaryMethods
vi) CorrectiveManagementforNPAManagement
ThefollowingdiagramshowsthecorrectivemanagementofNPAs.
StudytheproblemsofNPAsbranchwise,amountwiseadage
wisePreparealoanrecoverypolicyandstrategiesexclusivelyfor
NPAsCreateSpecialRecoveryCellatvariouslevelsIdentify
criticalbranchesforintensiverecovery
Fixtargetsofrecoveryanddrawtimeboundactionplan
3.12RecoverythroughLegalProcess:
Experiencehasshownthatlegalsupportiscriticaltorecovery
management.Therecoveryofloansthroughcrystallizedcollateralandother
backshoppingssubjecttoaprolixprocessasthepresentlegalsystemnormally
doesnotprovideafastandeffectiveexitroute.UseofCollateralsandCollateral
substitute
Itisseenthattherecoveryprocessthroughlegalsystemwithorwithout
collateralisequallycostlyandlengthy.Thecourtfeeispayableontheamount
ofdefaultorontheamounttoberecoveredandnotonthevalueofthesecurity.
JudiciaryandRevenuemachineryhavebeengenerallyunabletohelptheRFIs
inrecovery.Thesheetvolumeofcasesweightsthemdownevenifthesystem

58
 has the intention. Except forthe demonstrative effect, filing of summary or
moneysuitforunsecuredloansdoesnotprovideanytangiblebenefitforthe
RFIs.RFIsobservethatpursuingsuchsuitstoalogicalendisnotprudentasit
involveshigheradministrativeandriskcostsforthem.
The expenses made on the court lie in the books of accounts until
affectingthesalemakestheirrecovery.ThisisadrainontheRFIsresources
andisoftenwithoutanyreturnfortheRFIduringtheperiod.TheRFIsfeelthat
thecostofexecutingthecollateralisquitehighforRFIs.
1. RevenueRecoveryActs:
An Expert Group headed by Shri R.K. Talwar in 1970 had
recommendedextensionofsimilarfacilitiestocommercialbanksbyappropriate
State legislation (Talwar Committee, 1970). On the basis of the
recommendations of the Talwar Committee, the State Governments (barring
nine) had passed the Agricultural Credit Operations and Miscellaneous
Provisions (Banks) Act. The act empowers designated officials of Revenue
Department to issue an order having a force of decree of a civil court for
payments of any sum due to a bank by sale of the property charged or
mortgagedinfavourofthebank.Thisfacilitatesforeclosureofmortgageon
landinbanksfavourandbringsthepropertyforsale.Undertheactanominal
feeandnottheentiresalaryofthegovernmentofficial,ischargedtothebank.
Therecoveryofficers undertheActhavehelpedinrecoveringsmall
loansofthebanks.Thebanks,inStateslikeUttarPradesh,Karnataka,have
takenproactivesteps tofundthecost(salaryofrecoveryofficers andother
incidentalexpenses)bymakingacollectivecontributionfortheirestablishment
and/orallowingarecoveryfeeof5%to10%oftherecoveredamounttowards
theirmaintenance.Buttheabovesystemhasnotworkeduniformlywellinall
the states. The state governments had found it difficult to spare officials
possessingzealforthistypeofwork,whichisaprerequisiteforasupporting
machinerytoworkefficiently.Useofgovernmentofficialmachineryhelpsin
infusionofthethreatperceptionamongstpeople,butthepoliticalinterference
becomesapartofit.Therefore,thelackofpoliticalwillbecomesahindering
factor in the process. It would perhaps be necessary to study the relative
efficiency of the system across the country, so that improvements wherever
possible,couldbemade.
59
2. DebtRecoveryTribunals:
SpecialDebtRecoveryTribunals(SDRTs)havebeensetupunderthe
Recovery of Debts due to banks and Financial Institutions Act, 1993 for
expeditious adjudication and recovery of debts. These court now adjudicate
bankssuitsinvolvingamountofRs.10lakhandabovebytransferringthecases
pendingwiththecivilcourts.Theseloansarenormallysecuredwithcollaterals.
Onlysixsuchtribunals are operativenow.Thenumber ofsuchtribunals is
inadequateresultinginlargenumberofcasespendingbeforethem.Theyarenot
yetequippedwithproperinfrastructureandflexibilitytofunctionsmoothly.
Adv. (Dr.) Santosh A. Shah (2003), in his study entitled Non
Performing AssetsLegal Remedies while doing Criti cal Analysis of the
recoveryofDebtsDuetoBanksandFinancialInstitutionAct,1993states:
1. AfterhavingseentheimplementationoftheActuptillnow,itisgeneral
experiencethattheobjectoftheActofexpeditiousadjudicationisfulfilled
toalargeextentmainlyduetothefactthattheTribunalsundertheActhave
beenacceptingevidencebywayofAffidavitsandavoidingExaminationin
ChiefandCrossExaminationofthewitnessesexceptunderveryspecial
circumstances.ItisourexperienceasIhavementionedbeforeinthispaper
thatthemajortime,whichistakenfordisposalofCivilSuits,istakenin
trial,whichconsistsofExaminationinChiefandCrossExaminationofthe
witnesses.
2. Again since the Tribunals are specially appointed and empowered to
administer only these types of banks and financial institutions legal
proceeding,thePresidingOfficergetsagoodgripofthebankingoperations
andalsothelawrelatingtobankingwhichinturnsenableshimtodispose
offthecasesinaveryexpeditiousmanner.
3. Therealsoseemstobe,therefore,adevelopmentofspecializedbranchof
law,lawyers,andlawofficersofvariousbankswhoarespecializinginthis
workofthedebtrecoverytribunals.
4. All in all I see that at least the first object of the Act of expenditious
adjudicationhasbeenfulfilledtoagreatextentdebtsrecoveredwereRs.
1864.30 Crores up to 30.09.2001.DRTs now cover almost allimportant
StatesinIndia.
60
5. However,thesecondobjectoftheactofrecoveryhavingbeenstartedat
leastinthisregiononlyfromlast5years,itseffectivenessneedstobestill
established. Moreover, recovery would need creation of proper
infrastructure.
Forrecoveryofsmallloansandtoensurequickjusticeonsettlementof
dues,LokAdalats(PeoplesCourts)havebeensetupinsomeStates.Retired
highcourtjudgesandtwoothermembersheadthesecourts.Thesesmallcourts
are founds to be of success in selected pockets. Efforts are continuing to
popularizethisarrangement.Thejudgmentofthesecourtsisfoundtolackthe
teethofacivilcourtjudgmentfortheirenforceability.Butthesecourtshave
provided good opportunity to narrow or bridge the differences between the
bankerandthedefaulterbycreatingafavouableenvironmentforasettlement
andalsoinformalizingsuchsettlements.

Criticalanalysisofthesecuritizationandreconstructionoffinancialassetsand
enforcementofSecurityInterestAct,2002
1. TheSecuritizationActhasbeenenactedsoastotacklethegrowingNPAsin
thiscountry.TheeffectoftheActuptillnowhasbeenencouragingasin
mostofthecaseswherenoticeforattachmentandseizureofpropertyhas
been sent under this Act, the parties are observed to have come for
compromisewiththeBanks.TheActhascreatedanewregimebetweenthe
debtorsandcreditors.Itisprobablyanoutcomeofwhatwasthoughtby
manyasthepositionthatmanyindustriesinthecountrytookthefinancial
sectorforarideuptillnow.
2. Atthesametime,however,careshouldalsobetakentoseetoitthatdueto
Acts of this nature which are termed by some as financial POTA,
entrepreneurshipinthecountryshouldnotsuffer.TheActisalsotermedby
someas,ShootfirstActlater.Thelegislationsuptillnowweredebtor
centricbutnowareturnedtocreditorcentric.
3. Thebanksalsohavetolearntoanswertheusualcriticismagainstthem
whichisWhenyoudonotneedthefunds,thebankshavealotofthemand
whenyouneedthem,theyhavenone.
4. SomecriticshavealsopointedoutthatsuchanActisanoverreactionand
theNPAnormsdonottakeintoaccounttheagrobasedindustries,oil
61
 industries,sugarindustrieswhichhaveseasonalproduct.Thedistinctionis
alsobemadebetweenwilfulV/s.bonafidedefaulters.AnExitpolicyshould
beadoptedforbonafideborrowerswhoduetoreasonsbeyondtheircontrol
havegoneintodefault.Asagainstthatastrictpolicyandapplicationofthe
Actneedstobestringentlyappliedtowillfuldefaulterswhomanyatimeare
foundtobesiphoningandmisappropriatingthefundsoftheBank.
5. ItmustbeborneinmindthatoneofthecausesofNPAsisalsononprudent
lendingofmoney.
3.13.SignificanceReschedulingandOther:
Prof.C.SivaramiReddy&Smt.Kalavathi(2004)intheirstudyentitled
NonPerformingAssetsinBankscausesandremediesconcluded.
3.13.1RephasementoftheLoan:
Itisnecessarytofixrepaymentschedulefortermloanaccordingtothe
income generating capacity of the unit. If repayment schedule is not fixed
properlyoraunitisnotfixedproperlyoraunitisnotabletogenerateexpected
profit, possibility may be explored in consultation with the borrowers for
rephasementofloaninstallment.Rephasementoftheloaninstallmentshouldbe
doneonlywhenitisexpectedtogetpaymentaftertherephasement.
3.13.2CompromiseProposal:
Acompromisemaybecalledwhereborroweragreestopayacertain
amounttothebankerwithsomeconcession.Alargenumberofcompromise
proposalsarebeingapprovedbybankswithaviewtoreducetheirNPAsand
recyclingoffundsinsteadofresortingtolegalprocedures.
M.C.Naiduand&A.Prasad(2004)intheirstudyentitledRemedial
MeasuresforManagingNonPerformingAssetsinRRBsstated
3.13.3CompromiseswithBorrowers:
Thebankshouldalsoenterintocompromisesthroughnegotiationswith
the borrower to carry forward a clear picture of the latest position. It is a
redundant to carry the nonrecoverable loans on the bankbooks indefinitely.
With proper justifications and convincing arguments, compromises could be
enteredintoandimplementedimmediately.
Rehabilitationpackageforpotentiallyviablesickunitswillhelpsinthe
revivaloftheNPAintoperformingassets.Alittlehelpinthisregardmaygoa
longwayresultinginconstructivesolution.
62
 Dr.B.KrishnaReddy,Dr.A.V.Ramana,andK.Nandeeswaraiah(2004)in
theirstudyentitledManagementofNonPerformingAssetsinBankingSector:
SomeInsightsobserved
3.14CompromiseProposal:
It is the mechanism for settling outstanding dues through compromise.
Negotiationinthisregardistobehandledskillfullyonthebasisofrelative
strengthsoftheborrowerandthebanker.Banksshouldmakeallendeavoursto
strike a Zeroloss deal on a deal with minimum sacrifice waiver. Such
compromisemustberelatedto
Waiverofpenalinterest
Reductionininterestrate
Writeoffthefullorapartoftheamountofinterestdebitedtothe
accountoftheborrower.
Prof.B.Mohan&K.Rajesh(2004),intheirstudyentitledManagementof
NonPerformingAssetsinInstitutionalAgenciesstatedthatinthecompromise
settlementthepointsneedtorememberedare
Maximumrecoverywithminimumcost.
Distinctionneedstobemadebetweenwillfuldefaultersand
defaultersonaccountofconditionsbeyondtheirscope.
Wheresecurityisavailable,properweightageneedstobegivento
location,marketabilityconditions,possessionthereof.
Fundsrecyclingtothemaximumadvantageinsteadofoptionfor
lengthy,expensiverecoveryprocess.
Allcompromiseproposalsshouldbereportedtothenexthigher
authorityforscrutinysoastopreventfraudulentactivities.
Before presenting the compromise proposal before the Settlement
Advisorycommittee,theproposalneedstobeexaminedbythetop
executive.
Adequateattentionshouldbegivenandappropriateactioninitiated
forupgradingsubstandardassetstostandardassets.
V.K.Gupta(1994)intheirstudyentitledFastTrackforRecoveryof
BankOverduesstatedthattheslowpaceofrecoveryofbadanddoubtfuldebts
hasbeenadverselyaffectingtheviabilityofvariousbanksandfinancial

63
institutions. The prevailing system of recovery of bank dues through the
machineryofcivilcourtsisnotonlytimeconsumingbutalsononproductive
andexpensive.Followingrecommendationsofseveralhighlevelcommittees
includingNarasimhampanelonfinancialsectorreformsandassuranceofthe
FinanceMinisteronthefloorofparliamenttosetupspecialtribunalstohear
anddecidetheclaimofbanks,thebankershavebeenanxiouslylookingforward
tothenewsetupofrecovery.ThenewActcalledTheRecoveryofDebtsDue
toBanksandfinancialInstitutionsAct,1993.
S.D.Nayar(1994),writteninhisarticleRecoveryofBankDueshas
giventhenormsofdecree
Thedecreeinthehandsofthecreditormustbeadecreeforthe
paymentmoneytoRs.500ormore.
Thedecreemusthavebecomefinal.
Theexecutionofthedecreehasservedthedebtorwithaninsolvency
notice.
Thecreditormusthaveservedthedebtorwithoninsolvencynotice.
Theinsolvencynoticemustbeinrespectofadecreeforpaymentof
anyamountduetosuchcreditor.
Thenoticemustrequirethedebtortopaytheamountdueunderthe
decree.
Thedebtorhasfailedtocomplywiththenoticeandthetime
specifiedinthenoticehaselapsed;and.
Thenoticemustspecifythetimewithinwhichthedebtorhasto
complywithnoticebymakingpayment.
ThenoticehasnotbeensetasidebytheDistrictCourtthatistosay
incaseofdebtorapplyingtotheDistrictCourtunderclause(b)of
theprovisionthissubsection,hisapplicationhasbeenrejected.
RajendraSingh(2005)inhisarticleEmpoweringBanksforRecovery
ofNonperformingAssets(NPAs)statedthattheSARFAESIAct2002Need
ofthehourisessentiallyaboutenforcementofthelenderrightsandimproving
recoveryofNPAs.Thefinancialsectorisunderseverestressduetoitsinability
toenforcesecurityinterestandotherrights,mainlyduetoslowlegalsystem.

64
 The resulting increase in NPAs in the banking sector, the liquidity
pressureoncentralandstatefinancialandinvestmentinstitutionsandthreatto
thestabilityofthefinancialsectorhaveforcedthegovernmenttobringthis
legislation.
IssuesbeforetheSecuritizationAct
WhiletheActhasbeenwidelyacclaimedbybanks/Flsthroughoutthe
country as secured creditor(s) have unfettered liberty, the following issues
deserveattention:
1. The issue of pricing of fixing a realizable value on the assets is a
questionnotaddressedintheactsofar.Worldover,stressedassetsare
soldortransferredonaheavydiscount,attimesreachingalevelof75
80percent.Insuchasituation,bankswillhavetofirstbepreparedto
writeoffthedifferencebetweenthesale/transferpriceandthebook
value,secondlybepreparedtofacescrutinyofAgencieslikeCBIor
CVCforsale/transferofNPAatsuchalowprice.
SincethebanksholdadequateprovisionsfortheNPAs,writeoffofthe
shortfallmaynotbeincluded.
2. Issueswithregardtostampdutychargeablefortransferofassetsfrom
theoriginatortoAssetReconstructionCompany(ARC)havenotbeen
addressedintheAct.Thestampdutyisastatesubject;itwouldrequire
initiatives from the respective state government. As amatter of fact,
thesebankingassetsshouldbeexemptedfromthelevyofstampduty.
3. Whowillpaystatutorydueslikeoverduesalestax,exciseduty,income
tax,electricitychargesandotherlocaltaxarrearsafterthemanagement
istakenoverbythesecuredcreditor?Legalpositioninthisregardneeds
tobedefinedveryclearly.
4. The appointment of a manager for the management of the acquired
assetsinconsultationwiththeborrowers,whoseassetshavebeenseized
bythebanks,seemstobeautopianidea.
5. TheActprovidesforappealandforappealoverappeal,resultingin
lengthyjudicialprocess,whichmaydelayexecutionproceedings.
6. TheActprovidesforconcurrenceofsecuredcreditorsrepresenting75
percentinvalueoftheamountoutstandingwheretherearemorethan
65
 onesecuredcreditors.Thisconcurrenceespeciallyincaseofgoing
concernsmaynotcomethrough.
7. The appointment of a manager for the management of the acquired
assetsinconsultationwiththeborrower,whoseassetshavebeenseized
bythebanks,seemstobepracticallyimpossible.
8. Section13(4)providesformanagementofsecuredassetsonly.Wherea
companyhasanumberofassets,itisdifficulttodecidehowfeasibleis
themanagementofisolatedassetsandtheActissilentonthispoint.
9. Inlaw,onecannotdoindirectlywhatisprohibiteddirectly.Incaseof
saleofseizedassets,thesellerandthebeneficiarywillbethesame.The
sale of secured assets by banks at value enough to cover their dues
wouldbeadequatelyselfserving,butmayappeartobeunfairtothe
stakeholders.
10. Incaseofmanagementcontroloverthebusinessofthedefaulter(s)the
securedcreditorwillhaveeffectivecontroloverunsecuredassetsofthe
borroweraswell,whichcontravenesthestipulatedintentoftheAct.
11. Itwillbedifficultforbankstoselldistressedassets,astherewillbefew
takersforsuchassets.Thecorporate(s)mayganguptopreventsaleof
assetsbybanks.Auctionsmayturntobefarce.
12. TheActempowersthebankstotakeoverthemanagementofdefaulting
companies;banksarenotbusinesstycoonsorjacksoffalltradeswho
canrunanybusinessactivitywithguaranteedsuccess.Banksarenot
evencustodiansormerchantsofcommodities.
13. TheActdoesnotaddresstheproblemoflackofinfrastructureand
practicalproblemsinvolvedinsaleofdistressedassets.
14. Incaseofcertainspecificindustrieswhereanindustriallicence,specific
governmentapprovalorpermissionorspecialrightslikemininglease
etc. is issued in the name of the borrowing company, will such
license/approval/permissionbeautomaticallytransferredtothenameof
buyer/bank/concernedornot?
15. Willintangibleassetslikepatents,goodwill,brandsbedeemedtobe
automaticallytransferredtothebankers/buyersanddefaulterwouldnot
haveanyright,titleorinterestinsuchassets,oncehehasbeendivested
ofthesecuredassetschargedtothebank.
66
 16. Valuationofassetsandbiddingprocesscantriggerlegalcases.There
can be lack of unanimity among lenders also, as all lenders holding
atleast75percentstakeinoutstandingduesarerequiredtoagreetosell
theassetsofdefaulters.
17. Borrowersmightpreferobjectiononseveralissuesbeforemagistrates
authorizedtoissueseizureorderandcantransformintopotentialenquiry
intonatureofsecuredassets,properstatus,natureofliabilityetc.
18. Lenders are vulnerable to prosecution by compliance authorities on
many issues, despite the indemnity given under the Act to persons
exercisingtherightsofsecuredcreditors.
19. TheActprovidesforcreatingacentralregistrytorecordtheparticulars
of transactions related to SARFAESI Act and creation of security
interestincludingelectronicrecordofthesame.Ithasnotbeenclarified
whether this registration would exempt ARCs and securitization
companiesfromfillingparticularswiththestateregistrysimultaneously.
20. The extent to which a secured creditor can proceed against a third party
acquirerofsecuredassetsfromtheborrowerhasnotbeenadequatelyaddressed
intheAct.ItmayopenaPandorasBoxoflegalproceedingswiththirdparties
forthesecuredcreditor.
3.15Research:
Dr.N.B.Shete(2002),NonPerformingAdvancesof Commercial
Banks:AnOverviewwithregardtoprioritysectorNPAs,foundthatthemajor
factorslikenaturalcalamities,inadequateincomegeneration,hightransaction
costs,inappropriatefinancialpolicies,poorworkingoftheRFI,followupof
prudentialnormsandprovisioningofNPA.Needlesstosaythatdefaultsinthe
FRIsadverselyaffectsrecyclingofcredit,squeezeuptheirresourcesandare
closely linked with the banks heading towards a state of financial
unsustainabliity.
R.M.Kulkarni(2006),inhisthesisentitledAcriticalStudyofNon
Performing Assets of Public Sector Banks with Special Reference toSingle
District concluded Non Performing assets are aff ecting viability and
solvencyofpublicsectoraswellprivatesectorbanks.NotonlyBanksinIndia
arefacingthisproblembutalsoallovertheworldthesituationiscommon.Non

67
performing assets affect adversely the lending act ivities of banks. Non
recovery of repayment installment and interest on loan create hindrances in
creditdispensationprocess.Nonrecoveryofloansalsohurttheprofitabilityof
banks.
Itisobservedthatinthecaseofpublicsectorbanks,marginaldeclinein
NPAsratiowasmainlybecauseofincreaseintheshareofstandardassetsand
declineinthedoubtfulassetsandsubstandardassets.
T.Parmar(1994),inhisarticleRecovery:FindingofaStudyofTwo
Districts in Gujarat states that the guidelines gi ven by the RBI have not
adequatelybeenfollowedbythebanks.Thestudyrevealedthatbankshavenot
providedstaffaccordingtothebusinessofthebranch,andthejobrole,function
and responsibilities of the staff have not been clearly defined. The
organizationalstrengthremainedweakandhas notbeenstrengthenedtothe
extentnecessaryforbetterrecoveryperformance.Thestudyalsorevealedthata
schematic approach in lending to clusters of borrowers of villages was not
adopted to facilitate effective supervision. The approach of the Government
agencies was justto sponsortheapplications in bunchandthat toowithout
adequately examining the technical feasibility and economic viability of the
loanproposals.Recoveryperformancesofthebrancheswerenotconstantlyand
closelyreviewedbythecontrollingofficesandseparaterecoverycellshadnot
beensetupaspertheGuidelinesofRBI.
V.Narayanan(2000)NPAReductiontheNewMantraofSlippage
Management.Hesaysthatanyoneshortmeasurelikerecoverycampscanat
bestbeofsupplimentarynature.Inacreditproposalisprocessedproperly,
sanctioned,disbursedintimeandinadequateamountandmonitoredrightfrom
thebeginningthenthechancesofthisassetbecomingNPAisrelativelyless
thananotherwhichhasbeenprocessedinhaste,appraisedmechanically,
delayedinsanctionanddisbursedinadequatequantum.
TheNPAreductiontechniquesofSlippageManagementalongwith
propercreditappraisalandtheoccasionalfirefightingofNPAwillcertainly
helptochecktheincidenceofNPAinthebankingindustrytherebyimproving
thebanksprofitability.
68
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