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Anticipation for increasing NPAs and FEO.

A strong banking sector is essential for a flourishing economy. In a submission to this, the author in this essay tries to discuss more the non-performing asset (NPA) which bad loan affecting our economy. A major hindrance faced by most banks today. A high level of NPAs suggests a high degree of credit defaults which, in turn, affects the profitability of banks. Decreased profitability implies an unfavourable financial statement which in turn discourages investors from investing in the banks under consideration.

In recent past years number of NPAs increase drastically with an increasing number, our economy also witnessed a new disastrous evil in form of Fugitive Economic Offender (FEO), for which legislature has passed Fugitive Economic Offender Bill, 2018. Moreover the author briefly discussed the various factors affecting the increase in the number of NPAs and FEOs. Those factors are farm loan waiver, Infrastructure Leasing & Financial Services crisis, fraud in the banking sector and other reasons.

On the concluding note, the author by giving his recommendation tries to resolve the increasing the number of NPAs & FEOs, though, availability of speedy trial and many other reforms. In this essay, a modest attempt has made to discuss all the things.

Introduction
Till 2007, India's banking sectors was one of the best banking in the world. When United State and other Western Countries were facing the banking crisis and related global financial crisis, we one of the countries where it was not affected by this global for an especially our banking industry was robust. Nothing happened till 2007, the Indian banking sector does not get affected, and the reason for that is Reserve bank of India has proper guidelines. And these prudential guidelines have helped the Indian banking sector withstand this crisis.

These dark skies of crisis come when Eleventh five year plan allocate 500 million only for the infrastructure development, where the whole economy of a country worth for 1 trillion, which was the GDP of India. And this fund was going too sourced through banking or bank loans.

Here the cause is not allocating in a large portion of the budget or is not because of the failure of an Infrastructure development project, its cause of the delay in executing. There was an enormous delay in the execution in these policies due to environmental concern, land-related problem, public-private partnership agreement related problem.

All this resulted in, the project is not started and the project can't produce the revenue, but at the same time, the entities doing this project of infrastructure development have taken a loan. And the beauty of the bank loan is that it commences from the day when it issues to the account and starts charging the interest.

So as this is not only the reason for the increase in the NPA, but this is the major factor for this crisis.

Where one side Indian Banking is harshly affected by fall down in the return from performing assets, at the same time well know business tycoons, have taken a loan in colossal amount and flew away from overseas before commencing the criminal proceeding against them.

So to cure this ailment house of the legislature pass a bill on 19th July 2018, the Fugitive Economic Offender Bill, 2018, to restrain the public and private sector banks from the economic offender. The act has acquainted uncompromising measures to penalize the economic offender, it empowers the authorities to attach and confiscate properties and assets of an economic offender like loan defaulters who flee from the country.

Stringent measures are provided so that the offenders return to the country so that the debt can be recovered or criminal proceeding can be executed against them. The Preamble of the act incorporates the objectives of this act, it states that it is an act to provide for measures to deter fugitive economic offenders from evading the process of law in India by staying outside the jurisdiction of the Indian Courts, to preserve the sanctity Rule of law in India.

To declare a person an FEO, an application will be filed in a Special Court containing details of the properties to be confiscated, and any information about the person's whereabouts. The special court will require the person to appear at a specified place at least six weeks from the issue of notice. A special court in Mumbai declared absconding liquor Vijay Mallaya a Fugitive Economic Offender (FEO) on a plea of the Enforcement Directorate. Mallya has become the first businessman to be Declared EFO under the provision of the new Fugitive Economic Offenders Act which came into existence in August last year.[1]

What is a Non-performing Asset & Fugitive Economic Offenders Bill, 2018?

Non- performing Assets (NPA) is the only bad loan, which is failing in returning the back after 90 days or by acceding this period. And these bad loans are known as a non-performing asset because of these loan as an asset for the bank. However, the balance sheet divided into parts of Liabilities and Assets. So, for every bank, the money deposited by its customers is a liability and the money given as loan to its customer is an asset.

And the assets are called ‘not performing' because these assets are quits from producing the profit to the bank in term of interest on the loan.

According to the Narasimham Committee Report (1991), NPA is defined as an advance where payment of interest or repayment of installment of principal or both remains unpaid for a certain period. Earlier the period was of four quarters (180) but, subsequently this period was reduced, and from March 1995 onwards the assets for which the interest has remained unpaid for 90 days were considered as NPAs.[2]

However, the Fugitive Economic Offender (FEO), 2018, contemplates action FEOs by way of attachment and confiscation of proceeds of crime associated with FEOs and the properties including Benami properties of the FEOs and thereby deter FEOs from evading Indian law by remaining outside the jurisdiction of Indian courts. Section 2(1)(f) of the act defines the term ‘Fugitive Economic Offender’ (FEO), whereas, section 3 of the act provides that the provisions of this Act shall apply to any individual who is, or becomes, a fugitive economic offender on or after the date of coming into force of this Act (i.e. 21-4-2018). Moreover, whether the ingredients of the above definition are satisfied or not has to be determined by ‘special court’ under the prevention of money laundering Act, 2002 after following the procedure outlined in section 4,5,10 and 11 of the Act.[3]

Present Scenario of NPAs & FEOs:

The issue of non-performing assets in front of banks has been identified in the headlines for several months, it has some inconvenience. In this context, it is compelling to see how the Indian banking system administering the major recovery tracks.

This is important because the non-performing asset has caused many decisions in the past due to call, which did not exactly prove efficient.

However, several measures have been taken by the Government of India & Reserve Bank to deal with the problem of non-performing loan and fugitive economic offender. Some measures like Lok Adalat, O.T.S., and other compromise settlement have worked out but actually, recovery amount under these tracks was not satisfactory.

But Scheduled Commercial Banks (S.C.Bs.) managed to recover more from the non-performing loan in FY18 against FY17 due to vigorous efforts for speedy recovery via that Insolvency and Bankruptcy Code(IBC), 2016 & SARFAESI Act(Securitization Reconstruction of Financial Assets &Enforcement of Security Interest), 2002 routes.

According, to the Reserve Bank of India's Report on Trend and Progress of Banking in India 2017-2018 , the overall ratio of the amount recovered to the amount involved improve drastically to 41.3 per cent against 13.8 per cent in the previous year.

As per provisional data for 2017-18, the bank recovered Rs. 5,28 lakh crore (Rs. 38,500 crore in the previous year), while the amount involved was Rs.12,78,600 crore (2,78,300 crore). Moreover, in the reporting period, the maximum amount recovered was 4,92,500 crore (Collection of 21 companies from financial creditors, for which the resolution plan was approved) through the route of Insolvency & Bankruptcy Code, while the amount was Rs.9,92,900 crore.

The ratio of the amount collected in the case was 49 per cent to the amount involved.
In the previous year, when the IBC was bringing into action, 37 cases ware come in front of National Company Law Tribunal. But the data about the amount recovered and the amount involved in has not been disclosed by the RBI.

Via SARFAESI Act, 2002 route, the bank recovered 26,500 crore, this year, where the involved amount was 1,06,700 crore. The ratio of the amount recovered to the amount involved in this route raised to 24.8 per cent, from 18.3 per cent ( of the previous year).

But at the same time, by the route of Debts Recovery Tribunal route, bank recovery decreased to 7,200 crores where previously it recovered 10,300 crores.

Together will all recovery of NPAs, on 31st July 2018, after bundling of debates, Fugitive Economic Offender Act became law and allows for declaring a person as an offender after as an arrest warrant has been issued against the individual and the value of offence exceeds 100 crores.

And for this Judge M.S. Azmi said,
“the court was partly allowing the enforcement directorate’s application, through its counsel Hiken Venegavkar on June 22nd, 2018, which sought to declare Mr Mallya a fugitive economic offender and confiscate all his properties, estimated to the worth 12,500 crores. [4]

Moreover, Mr Mallya, who left the country on March 2016, is arrested by the U.K. Metropolitan police's extradition unit on April 18, 2017. And finally, on 5th January 2019, Vijay Mallya, liquor Baron, become 1st person to be declared a fugitive Economic Offender by the special court hearing cases under the Fugitive Economic Offenders Act.


The disaster of 2018 which enhance the NPA:

Further, the author wants to discuss challenges, which are causes to raise in NPA and economic offence. However, in FY18 the recovery is done with the good amount but the amount of recovery is not satisfactory because the non-performing loan shot one trillion and raising more.

As this year RBI comes with lots of reform to recover the NPA and to control the economic offence. But the causes are more clever then regulations of RBI, they evolve some new causes to raise the NPA. The new causes follow:-

  1. Farm Loan Waivers-

    In the latest round of agricultural loans announced by states like Madhya Pradesh, Chhattisgarh, Rajasthan and Assam only stream of loan has been streamed in the agricultural sector, while many have the effect of a wave, due to non-payment of agricultural loans in 2019 Run-up for a general election. Since this loan will affect credit culture, banks can be the leading conservative in the agricultural sector.

    Bankers fear that if the RBI did not exempt them, then in the December 2018 quarter the IL & FC group could have a debt of up to Rs 30,000. If these loans are classified as non-executed, then banks will have to make provision, which will affect their bottom line.
     
  2. IL and FS Crisis-

    The total consolidated loan near the infrastructure lender is close to one lakh crore, and it missed out on the time limit on its debt obligations starting from August 27, 2019. It has already vanquished on around Rs.450 crore worth of inter-corporate deposits to small industries Development Bank of India (SIDBI)

    Bank of India reported a net loss of Rs.4,738 Crore for the third quarter ended December 2018 as its bad loan provision more than double to Rs.9,180 crore core on account of the first 40 large account referred by the RBI for bankruptcy proceeding and also due to a fresh hit from the IL&FS crisis.

    Moreover, Bank of India (BOI) becomes the first state-run lender to be hit by the crisis at the IL&FS group, to which it has resorted to putting on a spurt provision, including towards large corporate account referees to the National Company Law Tribunal (NCLT).
     
  3. Fraud in Banking Sector-

    According to the RBI’s “Report on Trend and Progress of Banking in India 2017-18”, as of march-end 2018, the amount involved in frauds escalated to Rs.41,168 crores, whereas in march and 2017 the amount was Rs.23,934 crore.

    In toto, the number of fraud cases of amount involving Rs.1 lakhs & more is 5,917 till March-end 2018. In term of amount, fraud in the banking sector increasing but mainly reflecting a large value case in the jewellery sector.

    The Report said,
     Incidentally large value frauds involving Rs.50 crore & above constitute about 80 per cent of the frauds during this year. Ninety-three per cent of the fraud in term of amount of more than Rs.1 lakh occurred in public sector bank, while private sector bank accounted for six per cent”.[5]

    Off-Balance sheet fraud glided to Rs.16,288 crore as of March-end 2018 from Rs.63.3 crore as of March-end 2017. Similarly, in term of amount cases related to cyber fraud mounted to one hundred ten crore rupee from forty-two crore rupee.

    The RBI report said frauds have emerged as the most serious concern in the management of operational risk, with ninety per cent of them present in the credit portfolio of banks. In 2017-18, however, fraud related to off-balance sheet operation, foreign exchange transaction, deposit accounts cyber activity took centre stage.
  4. Other Reasons.-
    Increasing and propagating activities of banks has increased non-performing assets, which have increased for a large amount during the last decade. The quantum of NPA is calculated in separate figures and mainly on the basis of the absence of correct data and the method adopted for calculating the percentage of NPA's in relation to the amount of quantity of the total assets or loan assets of the bank, the size of the bank or loan portfolio or the size of outstanding advances.

For a large number of years, the bank was asked to take credit in its books, based on earned interest income, even for the amount of periodic interest which was not paid by the borrower. This was done by raising the debit in the suspicious account and by depositing the sum equal to periodic interest in the borrower's loan account.

After the objections of auditors and income tax authorities, the banks changed strategy and started giving extra loans to the borrowers who made defaulters make payment to the bank for adjusting the outstanding amount, in many cases, postponing the due dates of payment. Given and even complete and again, For example, the provision of fire for fuel, ambitious program for branch progress and new arrangements, transfer, transfer and expansion of banking services for unhealthy competition between offices of the same bank, but at the same time enough facilities are available for staff training. Not expanded.

The rules and procedures of prudent banking were easily forgotten in the concern of achieving the business goal. Even the senior management setup eased the rules for proper evaluation of loan proposals, the provision of standard bank acceptance letters, errors in the execution of the loan agreement, and the hiring of repayment of mortgage payments Compiled in the ignoring was ignored. Achievement of goals, to create a record of achievement and reporting.

Need for reform for the economic offender and non-performing asset:

  1. Insolvency and bankruptcy code, 2016
  2. in the term of law.
    a) For any reason, the moratorium should not be allowed for more than 270 days.
    b) DRTs as adjudicating authority for Partnership firm/ Proprietary concern is yet to be notified, which once done will improve recovery from these segments.
    c) Increase the tenor of debt for companies that have viable businesses but are currently suffering from over-leveraged balance sheets along with a moratorium period.
ii. For the credit building.-
  • To avoid delays in resolving the stressed assets, the judicial and legal systems should be strengthened. This can be done by increasing the number of NCLT courts/benches.
  • Similar to other global markets like Singapore and Hong Kong, deepening debt and capital markets to attract additional funds at an additional and international level. Tax concession for capital invested in companies under IBC can be considered.
  • Besides, the listing options of asset reconstruction companies can also be searched by RBI, SEBI etc.

2. Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

SARFAESI is the golden weapon in the hands of the secured creditor, but the provisions of this Act have to be carefully applied. The competent Authorized officer shall be appointed to serve the notice under this Act.

3. Fugitive Economic Offenders Bill, 2018

  1. The S.14 of Chapter II of the Fugitive Economic Offenses Act, 2018, has been declared as an FEO to defend any citizen's claim in any court against those people. It embeds the right of justice into the right of life and does not consonance to international laws.
  2. This bill does not have competent immunity to deal with the company or limited liability partnership or firm or other association of persons. So this bill should include company or limited liability partnership within the definition of word ‘individual' used in 2(1)(f) of this act.
  3. This act only reveals the procedural law and substantive law for this, but this never exhibits how any bank can get his loan to repay from this.
  4. This apprises very time taking process, which needs to be speedy justice provider.
  5. Instead of emphasizing the extradition, an emphasis should be on preventing the criminal from becoming a fugitive.

4. Mislenious

  1. Central Bank said in its report 2017-18 trend and progress,  In the agricultural sector, there is an adverse effect on lending, possibly reflecting the quality of the asset worsening in this area.
  2. Banks need to improve their credit monitoring and risk management strategies to increase their capital base to defend against future balance sheet tensions and to support inclusive growth in the developed financial scenario.
  3. As part of remedial measures, bankers can resort to settlement or one-time settlement. There are other ways for recovery of Lok Adalat and Debt Recovery Tribunal arrears.
  4. If there is delay due to reasons beyond the borrower's control, which are draft, flood, or other natural disasters, then the banker should restructure the debt keeping in view the real difficulty of borrowers.
  5. Irregularities in spot visits also increase the NPA, due to non-travel of the bank official on the customer point, the interest and principles collection on the loan decreases. Therefore NPA can be collected by regular travel.
  6. RBI should instigate a provision of no objection certificate (NOC), for the bank, which submitted by an individual at the time of taking a loan. In this NOC, it shall be stated that the bank gave him loan earlier has no objection if he takes loan another loan from other bank or the same with the same amount of salary. This provision somewhere prevents a loan from becoming a non-performing loan.
  7. Special Courts have become the panacea of our country. But the number of judges is constant. From the existing pool, you keep making special courts. And this turtles the justice delivery system.


Conclusion
The Non-Performing Assets have always engendered a snag before banks and Financial Institutions. Money locked up in NPAs has a great knock-on the profitability of the banks. Government of India has been taking various measures to tackle the problem of non-performing assets but still, a lot needs to be done to suppress this problem.

The bank management should speed up the recovery process and among the various recovery tracks, the bank should select any of them as per the suitability of the account. Proper documentation, pre and post loan appraisal policy, proper inspection, timely initiating action against the defaulters, proper implementation Recovery Act etc help in curing the piles of NPAs. The government should also make more provisions for faster settlement of pending cases. Apart from this, the government should take measures also to heal the viral of fugitive offenders. This somewhere helps the government itself to ameliorate the shape of the economy.

End-Notes:

  1. Anon, (2019). [online] Available at: https://economictimes.indiatimes.com/news/politics-and-nation/vijay-mallya-becomes-first-person-to-be-declared-a-fugitive-economic-offender/articleshow/67394758.cms. [Accessed 7 Jan. 2019].
  2. Rajeev, M. & Mahaesh, HP. (2010) Banking Sector Reform & NPA: A study of Indian Commercial Banks. [Online] (252). Available from: https://ideas.repec.org/p/sch/wpaper/252.html.
  3. Srinivasan, Anand G. (2018) Guide to Fugitive Economic Offenders Act 2018. New Delhi. Taxmann Publication (P.) Ltd.
  4. Saigal, s. (2019). Court declares Vijay Mallya a fugitive economic offender under the new law. [online] The Hindu. Available at: https://www.thehindu.com/news/national/vijay-mallya-declared-as-fugitive-economic-offender-under-new-law/article25919274.ece [Accessed 12 Jan. 2019].
  5. @businessline. (2019). Led by cyber activity, off-balance sheet operations, banks see a 72% rise in frauds. [online] Available at: https://www.thehindubusinessline.com/money-and-banking/led-by-cyber-activity-off-balance-sheet-operations-banks-see-72-rise-in-frauds/article25853604.ece [Accessed 4 Jan. 2019].

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