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Non-Processing Asset (NPA) and Debt Recovery Management in India

The custom of borrowing and lending money has been prevailing in the society since ages. Since humanity began to engage in any type of commercial transaction, the concept of banking has existed. Since then, the banking system has evolved. The banking industry is in charge of the global economy. We cannot expect the economy to continue to grow without a well-established credit system. A vibrant economy requires a dynamic banking system.

For the bank's financial fitness and its market, the increment in Non-performing assets (NPA) is not favorable. The pendency of cases of NPAs in Civil Courts to get debt-recovery issued resolved and recovered takes a forever time and until then the banks have to be on hold regarding such account. In the current scenario, the problem of non-performing assets (NPAs) in the Indian banking industry is at an all-time high.

The accumulation of non-performing assets (NPAs) and a decrease in NPA recovery results in poor money recycling, which has a direct impact on bank lending decisions. Due to the potential of non-performing assets (NPAs), bankers were growing hesitant to lend money to significant projects. The use of debt recovery channels such as Debt recovery tribunal, Lok Adalat and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) by the scheduled commercial for the recovery of the NPAs protects the interest of both debtor and creditor. The commencement of Insolvency and Bankruptcy code 2016 (IBC) have also paved the way to prompt corporate debt recovery.

Introduction
Due to India's distinct geographic, social, and economic characteristics, the banking system in the country differs greatly from those of other Asian countries. India is huge in terms of population and in land area with diverse culture and dissimilar income in each regions. A considerable percentage of the country's population is illiterate, yet the country also boasts a large pool of managerial and technologically advanced skills expertise and this is apparent in the country's banking and financial sector's structure, size, and variety.

India's financial system is backed with number of issues in which the gigantic quantity of non-performing assets on the bank's balance sheet is one of the major issue. The banks must keep the level of non-performing assets (NPAs) low in order for the banking sector to function properly in the economy. The most negative impact on the bank's financial health is because of Non-performing loans (NPLs). The bank's main business is making loans to people in need.

One of the main activities of banks and financial institutions is borrowing of capital (Credit of money). Credit makes up the majority of a bank's or financial institution's asset portfolio. Granting loans and the paying back of funds with interest, back from borrowers is the major component of bank's funding credit-dispensing activity, in addition to obtaining resources through new deposits.

The lifeblood of economic activity is finance. Credit advances are important in order to fund productive goals. Credit Risk, on the other hand, is associated with bank retail products and derives from the borrower's failure to repay. The credit cycle is disrupted, and the fund is frozen. As a result, these loan losses have a significant impact on the bank's profits. While it is impossible to eliminate such losses, banks can always strive to minimize them to a minimum.

What does non-performing assets (NPAs) mean?

The loan advanced by the banks are all can be termed as 'assets of the bank'. A loan or lease whose specified interest is not paid or else there is no repayment of the principal debt to the designated lender such loan or lease can be termed as Non-Performing Asset. The 'Non-Performing Asset' is borrower's asset or account that has been termed as substandard and dubious by the bank or financial institution. Here, the borrower has failed to make any previously agreed-upon instalments or to pay the principal amount, rendering the loan account non-performing.

If a borrower fails to pay dues in the form of principle and interest for 180 days, the asset is categorize as a non-performing asset (NPA). However, beginning in March 2004, if a borrower's dues are not paid for 90 days, the borrower would be placed in default. If a bank's advance or credit facilitated become non-performing asset then the bank classifies all credit facilities/advances given to that borrower as non-performing, regardless of whether some credit facilities/advances remain in good standing. An NPA, or non-performing asset, is a loan that does not generate revenue for a bank. It used to be mostly applicable to enterprises. However, with banks routinely providing consumer loans (including home, vehicle, personal, and education loans) and tight asset classification requirements, things have altered.

The loan is declared bad, or an NPA, if the borrower fails to make his equivalent monthly instalment (EMI) for 90 days. High nonperforming assets (NPAs) indicate poor financial health. This has far-reaching consequences for a bank, particularly in the stock and money markets. As a result, as soon as a loan becomes bad, the banks want it resolved or removed from their books.

Categories of Non-performing asset (NPA)

  1. Standard:
    It is when the borrower repays the principal and interest in a timely manner to the bank. Here, the crucial factor is that the arrear in the repayment of the principal and interest should not exceed 90 days at the end of the financial year.
     
  2. Non-Standard:
    These are non-performing assets for less than or equal to 12 months.
     
  3. Loss:
    Assets, which the bank's internal or external auditors, or the RBI have identified as a loss, but the lost amount is completely not written off the books. In other words these are those assets that is deemed uncollectible or have been identified of such low value that their continued status as a bankable asset is questionable even if there is some recovery potential.
     
  4. Doubtful:
    It is an asset is that has been a non-performing asset for more than a year. A loan categorized as dubious contains all of the flaws found in assets classed as sub-standard. Such assets have flaws to render full collection or liquidation. These are highly questionable and improbable based on currently known facts, conditions, and valuations.
     

Objects which results into development of Non-Performing Assets

Reason leading to arising of NPAs:
  • The economy's overall performance
    The amount of non-performing assets held by banks has a significance impact on the economy of the country. When the economy is in dark and recessionary phase borrowers, especially the commercial ones finds it difficult to repay loans.
     
  • Firms' cyclicality
    A Firm's cyclicality refers to a business cycle where the revenues are higher during the intervals of economic expansion and lower during the spans of economic contraction. The cyclicality of the firm has a direct impact on the banks' capacity to repay their loans. As a result, it affects the amount of non-performing assets held by banks.
     
  • Redundancy in terms of technology
    Technological redundancy is an issue that affects manufacturing companies' ability to repay their debts. The manufacturing entity's ability to raise cash has an impact on the company's ability to repay.
     
  • Intentional defaults and financial indiscipline
    The most common reason for non-payment of loans is intentional default. The majority of defaulters are uninterested in repaying their loans.
     

Non-Performing assets in India 2021 data

Because of different government activities, non-performing resources (NPAs) or terrible credits of banks have diminished by Rs 61,180 crore to Rs 8.34 lakh crore as of March 31, 2021. Toward the finish of March 2020, planned business banks (SCBs) had NPAs adding up to Rs 8.96 lakh crore on their asset reports. Gross NPAs of SCBs rose from Rs 3, 23,464 crore on 31.3.2015 to Rs 10, 36,187 crore on 31.3.2018, in view of straightforward acknowledgment of focused on resources as NPAs, as per RBI information on worldwide activities.

In addition, it have since declined to Rs 9, 33,779 crore on 31.3.2019, Rs. 8, 96,082 crore on 31.3.2018, because of the Government's procedure of acknowledgment, goal, recapitalization, and change. NPAs have diminished to Rs 7,39,541 crore on March 31, 2019, Rs 6,78,317 crore on March 31, 2020, and Rs 6,16,616 crore on March 31, 2021, because of the public authority's methodology of acknowledgment, goal, recapitalization, and changes (provisional data).[1]

Net NPAs have followed a comparative example, ascending from Rs 1,24,095 crore on 31.3.2014 to Rs 2,14,549 crore on 31.3.2015, Rs 3,24,372 crore on 31.3.2016, Rs 3,82,087 crore on 31.3.2017, and cresting at Rs 4,54,221 crore on 31.3.2018, prior to tumbling to Rs 2,84,689 crore on 31.3.2019, Rs 2,31,551 crore on 31.3.2020, lastly to (temporary information). Between December 2018 and December 2020, public area banks' (NPAs) diminished.

State Bank of India (SBI), which represents around 20% of state-claimed banks' gross nonperforming resources (NPAs) in Q3 FY21, revealed the most elevated resource quality improvement, with a terrible credit proportion of 4.8 percent, trailed by Punjab National Bank (PNB), which represents around 16% of NPAs and detailed a lower awful advance proportion of 13% in December 2020.[2]

Debt recovery

Given the overall tough climate, recovery is critical to the banking sector's stability. There should be no difficulty in claiming that Indian banks have done an outstanding job in containing non-performing assets (NPA). The bank's interest margin is also tied to recovery management. We must realize that cost and recovery management, backed by an enabling legislative environment, is the key to Indian banks' long-term health and competitiveness.

Without a doubt, enhancing recovery management in India will include expeditions as well as effective legal, institutional, and judicial activities. Banks are currently having significant issues collecting loans and enforcing securities attached to them. The current approach for recovering bank loans has resulted in a considerable amount of their capital tied up in non-productive assets whose value depreciates over time.

Legal Framework for debt recovery

The Banks and Financial Institutions Debt Recovery Act of 1993
The Narasimhan Committee supported the Tiwari Committee Report in 1991. The government adopted the cutting-edge recovery of Debts to Banks and Financial Institutions Act, in 1993, on the recommendations of Narasimhan Committee (Popularly known as the RDB Act). The RDB Act controlled the duties of the Debt Recovery Tribunal. It should be emphasized that an Act of Parliament, which was given the authority to do so by Article 247 of the Indian Constitution, established the Tribunal.

The RDB Act changed the way asset-recovery cases in India were handled, although it has been called into question on several occasions. The DRT's constitutionality was successfully challenged in the Delhi High Court in 1995, with the court ruling that the Tribunal could not function properly since it lacked a framework for submitting counterclaims. The RDB Act was subsequently revised, and the Supreme Court upheld the amended act's validity. Borrowers currently have the right to bring "counterclaims" under section 19 of the RDB Act.

What are Debt Recovery Tribunal?

In year 1993, the Recovery of Debts Due to Banks and Financial Institutions Act established the Debt recovery tribunal. It was created to give momentum in results of the pending cases and the execution of judgments. The bank legal actions against defaulting borrowers are dealt by these tribunals and are considered as quasi-judicial bodies. According to the stats of March 31, 2003 these tribunals had settled claims totaling Rs 314 billion and recovered Rs 79 billion.[3]

Recovery of bank debts had become a severe issue, as large quantities of public funds had been frozen due to defaulting borrowers. Chapter III of the Act establishes jurisdiction, power, and authority conferred on such tribunals and how to be exercised.[4] The Limitations Act's limitations will likewise apply to the Debt Recovery Tribunal.

According to Section 18 of the Act, only the High Court and the Supreme Court (exercising jurisdiction under Articles 226 and 227 of the Indian Constitution) shall have authority to hear cases involving the recovery of debts owed to banks and financial organizations. The Tribunal, on the other hand, can only hear cases worth more than '10 lakh. The Debt Recovery Tribunal can also hear appeals against secured creditors' actions brought under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI).

In the following regions, the Central Government has notified 33 tribunals. Chennai, Allahabad, Kolkata, Mumbai has three tribunals, Guwahati, Jaipur, Patna Ahmadabad, Bangalore, Ranchi, Cuttack, Coimbatore, Visakhapatnam, Nagpur, Lucknow, Hyderabad, Ernakulum, Chandigarh and Jabalpur has two tribunals.

What is Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002?

The SARFAESI Act has significant impact on the country's debt recovery dilemma. The most significant changes brought by the SARFAESI is that, it now allows banks (under Sec.13.4 SARFAESI) to take ownership of a loan account after it has been categorized and verified as a non-performing asset without having to go through the lengthy court process.

The Secured creditor might sell or rent the assets in security, or designate a receiver to deal with the assets in case it is marked as a non-performing resource, under the SARFAESI Act.

With the assistance of the Chief Judicial Magistrate, the bank can hold onto the asset in 60 days in the wake of serving the notification to the defaulter. In the event that a credit account is delegated a nonperforming resource (NPA) under the SARFAESI, the bank's approved authority can start the interaction. Despite the fact that the borrower has consented to pay the late sum, the bank has the privilege to look for reimbursement of the whole advance sum in addition to revenue.

Maybe than settling the record, the bank requests that the whole equilibrium be paid, and that all bank progresses be reimbursed on request. Nothing, nevertheless, can keep the bank from stopping the methods and proceeding with the advance record if the borrower has paid the late sum. All Scheduled Commercial Banks are dependent upon the SARFAESI Act. Following a Supreme Court judgment, Cooperative Banks are presently not ready to utilize SARFAESI to practice their powers.[5]

The Act was revised to permit a borrower to present a use of issue with the bank's approved authority preceding the bank's 60-day notice period. The Supreme Court insisted the sacred legitimacy of the SARFAESI Act in the Mardia Chemicals Case, yet thumped down Section 17(2) of the Act, which required the Tribunal conceded the store of 75% of the case before the allure. The SARFAESI Act was corrected after the Supreme Court choice.

As per this change, the Secured Creditor may possibly be qualified for claim the property if the purposes behind the borrower's rejection of the complaint are given to him. In the event that a bank has accepted control of a resource, an application can be documented with the Debt Recovery Tribunal with practically no deposits.

The Supreme Court further decided that defendant which is the borrower, his objection must be heard by the secured creditor and should explain the grounds for the non-acceptance of the objection. The bank must respond to the borrower/defaulter within seven days of receiving the objection application, stating why the charges imposed will continue.

If the bank rejects the objection, the borrower/defaulter may take the matter to the High Court under Article 227 of the Constitution of India. If the bank's objection is rejected and if Writ Court satisfied then the High Court may dismiss the writ application.

If the secured creditor is unable to recover the full amount due through the sale of the secured asset, the secured creditor may file a claim with the Debt Recovery Tribunal.

Lok Adalat

Under the Legal Services Authorities Act, 1987, Lok Adalat is a place where cases waiting in court or at a pre-litigation stage are adjudicated. Lok Adalat has shown to be a useful instrument for resolving debts on loans. The Indian Banks Association (IBA) releases instructions to its members for taking up matters with Lok Adalats for speedy settlement. Lok Adalats deals with the debt amount up to Rs.10 lakhs and higher in the dubious and loss category. It can handle both suit-filed and non-suit-filed accounts. Lok adalats are in operation at various times.

State, High Court, District, and Taluk levels are all conducted at the same time and in the same order as shown below:
  1. At least once a month, Mega Lok Adalats are held at District Court Centers.
  2. Weekly Lok Adalats at all Court Centers on a regular basis every week.
  3. National Lok Adalat: This is held bi-monthly generally on the second Saturday of each month or on any other day as specified by the National Legal Services Authority (NALSA).

What does Insolvency Resolution Process mean?

Corporate debtors and partnership/Individual units are both eligible for insolvency resolution via IBC. IRP for individual units begins with the debtors' drafting of a repayment plan. Debt recovery tribunal is the adjudicating authority. It binds the debtor and creditor to commence the procedure if creditors accept the repayment plan; otherwise, the debtor or creditor can file for a bankruptcy order. IRP provides a collective framework for lenders to cope with a corporate debtor's overall distressed situation. Recovery, security enforcement, and debt restructuring are all part of the process. It begins with the filing of an insolvency petition with the NCLT.

Following NCLT's appointment of an insolvency professional who acts as a creditors' agent and defaulting debtors' responsibility is passed to the insolvency professional. It permits creditors to monitor the business in order to save promoters assets to be liquefied. The resolution professional assembles a creditor committee in order to reach a consensus. The professional generally recommends a revival plan or liquidation within the 180-day time limit. The decision of the creditors' committee binds the corporate debtor and all of its creditors.

Conclusion
The number of credit defaults is rising every day. Despite the fact that numerous laws have been passed and repeated efforts have been made to underline the necessity of recovery, the number of nonperforming assets (NPAs) continues to rise. The annual rate of recovery from the amount engaged in the existing channels is not sufficient, according to this analysis. In addition, all channels have seen a decrease in NPA recovery since 2014.

The long run of cases in DRTs has been noted to have a direct influence on NPA recovery, and Bankers believe that the adoption of the SARFAESI Act will address these difficulties and offer necessary strength to the banks to expedite dues collection. Cases that are quickly resolved keep bankers away from the provisional load. After expanding the number of DRT centers, NPA recovery improved.

The newly adopted bankruptcy framework IBC 2016 will aid in the prompt resolution of business defaults. The efficacy of recovery channels is unavoidable in halting the rise of NPAs and preventing NPA vulnerabilities. The nation's largest burden of nonperforming assets (NPA) might be readily remedied by improving the functioning of existing channels.

End-Notes:
  1. https://www.business-standard.com/article/finance/bad-loans-decline-to-rs-8-34-trillion-at-march-end-2021-minister-121072600778_1.html
  2. https://www.livemint.com/industry/banking/bad-loans-declined-further-in-december-quarter-says-care-ratings-11616485003596.html
  3. https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/2087/SVisariaJMPaperJan2005.pdf
  4. Section 17, 17A, 18 The Recovery Of Debts Due To Banks And Financial Institutions Act, 1993
  5. Greater Bombay Cooperative Bank Ltd. v. United Yarn Tex. Pvt. Ltd. and Ors. 2007 AIR SCW 232

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