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SARFAESI Act In INDIA
IILM GSM (BATCH: 2011-13)
SUBMITTED TO:
PROF. F. M. A. KHAN
SUBMITTED BY:
KRISHNENDU CHOWDHURY
ROLL NO. – FT-FS(11)-324
PROGRAM- PGDM-FS
SECTION- ‘D’
IILM GSM
Abstract
NPAs exhibit a virus effect on banks and affect liquidity, profitability and
performance of banks. At macro level, NPA affect stability of banking and leads to
financial shocks in economy. The post-liberalization period saw remarkable
changes in Indian banking sector, deliberated to improve efficiency and to align
Indian banking with international standards. The research evaluates the
management of NPA and explains the effectiveness of recovery management
measures in Indian Scheduled Commercial Banks (SCBs), in particular
SARFAESI Act during 2003-04 to 2010-11.In addition to descriptive statistical
tools, correlation and regression study is undertaken to evaluate and explain
relationship between incidence of NPA and its recovery of NPAs. The empirical
results showed improvement in recovery of NPA contributed mainly by
SARFAESI Act and DRTs during the period. It may be observed from the study
that SARFAESI Act provided much needed momentum to recovery management.
Introduction
With an aim to provide a structured platform to the Banking sector for managing
its mounting NPA stocks and keep pace with international financial institutions,
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act was put in place to allow banks and FIs to take
possession of securities and sell them. As stated in the Act, it has “enabled banks
and FIs to realise long-term assets, manage problems of liquidity, asset-liability
mismatches and improve recovery by taking possession of securities, sell them
and reduce non performing assets (NPAs) by adopting measures for recovery or
reconstruction.” Prior to the Act, the legal framework relating to commercial
transactions lagged behind the rapidly changing commercial practices and
financial sector reforms, which led to slow recovery of defaulting loans and
mounting levels of NPAs of banks and financial institutions.
The SARFAESI Act has been largely perceived as facilitating asset recovery and
reconstruction. Since Independence, the Government has adopted several ad-hoc
measures to tackle sickness among financial institutions, foremost through
nationalisation of banks and relief measures. Over the course of time, the
Government has put in place various mechanisms for cleaning the banking system
from the menace of NPAs and revival of a healthy financial and banking sector.
Some of the notable measures in this regard include:
Sick Industrial Companies (Special Provisions) Act, 1985 or SICA: To
examine and recommend remedy for high industrial sickness in the eighties,
the Tiwari committee was set up by the Government. It was to suggest a
comprehensive legislation to deal with the problem of industrial sickness.
The committee suggested the need for special legislation for speedy revival
of sick units or winding up of unviable ones and setting up of quasi-judicial
body namely; Board for Industrial and Financial Reconstruction (BIFR) and
The Appellate Authority for Industrial and Financial Reconstruction
(AAIRFR) and their benches. Thus in 1985, the SICA came into existence
and BIFR started functioning from 1987.
The objective of SICA was to proactively determine or identify the
sick/potentially sick companies and enforcement of preventive, remedial or
other measures with respect to these companies. Measures adopted included
legal, financial restructuring as well as management overhaul. However, the
BIFR SARFAESI ACT 2002: An Assessment process was cumbersome
and unmanageable to some extent. The system was not favourable for the
banking sector as it provided a sort of shield to the defaulting companies.
Recoveries of Debts due to Banks and Financial Institutions (RDDBFI) Act,
1993: The procedure for recovery of debts to the banks and financial
institutions resulted in significant portions of funds getting locked. The need
for a speedy recovery mechanism through which dues to the banks and
financial institutions could be realised was felt. Different committees set up
to look into this, suggested formation of Special Tribunals for recovery of
overdue debts of the banks and financial institutions by following a
summary procedure. For the effective and speedy recovery of bad loans, the
RDDBFI Act was passed suggesting a special Debt Recovery Tribunal to be
set up for the recovery of NPA. However, this act also could not speed up
the recovery of bad loans, and the stringent requirements rendered the
attachment and foreclosure of the assets given as security for the loan as
ineffective.
Corporate Debt Restructuring (CDR) System: Companies sometimes are
found to be in financial troubles for factors beyond their control and also due
to certain internal reasons. For the revival of such businesses, as well as, for
the security of the funds lent by the banks and FIs, timely support through
restructuring in genuine cases was required. With this view, a CDR system
was established with the objective to ensure timely and transparent
restructuring of corporate debts of viable entities facing problems, which are
outside the purview of BIFR, DRT and other legal proceedings. In
particular, the system aimed at preserving viable corporate/businesses that
are impacted by certain internal and external factors, thus minimising the
losses to the creditors and other stakeholders. The system has addressed the
problems due to the rise of NPAs. Although CDR has been effective, it
largely takes care of the interest of bankers and ignores (to some extent) the
interests of borrower’s stakeholders. The secured lenders like banks and FIs,
through CDR merely, address the financial structure of the company by
deferring the loan repayment and aligning interest rate payments to suit
company’s cash flows. The banks do not go for a one time large write-off of
loans in initial stages.
SARFAESI ACT 2002: By the late 1990s, rising level of Bank NPAs raised
concerns and Committees like the Narasimham Committee II and
Andhyarujina Committee which were constituted for examining banking
sector reforms considered the need for changes in the legal system to address
the issue of NPAs. These committees suggested a new legislation for
securitisation, and empowering banks and FIs to take possession of the
securities and sell them without the intervention of the court and without
allowing borrowers to take shelter under provisions of SICA/BIFR. Acting
on these suggestions, the SARFAESI Act, was passed in 2002 to legalise
securitisation and reconstruction of financial assets and enforcement of
security interest. The act envisaged the formation of asset reconstruction
companies (ARCs)/ Securitisation Companies (SCs).
Provisions of the SARFAESI Act
The Act has made provisions for registration and regulation of securitisation
companies or reconstruction companies by the RBI, facilitate securitisation of
financial assets of banks, empower SCs/ARCs to raise funds by issuing security
receipts to qualified institutional buyers (QIBs), empowering banks and FIs to
take possession of securities given for financial assistance and sell or lease the
same to take over management in the event of default.
The Act provides three alternative methods for recovery of NPAs, namely:
Securitisation: It means issue of security by raising of receipts or funds by
SCs/ARCs. A securitisation company or reconstruction company may raise
funds from the QIBs by forming schemes for acquiring financial assets. The
SC/ARC shall keep and maintain separate and distinct accounts in respect of
each such scheme for every financial asset acquired, out of investments
made by a QIB and ensure that realisations of such financial asset is held
and applied towards redemption of investments and payment of returns
assured on such investments under the relevant scheme.
Asset Reconstruction: The SCs/ARCs for the purpose of asset reconstruction
should provide for any one or more of the following measures:
• the proper management of the business of the borrower, by change in, or
take over of, the management of the business of the borrower
• the sale or lease of a part or whole of the business of the borrower
• rescheduling of payment of debts payable by the borrower
• enforcement of security interest in accordance with the provisions of this
Act
• settlement of dues payable by the borrower
• taking possession of secured assets in accordance with the provisions of
this Act.
Exemption from registration of security receipt: The Act also provides,
notwithstanding anything contained in the Registration Act, 1908, for
enforcement of security without Court intervention: (a) any security receipt
issued by the SC or ARC, as the case may be, under section 7 of the Act, and
not creating, declaring, assigning, limiting or extinguishing any right, title or
interest to or in immovable property except in so far as it entitles the holder
of the security receipt to an undivided interest afforded by a registered
instrument; or (b) any transfer of security receipts, shall not require
compulsory registration.
The Guidelines for SCs/ARCs registered with the RBI are:
act as an agent for any bank or FI for the purpose of recovering their dues
from the borrower on payment of such fees or charges
act as a manager between the parties, without raising a financial liability for
itself;
act as receiver if appointed by any court or tribunal.
Apart from above functions any SC/ARC cannot commence or carryout other
business without the prior approval of RBI.
The Securitisation Companies and Reconstruction Companies (Reserve
Bank) Guidelines and Directions, 2003
The Reserve Bank of India issued guidelines and directions relating to
registration, measures of ARCs, functions of the company, prudential norms,
acquisition of financial assets and related matters under the powers conferred by
the SARFAESI Act, 2002.
Defining NPAs: Non-performing Asset (NPA) means an asset for which:
Interest or principal (or instalment) is overdue for a period of 180 days or
more from the date of acquisition or the due date as per contract between
the borrower and the originator, whichever is later;
interest or principal (or instalment) is overdue for a period of 180 days or
more from the date fixed for receipt thereof in the plan formulated for
realisation of the assets
interest or principal (or instalment) is overdue on expiry of the planning
period, where no plan is formulated for realisation of the
any other receivable, if it is overdue for a period of 180 days or more in the
books of the SC or ARC.
Provided that the Board of Directors of a SC or ARC may, on default by the
borrower, classify an asset as a NPA even earlier than the period mentioned
above.
Registration:
Every SC or ARC shall apply for registration and obtain a certificate of
registration from the RBI as provided in SARFAESI Act;
A Securitisation Company or Reconstruction Company, which has obtained
a certificate of registration issued by RBI can undertake both securitisation
and asset reconstruction activities;
Any entity not registered with RBI under SARFAESI Act may conduct the
business of securitisation or asset reconstruction outside the purview of the
Act.
Net worth of Securitisation Company or Reconstruction Company: Net worth is
aggregate of paid up equity capital, paid up preference capital, reserves and
surplus excluding revaluation reserve, as reduced by debit balance on P&L
account, miscellaneous expenditure (to the extent not written off ), intangible
assets, diminution in value of investments/short provision against NPA and further
reduced by shares acquired in SC/ARC and deductions due to auditor
qualifications. This is also called Owned Fund. Every Securitisation Company or
Reconstruction Company seeking the RBI’s registration under SARFAESI Act,
shall have a minimum Owned Fund of Rs 20 mn.
Permissible Business: A Securitisation Company or Reconstruction Company
shall commence/undertake only the securitisation and asset reconstruction
activities and the functions provided for in Section 10 of the SARFAESI Act. It
cannot raise deposits.
Some broad guidelines pertaining to Asset Reconstruction are as follows:
Acquisition of Financial Assets: With the approval of its Board of Directors,
every SC/ARC is required to frame, a ‘Financial Asset Acquisition Policy’,
within 90 days of grant of Certificate of Registration, clearly laying down
policies and guidelines which define the; norms, type, profile and procedure
for acquisition of assets,
valuation procedure for assets having realisable value, which could be
reasonably estimated and independently valued;
plan for realisation of asset acquired for reconstruction
The Board has powers to approve policy changes and delegate powers to
committee for taking decisions on policy/proposals on asset acquisition.
Change or take over of Management/ Sale or Lease of Business of the
Borrower: No SC/ARC can takeover/ change the management of business
of the borrower or sale/lease part/whole of the borrower’s business until the
RBI issues necessary guidelines in this behalf.
Rescheduling of Debt/ Settlement of dues payable by borrower: A policy for
rescheduling the debt of borrowers should be framed laying the broad
parameters and with the approval of the Board of Directors. The proposals
should to be in line with the acceptable business plan, projected earnings/
cash flows of the borrower, but without affecting the asset liability
management of the SC/ARC or commitments given to investors. Similarly,
there should be a policy for settlement of dues with borrowers.
Enforcement of Security Interest: For the sale of secured asset as specified
under the SARFAESI Act, a SC/ARC may itself acquire the secured assets,
either for its own use or for resale, only if the sale is conducted through a
public auction.
Realisation Plan: Within the planning period a realisation plan should be
formulated providing for one or more of the measures including
settlement/rescheduling of the debts payable by borrower, enforcement of
security interest, or change/takeover of management or sale/lease of a part
or entire business. The plan should clearly define the steps for
reconstruction of asset within a specified time, which should not exceed
five years from the date of acquisition.
Broad guidelines with regards to Securitisation are as follows:
Issue of security receipts: A SC/ARC can set up trust(s), for issuing security
receipts to QIBs, as specified under SARFAESI Act. The company shall
transfer the assets to the trust at a price at which the assets were acquired
from the originator. The trusteeship remains with the company and a policy
is formulated for issue of security receipts.
Deployment of funds: The company can sponsor or partner a JV for another
SC/ARC through investment in equity capital. The surplus available can be
deployed in G-Sec or deposits in SCBs.
Asset Classification: The assets of SC/ARC should be classified as Standard
or NPAs. The company shall also make provisions for NPAs.
Issues under the SARFAESI
Right of Title
A securitisation receipt (SR) gives its holder a right of title or interest in the
financial assets included in securitisation. This definition holds good for
securitisation structures where the securities issued are referred to as ‘Pass
through Securities’. The same definition is not legally inadequate in case of ‘Pay
through Securities’ with different tranches.
Thin Investor Base
The SARFAESI Act has been structured to enable security receipts (SR) to be
issued and held by Qualified Institutional Buyers (QIBs). It does not include
NBFC or other bodies unless specified by the Central Government as a financial
institution (FI). For expanding the market for SR, there is a need for increasing the
investor base. In order to deepen the market for SR there is a need to include more
buyer categories.
Investor Appetite
Demand for securities is restricted to short tenor papers and highest ratings. Also,
it has remained restricted to senior tranches carrying highest ratings, while the
junior tranches are retained by the originators as unrated pieces. This can be
attributed to the underdeveloped nature of the Indian market and poor awareness
as regards the process of securitisation.
Risk Management in Securitisation
The various risks involved in securitisation are given below:
Credit Risk: The risk of non-payment of principal and/or interest to investors can
be at two levels: SPV and the underlying assets. Since the SPV is normally
structured to have no other activity apart from the asset pool sold by the
originator, the credit risk principally lies with the underlying asset pool. A careful
analysis of the underlying credit quality of the obligors and the correlation
between the obligors needs to be carried out to ascertain the probability of default
of the asset pool. A well diversified asset portfolio can significantly reduce the
simultaneous occurrence of default.
Sovereign Risk: In case of cross-border securitisation transactions where the
assets and investors belong to different countries, there is a risk to the investor in
the form of non-payment or imposition of additional taxes on the income
repatriation. This risk can be mitigated by having a foreign guarantor or by
structuring the SPV in an offshore location or have an neutral country of
jurisdiction
Collateral deterioration Risk: Sometimes the collateral against which credit is
sanctioned to the obligor may undergo a severe deterioration. When this coincides
with a default by the obligor then there is a severe risk of non-payment to the
investors. A recent example of this is the sub-prime crisis in the US which is
explained in detail in the following sections.
Legal Risk: Securitisation transactions hinge on a very important principle of
“bankruptcy remoteness” of the SPV from the sponsor. Structuring the asset
transfer and the legal structure of the SPV are key points that determine if the SPV
can uphold its right over the underlying assets, if the obligor declare bankruptcy or
undergoes liquidation.
Prepayment Risk: Payments made in excess of the scheduled principal payments
are called prepayments. Prepayments occur due to a change in the macro-
economic or competitive industry situation. For example in case of residential
mortgages, when interest rates go down, individuals may prefer to refinance their
fixed rate mortgage at lower interest rates. Competitors offering better terms could
also be a reason for prepayment. In a declining interest rate regime prepayment
poses an interest rate risk to the investors as they have to reinvest the proceedings
at a lower interest rate. This problem is more severe in case of investors holding
long term bonds. This can be mitigated by structuring the tranches such that
prepayments are used to pay off the principal and interest of short-term bonds.
Servicer Performance Risk: The servicer performs important tasks of collecting
principal and interest, keeping a tab on delinquency, maintains statistics of
payment, disseminating the same to investors and other administrative tasks. The
failure of the servicer in carrying out its function can seriously affect payments to
the investors.
Swap Counterparty Risk: Some securitisation transactions are so structured
wherein the floating rate payments of obligors are converted into fixed payments
using swaps. Failure on the part of the swap counterparty can affect the stability of
cash flows of the investors.
Financial Guarantor Risk: Sometime external credit protection in the form of
insurance or guarantee is provided by an external agency. Guarantor failure can
adversely impact the stability of cash flows to the investors.
Literature Review
In Indian banking, the accumulation of NPA and its impact on profitability and
asset quality received attention during 1990’s. Financial Liberalization is
considered as important requirement for financial sector growth. Financial
liberalization covers various dimensions of financial sector that as noted by
Shehzada and Haan (2008) includes measure relating to (i) credit controls and
reserve requirements, (ii) interest rate controls, (iii) entry barriers, (iv) state
ownership in the banking sector, (v) capital account restrictions, (vi) prudential
regulation and supervision of the banking sector, and (vii) securities market policy.
To revive Indian Banking and promote a viable and efficient banking in line with
international standards, various measures were initiated based on recommendations
of Narasimham Committee (1991 and 1998) and Verma Committee. Chipalkatti
and Rishi (2006) noted that the banking reforms emerged from the
recommendations proposed by the Narasimhan Committee Report (1991)
advocated a move to a more market oriented banking system, which would operate
in an environment of prudential regulation, transparent accounting, and stricter
capital adequacy norms based on the Basel Capital accord. Nandy, D (2010)
remarked that the measure of NPA helps to assess the efficiency in allocation of
resources made by banks to productive sectors.
The importance of a sound banking system and the role of NPA to create distress
in banking system is discussed in many literatures.
Research on NPA including Karunakar et al (2008) noted that apart from flaws in
credit assessment of borrowers due to political economy considerations, laxities in
legal system, accounting disclosure practices, recession and willful default results
in accumulation of NPA. Indian banking has improved significantly and regulatory
authorities and banks initiated various measures to manage various causes of NPA.
Caprio, G and Klingebiel, D (1996) observed that the problem of NPAs arise either
due to the bad management by banks or due to the external factor like
unanticipated shocks, business cycle and natural calamities. Still, many of the
reasons mentioned in previous researches still remains and includes Reddy, PK
(2002) who noted that the problem India faces is not lack of strict prudential norms
but;
The reporting and NPA disclosure norms forced banks to strengthen their recovery
management measures. Management of NPA accounts hence plays a vital role in
bank’s stability and growth. It highlights the quality of loan assets, the liquidity
and performance of bank. NPA indicate two major flaws in banking and economy.
The additions to NPA component indicate the strength of credit risk management
to a great extent. Higher additions to NPA thus indicate poor credit risk
management of bank. The overhang component of NPA indicates the strength of
recovery management measures of the bank, which in turn is closely related with
the effectiveness of legal measures available for NPA recovery.
The Indian banking sector in post-liberalization period witnessed considered
progress on management of NPA and incorporated prudential measures for income
recognition, asset-classification, provisioning, etc. As rightly pointed out by
Chaudhary and Sharma (2011) major changes took place in the functioning of
Banks in India only after liberalization, globalization and privatization. Banking
which were completely preoccupied to satisfy the development priorities of
government till 1991 showed signs of operational inefficiency. One of the notable
signs of operational inefficiency was the poor quality of assets and alarming level
on NPA. This necessitated the implementation of various prudential norms to
improve the banking sector, which was felt not only in Indian banking sector, but
banking sector across the world.
The prevalence of NPA cannot be completely eliminated by adopting prudential
norms and effective risk management practices. Ghosh, S (2005) pointed out that
the quality of loan portfolio of financial institutions is widely perceived to be
directly dependent upon the financial health and profitability of the institutions’
borrowers, particularly the non-financial enterprise sector. Sharma, M (2005)
observed that more essential step to resolve NPA problem is timeliness of
measures as it would save the system from a greater damage, obviating serious
macroeconomic costs. Various measures and recovery mechanisms were initiated
in Indian banking system in post-liberalization period. NPA cannot be eliminated
in banking, but it can be controlled through various proactive and reactive
measures. The proactive measures includes effective risk assessment, credit
evaluation and monitoring techniques while reactive measures includes various
recovery measures that include Asset Reconstruction Companies (ARCs), Debt
Recovery Tribunals (DRTs), Lok Adalats, SARFAESI Act etc.
SAREAEST facilitated securitization of financial assets of bank and FIs or power
to take possession of securities and sell them. The SARFAESI Act 2002 allows
banks and other financial institutions to recover NPA accounts without the
intervention of the Court. It provided three different methods for recovery of non-
performing assets, namely: -
Thus it may be observed that SARFAESI helped to toughen the banking sector and
allows them to securitize recovery of NPAs. Unny, M.P (2010) based on a review
on recovery management practices emphasized that SARFAESI Act brought a
greater change in the debt recovery scenario in India. The major change brought in
by SARFAESI is that it allowed the banks to take over possession from the
defaulter, without going through the stringent court procedure, once the loan
account has been categorized as a Non-Performing Asset.Pereira, C (2004)
observed that the SARFAESI Act facilitated the establishment of ARCs. Ahmed,
J.U (2008) based on a study on NPA recovery management explained that among
the various channels of recovery available to banks for dealing with bad loans, the
debt recovery tribunals and SARFAESI Act has been the most effective in terms
of the amount recovered.
Research Objectives
This research investigates the trend in management of NPA with specific focus on
three measures, i.e., SARFAESI Act. The study infers based on statistical
information on recovery of NPA accounts using the above three measures during
the period 2003-04 to 2010-11. In addition to the analysis of trend in recovery of
NPA accounts, the study also focus on the relationship between various recovery
measures and sector wise NPA during the mentioned period.
Methodology
To achieve the stated objectives, the research utilized descriptive statistics, average
annual growth rate (AAG).
Data Analysis
4.1 Descriptive Statistics – NPA Sector Wise (2003-04 to 2010-11) NPA emanate from various sectors, classified into priority sector, non-priority
sector and public sector. Priority sector includes agriculture, Micro and Small
Enterprises and Other priority sector.
Table No. 1 showed descriptive statistics highlighting the movement of NPA
during 2004-04 to 2010-11. The statistic on sector wise NPA showed equal
importance of both priority and non-priority sector in total NPA of SCBs in India.
51% of total NPA arise from non-priority sector during the period. It may be
observed from the standard deviation of descriptive statistic that non-priority sector
showed a higher standard deviation indicating a widely disbursed NPA trend
during selected period. A comparison between priority sector and non-priority
sector NPA showed higher contribution of non-priority sector NPA (Average –
Rs.33,292 crores, Total – Rs.266,339 crores), compared to priority sector NPA
(Average – Rs.30,517 crores, Total – Rs.244,137 crores) during the period. It
refutes the earlier statements made by bankers that priority sector is the major
contributor for NPA. Also, it may be observed that the contribution of agriculture
sector in total priority sector NPA (Average – Rs.9,175 crores, Total – Rs.73,400
crores) is less compared to Small Scale sector (Average – Rs.9,559 crores, Total –
Rs.76,472 crores) and other priority sector NPA (Average – Rs.11,783 crores,
Total – Rs.94,265 crores).
Recovery of NPA through DRT, Lok Adalat and SARFAESI Act SARFAESI Act facilitated recovery of NPA accounts better than other modes of
recovery, as may be observed from the descriptive statistics. Bankers in India often
complained about the legal impediments for recovery of NPA accounts. This is
addressed by enactment of SARFAESI Act. During the study period, an average of
Rs.4370 crores were recovered using SARFAESI Act, while DRT and Lok Adalat
enabled recovery of Rs.3,301 crores and Rs.141 crores respectively. During the
study period, SARFAESI Act enabled highest recovery of NPA accounts, totaling
Rs.34,960 crores, while recovery through DRT and Lok Adalat stands Rs.26,409
crores and Rs.1,126 crores respectively.
Table No. 2 summarize the descriptive statistic on NPA recovery through
SARFAESI Act, DRTs and Lok Adalats. The statistics showed that SARFAESI
Act provided a more efficient tool for recovery management in Indian SCBs. Debt
Recovery Tribunals stood second with a total recovery of Rs.26,409 crores during
the period.
NPA (Sector wise) and Recovery (2003-04 to 2010-11)
It may be observed from Table No. 3 that recovery of NPA account increased
during study period indicated in higher annual average growth (AAG) rate of
amount recovered. While total NPA grew by an AAG rate of 7.43% during the
study period, the recovery of NPA accounts increased by 13.26 (recovery through
Lok Adalat), 13.26 (Recovery through DRT) and 49.37 (Recovery through
SARFAESI Act. Among the contributors of NPA, agriculture sector reported
higher AAG rate of 15.47, while small scale sector stand second reporting an AAG
rate of 9.74.
Major Findings The descriptive statistics showed that non-priority sector contribute more NPA in
total NPA of Indian SCBs in the study period. This refutes earlier observation
made by bankers regarding the significance of priority sector on total NPA of
banks. The post-liberalization period saw major reforms in banking sector that
include relaxing norms for priority sector lending. This might have resulted in
more non-priority sector NPA in Indian SCBs.
Another major finding is the correlation between total priority sector NPA and
recovery using SARFAESI Act. It may be observed from the correlation study and
regression study that priority sector NPA is an important predictor to the
movement of total recovery using SARFAESI Act. Among the various recovery
modes, recovery using SARFAESI Act contributed significant change in
management of NPAs in Indian banking sector. It is right to point out that
SARFAESI Act contributed landmark change in NPA recovery management.
It may also be inferred that one of the significant reason for the slow pace of
growth of NPA since 2003-04 is the effectiveness of recovery measures, except for
the fact that there has been an increased growth of NPA since 2007 due to global
financial crisis and due to the recessionary pressures. Among the various recovery
measures SARFAESI Act provided much needed momentum and eased the legal
hurdles to recover NPA accounts. It does not lead to inference that recovery of
NPA in absolute amount increased at a faster rate than incidence of NPA. A
comparison of the average of ratio of recovery as a percentage of various NPA
indicators highlighted the need to further enhance the recovery process. This
suggestion is based on the observation that the recovery as a percentage of Gross
NPA, Net NPA etc is still average around 10% to 20%.
Conclusion
My attempt in this research to evaluate management of NPA in Indian SCBs
focused mainly on the recovery management measures since 2003-04. In specific
terms, the study evaluated the trend in movement of total NPA – sector wise and
recovery of NPA accounts through SARFAESI Act. It may be observed from the
growth rate of major recovery measures that it increased at a faster rate than NPA
during the study period. Among the recovery measures, SARFAESI Act provided
much needed momentum to improve the recovery measures. This trend is good for
Indian banking sector that require strong and stringent measures to tackle the
presence of NPA to maintain new standards, to grow and improve, to remain
vibrant and viable in Indian economy.
Table No. 1: Descriptive Statistic – NPA Sector wise (2003-04 to 2010-
11) Amount in Rs. Crores
Agricult
ure
Micro &
Small
Enterpris
e
Others Priority
Sector
Public
Sector
Non-
Priority
Sector
Total
Minim
um
6,718 6,488 8,523 24,658 299 21,511 47,841
Maxim
um
16,660 15,990 14,559 47,209 685 46,873 94,513
Sum 73,400 76,472 94,265 244,13
7
3,818 266,33
9
514,29
1
Statistics Mean 9,175 9,559 11,783 30,517 477 33,292 64,286
Median 7,709 8,337 12,417 27,465 493 31,956 58,498
Std
Deviati
on
3,283 3,354 2,251 7,764 121 9,396 16,385
Standar
d Error
1,161 1,186 796 2,745 43 3,322 5,793
Kurtosi
s
4.588 0.626 -1.524 2.814 0.244 -1.424 0.157
Skewne
ss
2.077 1.199 -0.420 1.788 0.139 0.310 1.041
Range 9,942 9,502 6,037 22,551 386 25,362 46,672
Table No. 2: Descriptive
Statistics – Recovery of NPA
Accounts Amount in Crores
Lok
Adalat
DRT SARFAE
SI Act Minim
um
96 2,117 1,156
Maxi
mum
223 4,710 11,561
Sum 1,126 26,409 34,960
Statistics Media
n
131 3,241 3,866
Standa
rd
Deviat
ion
43 783 3,103
Mean 141 3,301 4,370
Standa
rd
Error
15 277 1,097
Kurtos
is
0.485 0.759 5.443
Skewn
ess
1.013 0.449 2.102
Range 127 2,593 10,405
BIBILIOGRAPHY
http://www.moneycontrol.com/news/icra-reports/rbis-final-
guidelinessecuritisation-icra_708770.html
http://www.rbi.org.in
http://www.dnb.co.in/
Indian Financial Services
http://www.rediff.com/money/2006/sep/16spec.htm
http://www.finance-innovation.org/risk09/work/6450490.pdf.
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