INDIA BUSINESS WORLD - FEBRUARY 16^th - FEBRUARY 29^th - 2008

SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST (SRFAESI) ACT PUTS BANKS ON FAST TRACK TO DEBT RECOVERY

BANKS have been able to recover over 41% of the bad debts for which proceedings were initiated in 2006-07 under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act. The Act has been responsible for the bulk of the bad loan recovery in the previous fiscal, helping banks improve ratio of non-performing assets (NPAs) to total assets.

The SRFAESI Act 2002 has allowed banks to attach defaulters’ properties after giving 60 days’ notice. Although legal issues have cropped up regarding attaching and selling defaulters’ properties, the threat of dispossession has propelled many borrowers to pay up. In 2006-07, bad loans of Rs 9,058 crore were referred to the SRFAESI Act, of which Rs 3,749 crore were recovered. Debt recovery tribunal mopups were marginally lower at Rs 3,463 crore although the loans referred to the tribunals were higher at Rs 9,156 crore.

According to the Economic Survey, the increase in options for recovery of loans has helped bring down the NPAs. “The gross NPAs of scheduled commercial banks as a proportion of total assets declined to 1.5% in 2006-07 from 1.8% in the previous year.” The banks have also managed to pare the absolute level of bad loans. In 2006-07, the amount recovered and written off (Rs 26,234 crore) was higher than the fresh addition of bad loans (Rs 26,211crore). In absolute terms, gross NPAs, which declined by Rs 8,276 crore in 2005-06, fell further by Rs 611 crore in 2006-07.

The Act also enabled the creation of asset reconstruction companies, which helped banks clean up their balance sheets. Asset reconstruction companies buy NPAs from banks and specialise in recovery of bad loans either through resolution or selling assets. While the Act helped lift the deadweight of large corporate bad loans from their books, banks have been able to get rid of lakhs of small default cases through Lok Adalats, people’s courts established by the government for settlement of disputes through conciliation and compromise.

Banks referred as many as 1.6 lakh loan default cases to the lok adalats. The second largest number of cases for loan recovery were referred to the SRAFESI Act (760, 1780) followed by debt recovery tribunals (4,028). Banks had referred loans amounting to Rs 9,156 crore to debt recovery tribunals, of which they managed to recover Rs 3,463 crore, representing 38% of the loans.

Asset quality improved among various segments of lenders in the financial sector in 2006-07. Non-banking finance companies saw their asset quality improve at a much better rate than banks. Gross NPAs and net NPAs as percentage of gross advances of reporting NBFCs declined to 1.9% and 0.4%, respectively, in March 2007 as compared to 3.6% and 0.5%, respectively in March 2006. The quality of loans advanced by NBFCs improved even as their loan books registered a sharp growth of 29.8% (Rs 49,097 crore) in March 2007 from Rs 37,828 crore in March 2006.