NPA recovery mechanism in India. Banking, NPA, Lok Adalat, DRT, SARFAESI, IBC Code

1. Recovery Methods of
NPA(Non Performing
Assets of Banks) in India
Praveen Sajjanapu

2.  Overview:
 Introduction
 NPA problem in Banking Sector
 Measures taken by Government and RBI
 Recovery Mechanism in India
 Conclusion

3.  Importance of Banking infrastructure:
 Banks play crucial role in the process of economic development of any
country that is why the availability of banking infrastructure is considered
as pre condition for rapid and balanced development of the country.
 The impact of banking system on economic growth can be seen by
enhancing resources to those sectors which are employment intensive and
have greater contribution to GDP (Gross Domestic Product) of the country.
 Importance of lending credit by banks:
 Adequate and cheap credit is a boon for the economic development of a
country.
 Economic progress can be easily achieved by providing credit to farmers,
industries, traders and businesses. This sector is termed as priority sector.
 But in recent times the default in loans which is termed as non performing
assets increased in priority sector.
 NPAs became a threat to Banking industry.

4.  What is Non Performing Asset (NPA)?
 Lending of Bank may be termed as Asset. When the asset ceases to generate
income it becomes Non-Performing Asset.
 A Non Performing Asset was defined as a credit facility in respect of which
the interest / and instalment of principal has remained ‘past due’ for a
specified period of time. Presently it is 90 days from the date of sanctioning
the loan.
 Classification of NPA.
Classification of NPA Criteria
Sub standard Assets Assets which have remained for a period of less than
or equal to 12 months.
Doubtful Assets If the asset is in Sub standard stage for 12 months.
Loss Assets These assets are of little value, it can no longer
continue as a bankable asset, there could be some
recovery value.

5. 10.36
9.33
8.96
8.34
5.41
11.6
9.1
8.2
7.5
5.9
0
2
4
6
8
10
12
14
Jan-18 Jan-19 Jan-20 Jan-21 Jan-22
GNPAs
and
GNPA
as
percentage
of
advances
Year
Gross NPAs and GNPA as percentage of gross advances during 2018-
2022
Gross NPAs (Rs. trillion)^ GNPAs as percent of Gross advances*

6. 24094
44817
58227
93152
119811
163920
177860
385961
327593
488175
210531
238464
0
2897
5884
2347
7187
13794
50978
59444
81990
129503
183168
178305
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
ADDITION IN GROSS NPAS AND WRITE OFFS
DURING 2008-2020
Addition in Gross NPAs (Amount in Rs. Crores) Write Offs (Amount in Rs. Crores)

7. 10.1
9.6
10.2
17.3
12.4
9.9
6.3
6.9 6.7
1.8 1.7
2.5
0
2
4
6
8
10
12
14
16
18
20
2019 2020 2021
Sectorwise GNPA percentage during 2019-2021
Agriculture Industry Services Retail

8.  Impact of Non Performing Asset:
 Banks won’t have sufficient funds for other development projects which will
impact the economy
 To maintain a profit margin, banks will be forced to increase interest rates.
 Due to the curb in further investments, it may lead to the rise of unemployment.
 Reasons behind rise of NPAs in India:
 In the period from 2004 to 2009, there was a huge growth in the economy,
which led to firms taking bank loans very aggressively.
 Most of the investment was in infrastructure sectors like roads, power, aviation,
steel
 Laxity in lending norms by the banks, without analyzing the financial health of
the companies and their credit ratings
 The banning of mining projects, delay in environment permit, led to a rise in
prices of raw materials and a big gap in demand and supply thereby affecting the
power, steel, and iron industries. This affected the capacity of the companies to
repay the loans to banks which resulted in Non-Performing Assets (NPA).

9.  Measures to recover NPAs
 As the Non-Performing Assets is not a new phenomenon, there have
been many efforts on the part of the Government of India and RBI to
sort out the problem. Different types of Recovery Mechanism has been
introduced by the Government and RBI to reduce NPAs and to recover
the NPA amount.
 Recovery Mechanism:
 Recovery mechanism is a process of planning, testing, implementing
the recovery procedures and standards required to restore financial
assets in the event of failure of the firm.
 It is a fact that NPAs ceased to generate income, require provision,
increase borrowing cost, affect morale of the employee, and erase
capital. In this context recovery of NPAs plays a vital role to sustain the
banking industry. Mainly recovery is done through three major tools as
are discussed below:

10.  Measures taken to recover NPAs
 As the Non-Performing Assets are not a new phenomenon, there have
been many efforts on the part of the Government of India and RBI to
sort out the problem. The Government based on the recommendations
of various Committees instituted the following mechanism for recovery
of NPAs.
 Recovery Mechanism:
 Recovery mechanism is a process of planning, testing, implementing
the recovery procedures and standards required to restore financial
assets in the event of failure of the firm.
 It is a fact that NPAs ceased to generate income, require provision,
increase borrowing cost, affect morale of the employee, and erase
capital.
 Recovery of NPAs plays a vital role to sustain the banking industry.

11.  Recovery Mechanism – India:
 In India mainly recovery is done through the following major tools as
are discussed below:
 1. Lok Adalats
 2. Debt Recovery Tribunals (DRTs) – RDB Act, 1993
 3. SARFAESI Act, 2002
 4. Insolvency & Bankruptcy Code, 2016

12.  Lok Adalats:
 Lok Adalat is a forum where cases pending in the court of law or pre-
litigation stage are settled/compromised amicably. Lok Adalats have
been given statutory status under the Legal Services Authorities Act
1987.
 Under this Act, the decision made by the Lok Adalats is deemed to be
final and binding on all parties and no appeal against such an award.
 The advantage of use of this recovery mechanism is that there is no
court fees involved when fresh disputes are referred.

13.  Debt Recovery Tribunals (DRTs):
 The Recovery of Debts and Bankruptcy Act, 1993 provides for
establishment of Debts Recovery Tribunals with original jurisdiction
and Debt Recovery Appellate Tribunals with appellate jurisdiction, for
expeditious adjudication and recovery of debts due to bank and
financial institutions, insolvency resolution and bankruptcy of
individuals and partnership firms and connected matters there with.
 The Act is applicable to cases where amount of debt due to any bank or
financial institution defined under the Act is rupees twenty lakhs or
more. One of the major issues associated with the DRT is the success
rate of tribunals as it is over burdened with more cases.

14.  SARFAESI Act, 2002 (Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002):
 SARFAESI Act empowers banks and financial institutions to recover
their non- performing asset loan dues without the intervention of the
court.
 The provisions of this Act is applicable only for non- performing loans
with outstanding above one lakh rupees. Further, non-performing loan
accounts where the amount is less than 20% of the principal and
interest are not eligible to be dealt under this Act.
 Asset Reconstruction Companies were set up to recover secured loans
by enforcing the security interest and auctioning borrower’s property.
 ARC’s is another institutional alternative of NPA resolution in India.

15.  Insolvency and Bankruptcy Code (2016):
 The Insolvency and Bankruptcy Code was enacted in 2016 to achieve
resolution of distressed corporate debtors. It also facilitates liquidation
in time bound manner under the supervision of National Company Law
Tribunal (NCLT)
 The code has set up a robust ecosystem where debtors and creditors
are initiating resolution process under the provisions of this code.

16. 45,728
1,811
53,484
2,750
67,801
4,211
133,095
7,235
268,413
10,552
245,570
10,018
81,879
26,380
258,642
38,905
196,582
52,563
9,929
4,926
145,457
66,440
232,478
105,773
A M OUN T I N VOLVED RECOVERY A M OUN T I N VOLVED R ECOVER Y A M OUN T I N VOLVED RECOVERY
2017- 18 ( A M OUN T I N RS. CRORES) 2018- 19 ( A M OUN T I N RS. CRORES) 2019- 20 ( A M OUN T I N RS. CRORES)
NPA
AMOUNT
RECOVERED
(RS.
IN
CRORES)
YEAR WISE AMOOUNTS RECOVERED UNDER VARIOUS FORUMS
NPA AMOUNT RECOVERED UNDER VARIOUS FORUMS DURING 2017 -2020
Lok Adalats DRTs SARFAESI IBC

17. T