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.