The Gujarat High Court has restored the Reserve Bank of India’s power to decide the period after which a bad loan can be called a non-performing asset (NPA).
Till 2004, RBI had set the NPA period for banks at 90 days, and at 180 days for Non Banking Financial Companies. But with the amendment, the financial institutions became free to have their own regulations for NPA. The NPA period was decided separately byeach firm.
The High Court’s ruling came on petitions filed by several defaulters of banks and NBFCs who had questioned every institution deciding its own NPA period, calling it violation of right to equality.
The bench of Chief Justice Bhaskar Bhattachrya and Justice J B Pardiwala said that the Section 2(1)(o) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act is held unconstitutional.
The High Court also observed that Parliament was wrong in taking the power to decide NPA guidelines away from the RBI. Before the amendment in 2004 to the Act, the RBI was the regulator for the banking, non-banking institutions and securitization agencies for deciding the period after which the loans can be treated as the NPA.
The finance ministry has asked public sector banks (PSB) to increase the usage of Sarfaesi Act provisions to quickly recover bad loans.
Data for 2012-13 showed that out of the three methods for NPA recovery — Sarfaesi Act, Debt Recovery Tribunals (DRT) and Lok Adalats – Sarfaesi Act route was the most effective. In 2012-13, around Rs 18,500 crore was recovered through the Sarfaesi Act route, while DRTs helped in the recovery of just Rs 4,400 crore and Lok Adalats only Rs 400 crore.
Under the Sarfaesi Act, lenders have the power to enforce the security interest by taking possession of the assets from the defaulting borrower without court intervention, following the expiry of a 60-day notice period on the loan being classified an NPA.
The ministry has now said wherever possible the PSBs must exercise their rights under Section 13(4) of the Sarfaesi Act, which empowers the lenders to take possession of the secured assets of the borrower (whose accounts have turned NPA) and sell the assets before their value deteriorates. The section also empowers lenders to takeover the management of the business of the borrower and sell the assets if needed.
It also wants PSBs to adopt the latest sophisticated risk management tools (RMT) to effectively measure risks in lending and price loans accordingly so that there is an improvement in the asset quality. These were measures suggested by the new financial services secretary GS Sandhu to the PSB chiefs in a recent letter, banking industry sources told FE.
The ministry also wants PSBs to ensure that the companies do not divert loans for purposes other than the one for which the loans was taken. It has also pointed out the need to have separate RMTs for retail, wholesale, infrastructure and big-ticket loans.
The concern is because of the many instances of ‘quick mortality’, where within six months of the bank extending the loan, the company has become sick.
Further Reading – The Ffinancial Express
The finance Ministry has now increased the no, of NPA accounts it monitors to the top 50 from the previous top 30. It has alsoasked the banks to submit an an action-taken report on recovery for the ‘top 50′ NPA accounts as on December-end 2013.
At June-end 2013, gross NPAs with the top 30 accounts of 26 PSBs were worth R63,671 crore, which is around 35% of their total gross NPAs of R1,82,829 crore.
In the last quarterly meeting to review the performance of PSBs and financial institutions, finance minister P Chidambaram had expressed concerns over high NPAs in two segments — large corporates and small industries. The ministry had in October last year asked PSBs to set up a separate vertical headed by an officer of the rank of general manager for recovering money from bad loans.
GS Sandhu, The the new secretary of department of financial services (DFS), also sought a list of wilful defaulters and findings of prima facie diversion of funds by such borrowers.
Gross NPAs of PSBs had surged to 5.17% of their advances in December-end 2013 from 3.84% at March-end 2013 (and 4.18% in end-December 2012) while their restructured assets increased to 7.44% from 7.18% during the period. A harder look at the NPA data reveals that at December-end 2013, maximum NPAs were in the small and medium enterprises loan segment with 7.21% of advances while agriculture loan NPAs were at 5.99%. NPAs in the corporate loan segment were 5.28%. In retail loans, NPAs were 2.74% and, in real estate, they were 1.83%.
In a report released on Thursday Fitch Ratings expressed concerns over stressed assets in India compared to other Asian emerging markets. Fitch said it “expects Indian banks’ asset quality to weaken further, with stressed assets (NPAs and restructured loans) to rise from 10% (at mid-2013) to around 15% during FY15 (by March 2015).”