Bad loan recovery by banks down 26% at ₹22,768 crore in FY16

Though banks have been making serious efforts to reduce their non-performing assets through various legal channels, the amount recovered by scheduled commercial banks (SCBs) in 2015-16 at ₹22,768 crore was 26 per cent lower compared with ₹30,792 crore in the previous year, the Reserve Bank of India said.

The legal channels that banks resort to for reducing NPAs include Lok Adalats, Debt Recovery Tribunals (DRTs) and invocation of SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act).

Public sector banks (PSBs), which are burdened with a high proportion of the banking sector’s NPAs, could recover only ₹19,757 crore, compared to ₹27,849 crore in the previous year, said the report.

The deceleration in recovery by SCBs was mainly due to 52 per cent reduction in recovery through the SARFAESI channel, to ₹13,179 crore in 2015-16 from ₹25,600 crore in 2014-15. However, recovery through Lok Adalats soared 228 per cent year-on-year to ₹3,224 crore. Recovery via DRTs jumped 51 per cent y-o-y to ₹63.65 crore. The number of cases referred to these three legal channels cumulatively was up 47.5 per cent at 46,54,753 as against 31,55,672 in the previous year.

Banks also reduced their stressed assets by selling them to asset reconstruction companies (ARCs). This has been increasing since March 2014 because of the regulatory support extended to banks under the Framework to Revitalise the Distressed Assets in the Economy.

In FY16, 16 ARCs acquired stressed assets amounting to ₹72,626 crore from banks, compared with 14 ARCs acquiring ₹58,479 crore in the previous year.

http://www.thehindubusinessline.com/money-and-banking/bad-loan-recovery-by-banks-down-26-at-22768-crore-in-fy16/article9449690.ece

RBI expands market for sale of banks’ stressed assets

Moots e-auction of NPAs, asks lenders to frame policy

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MUMBAI, SEPTEMBER 1:
The Reserve Bank of India on Thursday expanded the market for banks’ stressed assets by permitting them to be sold to other lenders, including non-banking financial companies and financial institutions.

The central bank also issued guidelines specifying that all assets classified as doubtful should be reviewed by the board of banks or a committee of board members.

“Early identification will help in low vintage and better price realisation for banks,” RBI said.

“At least once in a year, preferably at the beginning of the year, banks shall, with the approval of their Board, identify and list internally the specific financial assets identified for sale to other institutions, including securitisation companies and reconstruction companies,” it added. Currently, banks are required to lay down detailed policies and guidelines on sale of their stressed assets to securitisation companies or reconstruction companies. The policy has to cover the financial assets to be sold; norms and procedures for sale; valuation procedures to be followed to ensure that the realisable value of financial assets is reasonably estimated; besides delegation of powers of various functionaries for taking decision on the sale.

E-auction mechanism
The e-auction mechanism has been mooted besides a public solicitation of bids to attract a wide variety of buyers. Banks should lay down a board-approved policy in this regard, the RBI said.

On asset valuation, the central bank said banks should clearly specify (on a case-to-case basis) whether they would accept internal or external valuation of the asset being sold, besides clearly specifying the discount rate for asset valuation in their policy.

Two external valuation reports have been mandated for loans above ₹50 crore.

The cost of valuation has to be borne by the banks. Banks have been directed to review the efficacy of their extant policies on sale of NPAs, with focus on valuation of stressed assets, and rework them according to the new guidelines.

http://www.thehindubusinessline.com/money-and-banking/rbi-expands-market-for-sale-of-banks-stressed-assets/article9061120.ece

Sarfaesi provisions can help resolve NPAs of NBFCs faster: Icra report

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Report said the move is credit-positive for NBFCs with a retail focus, especially those which are in the mortgage space.

Domestic rating agency has said the decision to extend provisions of the Sarfaesi Act to loans given by non-banking companies will help bring down delinquencies and may result in cheaper funds for borrowers.

“The access to the Sarfaesi Act will strengthen NBFCs’ ability to contain life-time losses,” the rating agency said in a weekend note after the ministry decided recently to extend the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act 2002 to non-banking financial companies (NBFCs) with over Rs 500 crore in assets.
 

The report said the move is credit-positive for with a retail focus, especially those which are in the mortgage space. As of March this year, only 19 per cent of the overall credit of Rs 5 trillion was extended as loan against property (LAP) and housing loans.

The ministry notification has a list of 196 NBFCs that will benefit under the new framework. “If credit costs were to come down, there could be some moderation in lending rates by NBFCs, which would benefit borrowers, going forward,” the agency added.
“If we add the loans extended to SMEs, which include both property-backed and non-property backed credit to LAP, the total credit stood at Rs 1.2 trillion,” it said, adding that the share of non-property is very modest.

The average ticket size for LAP is pegged at Rs 10-13 million and up to 65 per cent of the book is estimated to have a ticket size of over Rs 10 million, which is the threshold for enforcement of security interest, it said.

The report further noted that large having over Rs 100 billion in assets under management will be benefiting more through this decision while small and mid-sized ones will not as their average loan sizes are under Rs 2.5 million.

The report blamed poor underwriting and over-leveraging of borrowers for the rising 90+day delinquencies in LAP and SME loans of NBFCs, which rose to 2.8 per cent in March 2016 from 2.2 per cent a year ago.

The Sarfaesi law will result in some moderation in NPAs as proceedings towards possession and sale of the security can get completed in two years as against three years required for action under the provisions of the Negotiable Instruments Act.

The report, however, conceded that proceeding under the Sarfaesi Act can take longer because of delay in getting possession orders from district or chief metropolitan magistrates as also stay orders from various courts.

But fear of action under Sarfaesi laws is likely to act as a deterrent to wilful defaulters, curb extended litigation and lead to faster resolution, it hoped.

http://www.business-standard.com/article/finance/sarfaesi-provisions-can-help-resolve-npas-of-nbfcs-faster-icra-report-116091800242_1.html

Finance ministry drafts incentive scheme for asset reconstruction companies to reduce junk assets

MUMBAI:The government has thrown new rules at state-owned banks, nudging them to salvage their junk loans, which have strained balance sheets and re-priced stocks of several lenders.The finance ministry, concerned that a mountain of loss assets could call for bigger fund infusion into banks, has stepped in as the junk loan market has been at a standstill since last year.A string of auctions by banks to sell non-performing assets has bombed with the lenders unwilling to accept the price asset reconstruction companies, or ARCs, who deal with sticky loans were willing to fork out.”The ministry must have felt that it was high time to lay down some ground rules and push the banks for quicker recovery of loss assets,” said a junk asset dealer who has handled just one transaction in the last one year.

In a recent communique to state-owned banks and ARCs sponsored by public sector institutions, the ministry has laid out broad parameters for recovering dud loan assets. It has also put in place an incentive structure to remunerate ARCs. As per the scheme, the lower the collateral value on a loan account, the higher is the upside for the ARC.

Banks’ loss assets, for which lenders have to make full provisioning equal to the loan amount, add up to more than Rs 30,000 crore out of the PSU banks’ total non-performing assets of Rs 1 lakh crore. Any recovery from loss assets adds to a bank’s net worth.

The ministry’s move to fix a commission and incentive structure will provide some relief to ARCs as a number of them are struggling to stay afloat since more and more banks are preferring to revolve bad loans on their own.

As per the incentive structure, if the recovery is more than the principal amount and the loan has tangible security worth more than the principal, banks should pay 5% of the recovered amount in excess of the principal to the ARC.

But if the recovery is less than 90%, then even if the security is more than the principal, banks need not pay any commission. In cases where the recovery is 90% or more than the principal but if the loan does not have tangible security, banks should pay  commission as high as 10%.

A commission of 6% is fixed if recovery is 90% or more of the principal and tangible security is worth 50-90% of the loan. If recovery is over 90%, but the collateral is less than 50% of the principal, ARCs will be paid7%.

The finance ministry arrived at the commission framework after consulting PSU banks and ARCs like Arcil, ISARC and ASREC.

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Bad loans: 5 things Rs 1.14 lakh crore can do to get India shining

India’s 29 state-owned banks have written off a total of Rs 1.14 lakh crore between 2012-13 and 2014-15, a sum large enough to build more than 10,000 km of highways.

The Indian Express reported on Monday that “twenty-nine state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than they had done in the preceding nine years.”

Here are five things such an amount can do to push India up on the development ladder:

1. Build more than 11,000 km of national expressways at an average cost of Rs 10 crore per km, entirely funded by the government.

2. The current NREGA annual budget is Rs 34,699 crore. With Rs 1.14 lakh crore, the government can widen the scope of the rural job scheme by nearly four times. Conversely, with such an amount, the government will be able to fully fund the NREGA scheme for nearly four years without setting aside money in the annual budget.

3. The written off debt amount of Rs 1.14 lakh crore, if made available to the government, will allow it to nearly fully fund the annual food subsidy bill of Rs 1.25 lakh crore.

4. India currently spends about Rs 14,000 crore to build rural roads. The written off bank debts is more than eight times the annual budget of the Pradhan Mantri Gram Sadak Yojana. With Rs 1.14 lakh crore, the government can expand the scope of the rural road scheme eight times.

5. India spends Rs 22,000 crore from the annual central budget to finance the Sarva Shiksha Abhiyan, a state-funded elementary and primary education programme. With Rs 1.14 lakh crore, the total amount written off as bad debts between 2013 and 2015, the government will be able to expand the scheme five fold.

http://www.hindustantimes.com/business/bad-loan-write-off-5-things-rs-1-14-lakh-can-do-to-get-india-shining/story-HMjOZdtIzbuCe90ud5bYjL.html

Rs 1.14 lakh crore of bad debts: The great government bank write-off.

That is the amount of bad loans waived in last three financial years, more than the write-off in the previous nine.

Twenty-nine state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than they had done in the preceding nine years.In response to an RTI application filed by The Indian Express, the RBI disclosed that while bad debts stood at Rs 15,551 crore for the financial year ending March 2012, they had shot up by over three times to Rs 52,542 crore by the end of March 2015.Asked about the details of the biggest defaulters, whether individuals or business entities, whose bad debts to the tune of Rs 100 crore or more had been written off, the RBI said: “The required information is not available with us.” Banks are required to report the bad debts on a consolidated basis, it said.

Even as the government has been trying to shore up public sector banks through equity capital and other measures, bad loans written off by them between 2004 and 2015 amount to more than Rs 2.11 lakh crore. More than half such loans (Rs 1,14,182 crore) have been waived off between 2013 and 2015. Only two banks, State Bank of Saurashtra and State Bank of Indore, have shown zero bad debts in the past five years. In other words, while bad loans of public-sector banks grew at a rate of 4 per cent between 2004 and 2012, in financial years 2013 to 2015, they rose at almost 60 per cent. The bad debts written off in financial year ending March 2015 make up 85 per cent of such loans since 2013.

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The RTI reply also disclosed that bad debts have declined only four times since 2004. The last time was in 2011. An analysis of the information available with the RBI till 2012-13 also shows that between 2009 and 2013, both the advances by public sector banks to individuals and business entities as well as their amount of bad debts written off doubled. From 0.33 per cent of total advances in 2009, bad debts rose to 0.61 per cent in 2013. Bank-wise break-up shows State Bank of India, India’s largest bank, is way ahead of others in declaring loans as unrecoverable, with its bad debts shooting up almost four times since 2013 — from Rs 5,594 crore in 2013 to Rs 21,313 crore in 2015. In fact, SBI’s bad debts made up 40 per cent of the total amount written off by all other banks in 2015 and were more than what 20 other banks wrote off. In 2014 too, the bank’s bad debts alone comprised 38 per cent of the total of all banks. The figure of bad loans for 2014 and ‘15 combined, Rs 34,490 crore, was Rs 10,000 crore more than that for between 2004 and 2013, Rs 23,992 crore. The country’s second-largest public sector bank, Punjab National Bank, has also witnessed a consistent rise in bad debts since 2013. These grew by 95 per cent between 2013 and 2014 but climbed by 238 per cent between 2014 and 2015 — from Rs 1,947 crore in 2014 to Rs 6,587 crore in 2015. Reserve Bank Governor Raghuram Rajan has repeatedly expressed concern over the health of public-sector banks, and pushed for steps to ensure that banks classify certain stressed assets as non-performing assets (NPAs) and make adequate provisions to “strengthen their balance sheets”, besides working out schemes of merger. With public sector banks sitting on over Rs 7 lakh crore stressed assets, including NPAs and restructured loans, Rajan recently said the estimates of NPAs being 17-18 per cent are bit on the high side and that entities should be careful not to treat NPAs as total write-offs but see if they can change promoters and repay as the economy recovers. He also said that some banks would have to merge to optimise their use of resources. Gross NPAs of public-sector banks rose to 6.03 per cent as of June 2015, from 5.20 per cent in March 2015. RBI has asked banks to review certain loan accounts and their classification over the two quarters ending December 31, 2015, and March 31, 2016.

WRITE BACK

Editors Note:

In response to the above story, published in The Indian Express on February 8, 2015, the Union ministry of finance, the Reserve Bank of India and the country’s largest bank, State Bank of India, have written back stating that the write-offs are an accounting entry to meet regulatory guidelines.

Ministry of Finance:

The fact of the matter is that write-offs are basically technical and are done within the framework of Income Tax Act, 1961 and RBI Guidelines regarding provisions for bad loans as per Standard Accounting Practices. Banks write-off advances at Head Office level as part of the balance sheet cleaning exercise and these loans continue to remain outstanding in the branch books. Recovery efforts continue to be made in the respective branches with respect to these bad loans. Write-off does not mean that recovery comes to a stop.

Reserve Bank of India:

‘Writing off’ of non-performing assets is a regular exercise conducted by banks to clean up their balance sheets. Substantial portion of this write-off is, however, technical in nature. It is primarily intended at cleansing the balance sheet and achieving taxation efficiency. In ‘Technically Written Off’ accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery. Further, write offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks. The data published in the above news item is the total write-off made by banks, which includes a large portion of technically written off accounts where the recovery efforts continue as usual.

State Bank of India:

We would like to point that SBI has a loan book of Rs 13,70,701 crore and the net NPAs are Rs 28,592 crore as on September 2015, which represent 2.14% of the advances. Standalone figures may appear big, however if you look at the overall size of SBI and its net NPAs, it can be seen that we are amongst the most efficient public sector banks in India. Moreover, our NPA figures have been improving over the last few years. It is pertinent to mention that SBI is 2.8 times larger than the next largest bank in the country in terms of business. Writing off a bad debt is an accounting entry to meet the regulatory guidelines. Writing off an amount does not mean it is a total loss as our legal team continues the recovery process and in due course recoveries are effected in the written off accounts, which are then added to the profits of the bank for that year. During the year ended March 2015, our bank recovered Rs 2,300 crores from the written-off accounts. We would herein like to add that for recovery, our legal systems and processes are most robust and reliable in the entire banking system.

Our Correspondent replies:

The report is based on a response from the Reserve Bank of India to an RTI application filed after the December 16, 2015, Supreme Court judgment, which said the banking regulator was bound in law to give information regarding private and public banks under the Right To Information Act. “RBI is supposed to uphold public interest and not the interest of individual banks. We have surmised that many financial institutions have resorted to such acts which are neither clean nor transparent. The RBI in association with them has been trying to cover up their acts from public scrutiny,” said a bench of Justices M Y Eqbal and C Nagappan. The RBI has noted that the total write-offs includes a large portion of technically written-off accounts where the recovery efforts continue as usual. Therein lies the problem. After a technical write-off, there is no incentive for banks to pursue recovery, as noted by RBI’s former deputy governor KC Chakrabarty in the past. Given the humongous bad loan problem at hand, the write-offs cannot be seen as just housekeeping. The Rs 1,14,000 crore written off over just the last three years (2012-13 to 2014-15) is more than the write-off over the previous nine years. So acute is the problem that both the Union finance ministry and NITI Aayog have separately pitched for setting up a government-owned asset reconstruction company to take over banks’ bad assets. Most importantly, write-offs force the government to commit large dollops of capital so that banks continue to undertake normal lending operations in the coming years. The finance ministry has proposed to infuse Rs 70,000 crore over the next four years, which may not be enough. Capital infusion by the government is always at the taxpayers’ expense. Setting aside moneys from the Budget for this only precludes higher allocation for critical sectors such as health and education. 

http://indianexpress.com/article/india/india-news-india/bad-loan-financial-year-rti-rbi-bank-loan-raghuram-rajan-bad-loan-financial-year-rti-rbi-bank-loan-raghuram-rajan-1140000000000-bad-debts-the-great-govt-bank-write-off/

Government Press Release » Government Press Release » News PM’s remarks at Gyan Sangam – the Bankers’ Retreat in Pune

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The Prime Minister, Shri Narendra Modi, today called upon India’s banking sector to establish banks which rank among the top banks of the world.

He was speaking at Gyan Sangam – the Bankers’ Retreat in Pune. He said it was perhaps the first time that banks had given tasks to the Prime Minister through a presentation. He said the Gyan Sangam reflected team spirit and a collective will to address issues. He described Gyan Sangam as a unique initiative.

He said the objective in this bankers’ retreat was to find solutions to problems, and this was the first step towards catalyzing transformation. He said informal discussions helped achieve meeting of minds, which in turn enabled strategic goal setting.

The Prime Minister appreciated the efforts of the banks in successfully implementing Pradhan Mantri Jan Dhan Yojana. He said this is going to have multiple effects. He said the Jan Dhan Yojana would help redefine goal setting among banks, due to enhanced confidence levels following the success of the programme.

The Prime Minister said 7 crore families had benefited from direct cash transfers of LPG subsidy in just three days since January 1st. He said this represented one-third of all families India. He said such achievements should boost confidence.

The Prime Minister said the banking sector of a country mirrors its economic rise. Japan and China had banks in the top ten banks of the world during their economic rise.

The Prime Minister said banks would be run professionally, and there would be no interference. But accountability was essential. He said the Government had no vested interest, and public sector banks can derive strength from this fact.

However, the Prime Minister said India is a democracy. He said he is against political interference, but supports political intervention, in the interest of the people. He said political intervention will enable the voice of the common man to reach such institutions.

The Prime Minister said this also highlighted the issue of poor financial literacy in the country. He said today even the common man needed financial literacy. He called upon banks to take the lead in encouraging competitions on financial literacy in schools, much like mock Parliament competitions.

The Prime Minister said banks should develop dedicated teams to fight cyber crime.

The Prime Minister said that with 81% of branches and 77% of deposits, the net profits should improve from current levels of 45%.

The Prime Minister called for developing common strengths among the 27 public sector banks. He suggested this could be done in areas such as software, and advertising. He gave the example of number portability in the telecom sector in this regard. He said this would improve the customer-centric focus of banks. The Prime Minister said public sector banks, as a team, should also be conscious of the direction in which the country is moving, and work towards simplifying procedures to facilitate the common man.

The Prime Minister also called upon banks to trust the common man.

The Prime Minister said the Swachhta Abhiyan has caught the imagination of the younger generation. He called upon each public sector bank to help develop 20,000 to 25,000 Swachhta entrepreneurs. He also asked banks to prioritize loans to students as this would be a very productive investment for the country. He said the country needs skill development for its youth in a big way, and banks need to take the lead in this.

The Prime Minister asked public sector banks to set goals for the 75th anniversary of independence in the country in 2022. He said he had resolved to provide housing for all by 2022, and banks had a huge opportunity here, as 11 crore houses were required.

The Prime Minister said banks should redefine parameters for success. For instance, let them prioritize loans to enterprises which will generate more employment, he said.

The Prime Minister called for an end to lazy banking, and asked banks to take on a proactive role in helping the common man.

The Prime Minister said that as part of Corporate Social Responsibility, banks should take up one sector each year to play a positive role.

Governor of Maharashtra Shri Vidyasagar Rao, Chief Minister of Maharashtra Shri Devendra Fadnavis, Finance Minister Shri Arun Jaitley, MoS Finance Shri Jayant Sinha, RBI Governor Shri Raghuram Rajan, and Secretary Financial Services Shri Hasmukh Adhia were present on the occasion.

 

http://www.business-standard.com/article/government-press-release/pm-s-remarks-at-gyan-sangam-the-bankers-retreat-in-pune-115010300579_1.html

Decrypting The Wilful Defaulter Tag

Decrypting The Wilful Defaulter Tag

United Bank of India (UBI) declared Kingfisher Airlines, Mallya himself and three directors of the company – Subhash R Gupte, Ravi Nedungadi and Anil Kumar Ganguly – as wilful defaulters.

Kingfisher Airlines in July 2014 moved the Calcutta High Court, two months after the bank had in May 2014 identified it and Mallya as wilful defaulters. The court last week dismissed the plea, paving the way for UBI to declare the company and its chairman wilful defaulters.

Last Tuesday the Supreme Court on rejected a plea by Kingfisher Airlines against being declared a wilful defaulter, saying it has become infructuous as the Grievance Redressal Committee of Union Bank of India has already passed an order.

Wilful defaulter

A borrower is classified as a wilful defaulter in any of the following events:

  • When there is a default in repayment obligations by the unit (company/individual) to the lender even when it has the capacity to honour the said obligations. There is deliberate intention of not repaying the loan.
  • When the funds have been siphoned off and not been utilized for the purpose for which it was availed. Further, no assets are available which justify the usage of funds.
  • When the asset bought by the lenders funds has been sold off without the knowledge of the bank/lender.
  • The funds are not utilized for the specific purpose for which finance was availed but have been diverted for other purposes.
  • Further, in cases where a letter of comfort or guarantees furnished by group companies of wilfully defaulting units are not honoured when they are invoked by the lender, then such group companies are also considered to be wilful defaulters.

The decision to tag a borrower as a willful defaulter is the harshest step a bank can take upon any borrower.

Identifying and Declaring wilful defaulters

Bankers have an internal committee, headed by an executive director that examines cases of wilful defaults. The credit monitoring or recovery departments give their reports on borrowers deemed to have defaulted wilfully to this committee. The committee examines the efforts made by the bank to recover the dues, the repayment capacity of the borrower, end use of the funds before identifying an individual as wilful defaulter. The decision taken on classification of wilful defaulters is well documented and supported with evidence

Once a borrower is identified as a wilful defaulter, the bank sends him/her a notice with the reasons for the same. The borrower is generally given 15 days to make a representation against the decision to the grievance redressal committee. This committee is either headed by the chairman and managing director or by the executive director who is not part of the panel on identification of wilful defaulters. The bank declares a borrower wilful defaulter if he fails to offer a proper explanation or avoids the grievance redressal committee hearing repeatedly despite notices.

Banks also send their list of wilful defaulters to RBI, Securities and Exchange Board of India (Sebi) and Credit Information Bureau India (Cibil). This is aimed at preventing wilful defaulters from accessing capital markets and borrowing from other banks and financial institutions. The penal measures include the following:

  • No additional facilities will be granted to listed wilful defaulters by banks and financial institutions
  • Promoters of companies that have been identified for siphoning of funds, misrepresentation of accounts and fraudulent transactions will be debarred from institutional finance for floating new ventures for a period of five years
  • Legal process against wilful defaulters will be initiated. Lenders may initiate criminal proceedings also
  • Banks will adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
  • Wilful defaulters will not be allowed to take up board positions in any company

Banks need not report cases

  • Where outstanding amount due is below Rs 25 lakh and
  • Where lenders/Banks have agreed for a compromise settlement and the borrower has fully paid the compromised amount.
ICRA: NPA’s of PSU banks to touch 4.6% in FY’15

ICRA: NPA’s of PSU banks to touch 4.6% in FY’15

ICRA an independent investment information and credit rating agency estimates that public sector bank’s gross non-performing assets (NPAs) to stand at up to 4.7 per cent at the end of this financial year, compared with 4.4 per cent at the end of FY14 it expects public sector banks’ gross NPAs to be at 4.4-4.7% as on March 31, 2015.

Fresh non-perfoming assets or NPAs of public sector banks are estimated to be at 3.5% of advances during the quarter ended June’14, according to a study by ratings firm Icra. Their gross NPAs increased by 20 basis points (bps) to 4.6% during the quarter. Asset quality of private sector banks too continued to remain under pressure as their NPAs also increased by 20 bps to 2.0% during the quarter.

However, there was a significant drop in the number of fresh cases of loans being refered to the corporate debt restructuring or CDR Cell for restructuring during the first of FY’15.

“The rate of generation of fresh NPAs remained elevated for public sector banks (3.5 per cent) and, as result, their gross NPAs increased by 20 basis points to 4.6 per cent in the first quarter of FY15. During the same quarter, the NPAs of private banks increased by 20 basis points to two per cent,”

– Icra.

The Icra study notes that the level of NPAs in the banking system gets understated as a sizeable amount of loans are sold to asset reconstruction companies or ARCs. It says that the gross NPA percentage would have been higher by 20-30 bps if there were no sales to ARCs . But sale of NPAs to ARCs is expected to decline in the rest of the current financial year ending March’15 as the Reserve Bank of India has prescribed that ARCs must invest and hold 15% in Security Receipts (SRs) as against 5% earlier.

Income Tax Departments may no longer have first shot in NPAs

Income Tax Departments may no longer have first shot in NPAs

The Department of Financial Services in the finance ministry is considering to incorporate in the Sarfaesi Act the ‘principle of first to register’ a lien on the assets of defaulting companies.

The registration has to be with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (Cersai) set up to eliminate instances of multiple lending on the same property.

According to the changes proposed by the government in the Sarfaesi Act, whoever registers their charge on an asset first with the designated central registry will get priority over others in recovering the dues by attaching the assets. Since lenders practically are the first to do such registration (at the time of giving the loan), this would in most cases lead to their lien getting precedence.

The Income Tax Departments role in Recovery by lenders

Currently, the out-of-the-court mechanism under Sarfaesi Act allows secured creditors to take possession of the assets of a firm under liquidation if their dues are not paid within two months of raising demand. However, in practice, tax authorities and municipal corporations often attach the assets of a defaulting company beforehand, which comes in the way of lenders recovering their dues.

The tax departments draw the powers to attach from their respective laws – Income Tax Act, Central Excise Act and the like. As per the new proposal, the provisions of Sarfaesi Act of 2002, which is a relatively new law, will prevail over those of older statutes and will effectively protect the interest of lenders without any amendment to any other law.

The proposed amendments also include a provision to classify central and state authorities handling income tax, excise and value added tax as well as municipal corporations as secured creditors, so that the moment a taxpayer defaults, the authorities would need to register their charge on the assets. However, if the company has already taken a loan, the lender would have already registered his charge on the assets, giving the tax authorities only second charge on the assets.

Currently, secured creditors include banks, financial institutions, debenture trustees appointed by banks, securitisation companies, asset reconstruction companies and any other trustee holding security. “These changes to the Sarfaesi Act will be a huge leapfrog in terms of reforms in this area. States which agree to this provision may soon be perceived as more investor friendly and therefore would see greater lending by banks and financial institutions,” said an expert in bankruptcy laws.

The changes are in line with international best practices followed by the UK, US, Australia and Canada.