Worsening recovery of bad loans
IN AN indication of deteriorating management of non-performing assets (NPAs), the rate of recovery of banks’ gross NPAs has been steadily declining for the past 12 years and hit the lowest level of 20.8 per cent in 2016-17, according to the latest data from the Reserve Bank of India (RBI). Recovery of written-off loans through various channels, such as debt recovery tribunals (DRTs), has also been falling year-on-year. While the loan recovery rate has been falling, the number of cases being referred to the National Company Law Tribunal (NCLT) benches for insolvency resolution has been correspondingly rising since the enactment of the Insolvency and Bankruptcy Code (IBC) last year.
“Recovery of banks’ NPAs remains poor, having declined to 20.8 per cent by end-March 2017 from 61.8 per cent in 2009,” the RBI said in its Report on Trend and Progress of Banking in India 2016-17 released last Thursday. After peaking in 2009 and remaining well above 40 per cent in the earlier years, the recovery rate has declined over the years, the data show. Banks were able to recover higher amount through secured loans, term loans and exposure to real estate.
During the 2015-17 period, the average recovery ratio of Indian banks was 26.4 per cent, with recovery by private sector banks at 41 per cent being much higher than by public sector banks (PSBs) at 25.1 per cent. Banks continue to pursue various recovery measures for NPAs as well as written-off loans. A higher recovery rate indicates the ability of banks to prune their NPAs. During this two-year period, banks and financial institutions recovered an average of around 10 per cent through the existing legal recovery channels, including DRTs, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and Lok Adalats.
The recovery percentage through these three channels fell to 9.8 per cent in 2016-17, down from 10.3 per cent in 2015-16. Out of Rs 2.86 lakh crore worth of bad loans being chased through DRTs, SARFAESI and Lok Adalats, banks were able to recover Rs 28,000 crore worth of loans in 2016-17. In the previous financial year, the banks and financial institutions could recover Rs 22,800 crore worth of bad loans out of total Rs 2.21 lakh crore being chased through these legal channels.
The highest recovery rate of 24.4 per cent was recorded in DRTs in 2016-17, up from 9.2 per cent in 2015-16. “The significant improvement in the case of DRTs was due to opening of new tribunals, strengthening existing infrastructure and computerised processing of court cases,” the RBI said. In the current financial year, banks have been largely focussing on NPA recovery through resolution under the IBC. Under the direction from the RBI, the banks have taken 12 large NPA cases for resolution under the IBC, accounting for a combined debt of around Rs 2.5 lakh crore.
Apart from DRT, SARFAESI and IBC, banks also recover their amounts stuck in NPAs through sale of stressed assets to securitisation companies and reconstruction companies with lenders taking haircut on every sale. While private banks and foreign banks have been aggressive in selling stressed assets to securitisation and reconstruction companies, such “sale of NPAs by public sector banks remain lukewarm,” the report said. This could be due to PSBs unwilling to sell their assets at a significant discount. An analysis of purchase of NPAs by asset reconstruction companies (ARCs), however, indicates that acquisition cost as a proportion of the book value of assets increased from 28.7 per cent in March 2014 to 36 per cent in March 2017, indicating that the banks had to incur lower haircuts on account of sale of NPAs, the RBI said.