NPA Market In India

Banks are the backbone of any country in so far as its upward economic developments are concerned. A well-knit Banking System supported by proper regulatory mechanism is inevitable for the economic development of a Country. Banks are intermediaries between the depositors and borrowers. It gives interest for deposits and collects interest onloans to meet the commitments of the depositors. The chain breaks when borrowers fail to repay the principal and interest as per the agreed terms which lead to decline in assetsof banking system and increase in stressed assets.Asset quality of the bank is deteriorated as reflected in the increase in the ratio of Gross NPA to total advancesfrom 2.4% in FY 10 to 3.3% in FY 13.The ratio of Net NPA has also gone up from 1.1% in FY10 to 1.7% in FY13. The Narasimham Committee I in 1991 had recommended the creation of an Asset Creation Fund to which public sector banks would transfer their non-performing assets with certain safeguards. However, the recommendation was not accepted, and banks have been internally dealing with their NPAs. Debt Recovery Tribunals (DRTs) were established in 1993. A Scheme of Corporate Debt Restructuring (CDR) was introduced in 2001 outside the purview of BIFR. The SARFAESI Act was passed in 2002 paving way for the creation of Asset Reconstruction Companies (ARC). Currently there are 14 ARCs in India.These Securitization Companies/Reconstruction Companies (SC/RC) are regulated by the central bank of the country,RBI. RBI closely monitors the SC/RCs and their activities. These ARCs operate as per the provisions of the SARFAESI Act. They buy/acquire financial assets from banks and other financial institutions, and resolve them. The amount of assets acquired by the ARCs has displayed a consistent upward trend.Selling NPAs to ARC is indeedan efficient way of dealing with the bad loans as it allows the banks to focus on their core activities and helps in realising the blocked assets. The acquisitions are done either by issuing Security Receipts, which are transferable financial instruments or by paying cash to the banks. It may be observed that, the banks are coming up with the option of subscribing SRsfor which they were reluctant earlier, reason being the increase in NPAs in the banking sector withthe passage of time. On the whole the banks have started to display a strong inclination towards sale of assets for SRs also.

Details of Financial AssetsSecuritised by SCs/RCs

  End-June 2010 End-June 2011 End-June 2012 End-June 2013
Book Value of assets acquired   62217 74088 80500 88500
Security Receipts issued   14051 15859 16700 18900
Security Receipts Subscribed by   - - - -
a. Banks 10314 11233 11600 12600
b. SCs/RCs 2940 3384 3600 4500
c. FIIs - 39 100 100
d. Others(Qualified Institutional Buyers) 797 1203 1500 1700
Amount of SRs completely redeemed   4556 6704 8200 10100

For the purpose of recovery Banks/FIs have multiple routes. They may proceed for action under SARFAESI Act, approach Debt Recovery Tribunals or Lok adalats. Among the various recovery channels available to Banks, the DRTs and SARFAESI have been the most effective in terms of amount recovered.In FY13 SARFAESI played a vital role and accounted for about 80% recovery of the total NPAs amount.Under the companies Act 2013,the National Company Law Tribunal (NCLT) is being set up to bring all lawsuitspertaining to companies under a single body.

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