If you look at a company’s balance sheet and if you look at a bank’s balance sheet, one of the striking differences would be in which column the loans fall. For a bank, they fall in the assets column and for a company they fall in the liability column. A bank gives you a loan and it expects to get it back with some interest on the loan.
If the customer does not pay either the interest or the principal sum, it means what earlier was an asset to the bank has now turned into a liability and hence, these assets are termed as non-performing assets (NPA). According to the Reserve Bank of India (RBI), interest or installment on loans, which are overdue for more than 90 days after a particular quarter, is called a non-performing asset.
Why do NPAs have to be reduced?
NPAs for obvious reasons cause a truckload of problems. If the NPAs keep on increasing, the bank will lose out on its loan reserves, bank shareholders will be affected, the cost of bank operations will increase and it will also result in slow loan assets turnover. The latest report of June 2016 reveals that the total amount of Gross Non-Performing Assets (NPAs) for public and private sector banks is around Rs. 6 lakh crores. This led to India trying to remedy the NPAs using various measure. The most popular ones are listed below.
This led to India trying to remedy the NPAs using various measure. The most popular ones are listed below:
1. Debt Recovery Tribunal Act
When a borrower, is unable pay the loans, the bank after failed attempts at recovering the loan, approaches a Securitisation and Reconstruction company. If that company also fails to recover the loans, they can approach a Debt Recovery Tribunal. Passed in 1993, the Indian Parliament had introduced the act with the intention of ensuring high efficiency in settling claims of the banks and financial institutions and helping them recover their dues for loans of Rs. 10 lakh and above.
An act with good objectives, it has not managed to generate the kind of results it was expected to and about 70,000 cases are pending. This is mainly because the influential borrowers get away by claiming to have their cases pending in civil courts. The other reasons include lack of infrastructure, grey areas in the judiciary and lethargy of the various systems.
2. Amendment to SARFAESI Act
The Amendments to the SARFAESI (Securitisation and reconstruction of financial assets and enforcement of security Interest) Act, 2002 were introduced in 2016, in the hope that NPAs would be recovered faster and make the functioning of the ARCs (Asset Reconstruction Companies) smoother. ARCs are companies that buy NPAs from banks at a discount and recover the money from defaulters.
The bill took into consideration and amended 4 acts—Sarfaesi Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899 and the Depositories Act, 1996. This bill places more power in the hands of the RBI, which can now audit and inspect ARCs, impose penalties for not adhering to its directives and sack any chairman or director. No matter how transparent the amendments make the system, the key is implementation, which is yet to be seen. The lack of infrastructure can be an added hurdle.
3. Insolvency and Bankruptcy Code, 2016
Insolvency and Bankruptcy Code (IBC) helps troubled corporates, partnership firms and individuals in debt to re-organise and opt for insolvency resolution in a time-bound manner to maximise value of its assets. The National Company Law Tribunal (NCLT) is the adjudicating authority for the corporate insolvency and bankruptcy cases.
The NCLT already has more than 4,000 cases pending. The added burden might cause inefficiency and further postponement of cases. Another challenge could be the lack of information utilities’ infrastructure. Even though a significant reform, it requires meticulous planning and proper implementation for its best utilization.
4. Amendment to Banking Regulation Act
The Banking Regulation (Amendment) ordinance was replaced by the Banking Regulation (Amendment) bill in July, 2017. This is an amendment to the Banking Regulation Act, 1949. It allowed the Central Government to grant RBI the right to keep an eye on bank accounts of big loan defaulters.
RBI will also be able to implement stringent rules on Joint Lenders’ Forum (JLF) and Oversight Committee (OC) for monitoring the levels of NPA. Under this amendment, a bank will no longer have the permission to extend loans to a defaulter. These powers vested in the hands of RBI will mean increased stability of banks.
5. Lok Adalat
Lok Adalat, literally translating to People’s court is an innovative special court where a conclusion is reached by making the two parties cooperate and compromise by direct communication. First started in 1982 to relieve regular courts of their insurmountable burdens, the court requires no fees and in case there is a settlement, the fees given earlier when the case was going on in the regular court, will be reimbursed.
Even though this system has picked up, it comes with its own set of pitfalls. Firstly, it is not capable of solving all types of cases, as some of them require punishment and not settlement. Another point is that in some cases, justice comes with a big compromise for 1 of the 2 parties. This is definitely not a desirable situation as it is depriving the party of justice in its true spirit. However, Lok Adalat is still a preferred way of dealing with a majority of cases as it saves citizens the headache of regular courts.