NPA Market In India

Rapid growth of consumer market in India has resulted in great deal of investment opportunities pushing up the demand for bank credit. Credit growth picked up significantly since 2001 largely on account of robust growth in the economies and excess liquidity in the banking system. The growth remained broad based thus reducing credit concentration risk. The principle driver to credit growth was retail loans, which grew by over 35% annually. Assets quality of the banks has improved significantly as reflected by the decline in the ratio of gross NPLs to gross advance from 16% in FY 97 to 2.4% in FY 07. The Ratio of net NPLs to net advance at 1.0% is comparable with that of several advance countries. Some of the key Factors that enable this significant reduction in nonperforming assets include a rapidly expanding economy, improvement in the credit appraisal process, grater provisioning and write-offs of NPA and SARFAESI Act that enable resolution of NPLs. 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.. These recent measures have all enabled banks to address the "flow" and not just the stock of NPAs. These institutional measures, accompanied with high economic growth and asset base diversification have helped banks to improve the quality of assets despite the tightening of prudential norms in terms of classification of non-performing assets. NPAs in percentage terms displayed a declining trend till 2007-08, but then stagnated and have started increasing again over past couple of years. However the scenario of NPA management considerably improved since the passing of the SARFAESI Act. According to the provisions of the act, Asset Reconstruction Companies (ARC) were established in the country. These Securitization Companies/Reconstruction Companies (SC/RC) are strictly regulated by the central bank of the country. RBI closely monitors the SC/RCs and their activities. The activity in the securitization industry was low in the beginning, but picked up slowly with the passage of time. As of march 31, 2011 there were 14 ARCs operating the country. 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. The acquisitions are done either by issuing Security Receipts, which are transferable financial instruments or by paying cash to the banks. It may however, be observed that the trend is against the subscription of SRs by the banks. On the whole the banks have started to display a strong inclination towards sale of assets for cash and not against the issue of SRs.

2007 Book Value of assets acquired Security Receipts issued Security Receipts subscribed by a. b. c. d. 28544 7436 Banks SCs/RCs FIIs Others (Qualified 6894 408 134

2008

2009 Crore 41414 51542 10658 8319 1647 692 12801 9570 2544 687

2010 62217 14050 10314 2940 797

Amount of Security Receipts completely redeemed

Institutional Buyers) 660 Others (Qualified Institutional Buyers)

1299

2792

4556

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.

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