Академический Документы
Профессиональный Документы
Культура Документы
2001
Occasional Paper - 21
\T/
National Bonk for Agriculture and Rural Development
Mumbai
2001
Published by National Bank for Agriculture and Rural Development, Department of Economic Analysis and
Research, 4th floor, 'C Wing, Plot No. C-24, 'G' Block, Bandra-Kuria Complex, P.B. No. 8121, Bandra(East),
Mumbai - 400 051. Printed at Shubhamkaroti Printers, Ghatkopar (E), Mumbai.
ii
Acknowledgement
III
Authors
K.C. Sharma, P.Josh, R.Amaiorpavanathan and J.C.MIshra are Faculty
Members, BIRD, Lucknow. Sanjay Kumar Is Faculty Associate, BIRD,
Lucknow R.Bhaskaran Is Joint Director, BIRD, Lucknow.
The usual disclaimer about the responsibility of the National Bank as to the
facts cited and views expressed in the paper is implied.
IV
CONTENTS
Page No
CHAPTERI CHAPTER II
CHAPTER III CHAPTER IV
CHAPTERV
ACKNOWLEDGEMENT
INTRODUCTION
CONCEPTUAL ASPECTS OF OVERDUES, RECOVERY AND
PRUDENTIAL NORMS
IMPACT OF NPAs ON HEALTH OF RFIs
NON-PERFORMING ASSETS IN RURAL FINANCIAL
INSTITUTIONS
RECOVERY PERFORMANCE
13
11 15
27
CHAPTER VI
37
REFERENCES
CHAPTER I
INTRODUCTION
This occasional paper on recovery management in rural credit is
prepared at the behest of National Bank for Agriculture and Rural
Development (NABARD), Head Office, Mumbai. The focus is on rural
financial institutions (RFIs). Regional Rural Banks (RRBs), Co-operative
banks and rural branches of Commercial Banks (CBs) are the RFIs for the
purpose of this paper.
The Broad Objectives of the Paper are
• To discuss the conceptual aspects of overdues, recovery and prudential
norms.
• To analyse the pattern of build up of overdues in Rural Financial
Institutions.
• To discuss the factors affecting recovery of loans in Rural Financial
Institutions.
• To suggest methods and strategies for better recovery and NPA
Management in Rural Financial Institutions.
The paper is based on the review of earlier work in the area of
overdues and recovery management. Empirical analysis in the paper is
based on relevant data and information that are available to throw light on
the issue of overdues and recovery management in Rural Financial
Institutions (RFIs).
Rural credit relates to credit for agriculture and non-agricultural
purposes, the former being the major component (about 85% of the total
disbursement during 1998-99). The relative share of commercial banks, co-
operative banks and RRBs in the total institutional credit disbursement to
agriculture is about 49, 44 and 7 per cent respectively for TE 1998-99
(Economic Survey 2000-01).
For in-depth understanding of the problem of overdues in RFIs,
NABARD had earlier sponsored three studies in Karnataka, Orissa and
Madhya Pradesh. These studies were undertaken by the National Institute of
Rural Development (NIRD 1999), Hyderabad; National Institute of Bank
Management (NIBM 1996),
CHAPTER II
CONCEPTUAL ASPECTS OF OVERDUES, RECOVERY
AND PRUDENTIAL NORMS
2.1 Overdues, Recovery and NPAs
2.1.1 Overdues and Recovery
The magnitude of recovery amount overdue is one of the most
important indicators of financial health of RFIs. Currently, the accepted
standard of measurement of overdues is in relation to demand. The logic for
the demand as the basis is that it is the amount which has become due and
not the amount which is yet to become due for repayment. This distinction
is important because loans will have varying due dates for instalments as
they are issued on the basis of future cash flow from investments.
The term "overdues" is used to convey the meaning that instalments
of loans and Interest thereon are not paid on due date. The term "recovery"
of dues relates to repayments of loans and interest thereon in time.
Therefore, overdues exist if recovery of loans is not in time.
There exists a provision in RFIs to block the part of defaults that are
legally disputed or against which legal proceedings have been initiated. This
amount does not get included in the total amount due for repayment i.e.
"demand". For example, if a RFI has Rs. 100 in default including Rs. 20, on
which legal case is filed and recovery out of Rs. 80 is Rs. 50. The recovery
percentage will be calculated as 62.5% and not 50%. Therefore, exclusion
of disputed amount leads to overestimation of recovery performance.
RFIs often fail to write off bad loans due to various reasons. When
bad debts are not written off, the reported loan recovery performance may
be highly distorted. For example, assume that an RFIs lends Rs. 100 every
year and recovers 90 of that each year and Rs. 10 become bad.
borrower to repay the loan with interest. Failure of investment may result in
non-generation of income, failure of expected income may lead to
inadequate income, perception or pressure of more important and urgent use
of income may incapacitate the repayment and finally the borrower's
willingness and desire has to be there to fulfil repayment obligation. If loans
are not repaid, the RFI loses both its interest income as well as its capital.
Good management of recovery of dues is, therefore, a complex issue
encompassing economic and non-economic factors and has implications for
profitability of the RFIs.
Repayment of loan together with interest by borrowers is crucial for
recycling of funds deployed in rural credit. The fuelling of development
process by dispensing credit is meaningful only when timely repayment is
forthcoming. Othenwise expansion of credit delivery is seriously vitiated
and the delivery system gets chocked limiting the continued supply of credit
by financial institutions in rural areas. Good recovery is an important
ingredient for profitability of RFIs as it leads to increased financial capacity
to deliver credit.
2.2 Prudential Norms
The introduction of banking sector reforms in 1992 is a watershed in
the Indian banking system. The reforms have not only brought about
structural changes in the Indian banking system but have also greatly
influenced all types of banking entities in various aspects of operations,
governance, transparency and accountability. Though the reforms were
initially directed towards the commercial banks, they were subsequently
extended to cover the rural banking sector of the country corriprising also of
regional rural banks and co-operative banks.
Out of the various reform measures, the introduction of prudential
norms has been the cornerstone of banking sector reform process. The
prudential norms mainly cover the following four major aspects: Capital
Adequacy; Income Recognitiop; Asset Classification; and Provisioning.
Herg it will be pertinent to mention the views of the Committee on the
Financial Systerri, .j^991 popularly known as Narasimh^m Committee I.
Prudential Norms
CBs
RRBs
Co-operative Banks
1992-93
1992-93
1995-96
1995-96
1996-97
1996-97
(with three years (with three years (No phasing for NPAs) phasing of NPAs)
phasing of NPAs)
1992-93
1996-97
1996-97
(with relaxation in
the first year)
10
11
1- (SLR + CRR)
Where SLR = Statutory Liquidity Ratio
CRR= Cash Reserve Ratio
Thus, as the level of NPAs to total loans and advances increases, the
liquidity risk of RFI also increases.
3.4 Loan Assets Turnover
RFIs with high NPAs have a regressive loan portfolio. As large
amount is blocked in NPAs and is not available for recycling, the loan
availability starts shrinking over the period. This invariably reduces the real
rate of expansion of loan portfolio.
12
suggested that lending rates should also come down. Although theoretically
such reduction is relevant, yet in the context of the huge burden of NPAs
and need to maintain higher spreads to protect their profit position, banks
have not been in a position to do so."
3.6 Risk Taking Ability
Lastly, high level of NPAs reduces risk taking ability of the RFIs. It
also affects the credit rating of the RFIs thereby restricting their ability to
approach the public for capital subscription (Tier I Capital). Alternatively, a
low rating substantially increases the cost of raising funds even for Tier II
Capital.
3.7 Sum Up
Thus, it can be concluded that NPAs greatly affect the financial health
of the RFIs. Nothing can highlight the importance of NPAs and their impact
more than the Narasimham Committees (I and II) whose reports have
become the precursor of the financial reforms in general and banking
reforms in particular. The Committee on Banking Sector Reforms
(Narasimham Committee II, 1998) is quoted in this regard as follows:
" NPAs constitute a real economic cost to the nation in that they
reflect the application of scarce capital and credit funds to unproductive
uses. The moneys locked up in NPAs are not available for productive use
and to the extent that banks seek to make provisions for NPAs or write them
off, it is a charge on their profits. To be able to do so, banks have to charge
their productive and diligent customers a higher rate of interest. It thus
becomes a tax on efficiency. It is the customer who uses credit efficiently
that subsidises the inefficiency represented by NPAs. This also raises the
transaction costs in the system thus denying the diligent credit customers
the benefit of lower rates, which would help them to be more efficient and
competitive. NPAs, in short, are not just a problem for banks. They are bad
for the economy".
14
CHAPTER IV
NON- PERFORMING ASSETS IN
RURAL FINANCIAL
INSTITUTIONS
15
(Rs. Crore)
Variables 1996 1997 1998
Total Advances 229231 244214 284971
Total Gross NPAs 39583 * 43577 45652
% of Gross NPAs to Total 17.27* 17.84 16.02
Advances
Priority Sector Advances (PSA) 69609 79131 91318
% of PSA to Total Advances 30.37 32.40 32.04
Gross NPAs in PSA 19106 20774 21183
% of Gross NPAs in PSA 27.45 26.25 23.20
Share of Gross NPAs in PSA to 48.27 47.67 46.4
Total Gross NPAs
Non-priority Sector Advances 159622 165083 193653
Gross NPAs in Non-priority 20477 22802 24469
Advances
% NPAs in Non-priority 12.82 13.81 12.63
Advances
* The figures of Gross NPAs and the percentage of Gross NPAs to Total
Advances as
subsequently revised to Rs 41661 crore and 18 per cent respectively, but the
break
figures for priority sector and non-priority sector were not
available.
Source: RBI, Website
17
Table 4.2: Distribution of RRBs according to Percent NPA to Total
Advances
% of NPA to Loans
Years Above 41 10 Below Total Median
% %
to to
70% 70% 40 10% NPA
% ratio
95-96 22 91 79 4 196 45.2
96-97 10 88 88 10 196 40.0
97-98 4 71 109 20 196 32.3
98-99 1 56 119 20 196 26.2
Source: Key Statistics on Regional Rural Banks 1996, 97,98, and 99,
NABARD, Mumbai,
Initially, there has been major shift of RRBs from higher level NPA
categories (viz., above 70% and between 41 % to70%) to lower level
categories but the improvement has not further progressed downward from
the 3"* category of 10% to 40% to 4* category of below 10%. The
concentration of majority of RRBs in the 3'" size category indicates that
after major reduction in NPAs, it becomes increasingly difficult to effect
marginal reduction in NPAs position & stupendous efforts are required to
further reduce the NPAs of the RRB.
4.2.2 State Wise Analysis
NPAs and recovery perfonnance of RRBs of major states of India are
given in Table 4.3
Table 4.3 : NPAs and Recovery Performance of RRBs: Major
States
State 1996-97 1997-98 1998-99 % NPAs Recovery %
NPAs Recovery %NPAs to loans %* to loans %*
to loans
A. States with NPAs% below National Average (98-99)
18
19
Source: Key Statistics on Regional Rural Banks 1996, 97,98 and 99,
NABARD, Mumbai
The share of standard assets in the total loan portfolio of RRBs has
also increased significantly from 56.93% in 1995-96 to 72.11 % in 1998-99.
Despite these encouraging trends, the overall quantum of NPAs in loan
portfolio at 28% and that too of doubtful assets at 17% is still high as
mentioned earlier. Further, it may be observed that while in the last two
NPA categories there is decrease in both absolute and relative terms, in case
of sub-standard assets, they are, in fact, increasing in absolute terms. This
trend can be attributed either to shift of doubtful assets to substandard level
or occurrence of new sub-standard assets out of fresh loans with no
upgradation of already existing sub-standard assets into standard assets. This
is a disturbing feature and if not arrested early, may nullify the efforts of
RRBs to contain NPAs.
20
21
23
Table 4.7: NPAs level and Recovery Performance of SCBs: Major States
States 1996- 1997-98
97
% NPAs to loans Recover %NPAs to
y% loans Recovery
%
A. States with NPAs % below (1997-
National Average 98)
1. Tamil 0.18 99.9 0.19 99.1
Nadi
2. Gujarat 3.27 98 1.00 94
3. 1.37 99 1.45 99
Haryana
4. Kerala 5.92 87 2.56 81
5. 3.59 89 2.62 90
Karnataka
6. Goa 4.05 71 3.54 68
7.M.P. 3.13 99 4.32 99
8. Orissa 7.16 79 5.24 88
9. 9.17 82 5.77 80
Rajasthan
10. U.P. 5.43 85 6.88 89
11.W.B. 17.33 70 11.5 78
2
B. States with NPAs% above National
Average (1997-98)
1.A.P 10.31 63 18.6 62
5
2. ra 13.20 79 18.6 68
Maharast 7
h
3: J&K 22.37 64 28.2 45
0
4. H.P 26.9 35 34.5 39
7
5. Assam 46.55 24 49.6 19
3
6. Bihar 57.00 18 66.1 13
9
1. Haryana
2. Rajasthan
3. Tamil Nadu
4. Karnataka
5. H.P.
6. W.B. 7.A.P.
8. Kerala
4.35
12.23
10.76
31.36
15.87
16.50
11.87
15.49
79 5.98 78
83 8.84 85
60.2 12.51 76.4
75 13.35 69
63 14.97 56
72 15.11 74
75 15.52 71
80 18.12 79
62
18.63
58
64 19.60 66
58 20.33 57
56 23.18 36
70 24.85 70
17 48.18 17
18 72.56 11
7 88.54 4
25
Table 4.9: Growth of NPAs in CBs, RRBs, SCBs and DCCBs (1996-97 to
1998-99)
Category NPAas%oftotal Volume of NPAs (Rs. Share the total
of Banks Advances Crores) in NPAs
1996-97 1997- 1998- 1996- 1997- 1998- 1996-97 1997- 1998-
98 99 97 98 99 98 99
i)CBs 18.00 17.8 16.0 41661 43577 45652 81 80 79
4 2
ii) RRBs 36.79 32.8 27.8 3205.2 3237.9 3167.84 6 6 5
4 9 0 9
iij) SCBs 9.41 11.7 12.5 1626.4 2304.1 2747.93 3 4 5
6 5 7 7
iv) DCCBs 19.7 18.0 17.8 5223.8 5687.3 6572.7 10 10 11
6 1 5 7 3
Total 18.35 17.9 16.4 51716. 54806. 58140.7 100 10 100
8 7 5 5 0
26
CHAPTER V
RECOVERY
PERFORMANCE
The efficiency of a RFI as a financial intermediary depends to a great
extent on timely recovery of loans. Abnormal delay in recovery of loans
builds up NPAs which affect RFIs adversely with respect to liquidity and
impair their ability to service the maturing liabilities as mentioned earlier.
The blocked funds in NPAs increase the cost of financial intermediation as
RFIs resort to raising deposits and borrowings at a higher cost as a measure
to minimize the imbalance between cash outflow and cash inflow arising out
of the NPAs. This has an adverse impact on the profitability of the banks
both in the short-run and long run as mentioned earlier.
5.1 Recovery Performance of RRBs
The Agricultural Credit Review Committee (1989) observed that the
recovery level of 49% of demand in the RRB system was a matter of
concern. This situation, however, has improved in recent years.
The percentage of recovery to demand in RRBs across states during
the period 1991 to 1998 is presented in Table 5.1. The recovery rate in
RRBs touched a very low point of 40.89% during 1992 in a seriously
contaminated recovery climate in the country after the announcement of
Agricultural and Rural Debt Relief (ARDR) scheme 1989 by the
Government of India. As per the ARDR scheme of 1989, loans outstanding
of less than Rs 10,000 were waived.
For ease in interpretation, Table 5.2 is prepared where region-wise
recovery percentage are given. During 1992, with the exception of Southern
Region (Andhra Pradesh, Karnataka, Kerala and Tamil Nadu) and Central
Region (Madhya Pradesh and Uttar Pradesh), the recovery rate was
substantially low in all other regions of the country. In fact the southern
region had a marginally higher recovery percentage during the year.
27
Table 5.1 : State wise Recovery Percentage of RRBs during the period 1991-
98
Sr.No.
Name of States
1991
1992
1993
1994
1995
1996
1997
1998
Haryana
Himachal Pradesh Jammu & Kashmir Punjab Rajasthan
Northern Region
53.06
36.44
37.87
41.28
52.35
57.86
56.29
65.83
6.
7.
8.
9.
10.
11.
12.
Arunachal Pradesh
Assam
Manipur
Meghalaya
IWizoram
Nagaland
Tripura
Southern Region
54.68
56.73
56.63
64.66
66.29
68.93
71.62
72.74
ALL INDIA
45.21
40.89
41.20
46.23
50.98
55.10
56.96
60.54
28
Table 5.2: Region-wise Recovery Performance in RRBs
Region
Northern Region
(Haryana,HP,Punjab,J&K, 53.06 36.44 37.87 41.28 52.35 57.86 56.29 65.83
29.39
Rajasthan
North Eastern Region 33.90 14.08 9.11 10.27 14.67 14.47 21.31 24.64 10.56
Eastern Region
(Bihar.Orissa, West Bengal) 38.45 27.33 24.71 27.51 31.66 37.48 42.34
42.66 15.33
Central Region
(IWP&UP) 36.05 36.25 39.16 41.45 47.23 50.12 52.48 55.26 19.01
Western Region
(Gujarat & Maharshtra) 40.02 33.92 38.68 46.89 58.06 67.35 59.15 66.36
32.44
Southern Region
(AP, Karnataka, Kerala, 54.68 56.73 56.63 64.66 66.29 68 93 71.62 72.74
16.01
Tamilnadu)
ALL INDIA
19.65
29
recovery was an integral part of such DAPs. All the Sponsor Banks/ RRBs
signed a Memorandum of Understanding (MoU) with NABARD to achieve
certain business parameters including recovery targets over a period of five
to seven years which brought about commitment of the management of the
individual RRB.
The increasing competition in the banking world under the ongoing
financial reforms process also propelled RRBs to make vigorous recovery
efforts to ensure their survival and growth. The introduction of prudential
norms in 1995-96 and further tightening of the norms in the subsequent
years led to greater accountability on the part of the management and staff
of RRBs. These norms clearly established a direct linkage between recovery
of advances and the profitability of the branches which was not conspicuous
in the previous system of health code classification of assets based on
overdues criterion. The RRBs were left with no option but to effect recovery
of derecognised income and prevent fresh incidence of non-performing loan
assets. This resulted in fairly widespread improvement in internal systems
and control and strengthening of recovery mechanism in RRBs.
The Organisation Development Initiative (ODI) taken up by
NABARD/Bankers Institute of Rural Development (BIRD) in selected
RRBs helped in arousing the motivational levels among the staff and
transforming them into challenge seekers as the process involved a wider
cross section of staff in business and profit planning through DAPs. This
brought commitment of the RRB staff without which it would have been
difficult to negotiate the U-turn on recovery highway.
5.2 Recovery Position in Co-operatives
Recovery position in relation to short term and long term co-
operative credit across states for the last three to four years is shown in
Tables 5.3 and 5.4 respectively. As regards short term credit, recovery
percentage is generally higher in case of SCBs across states followed by
DCCBs and PACS respectively. Recovery rates are lower in North-Eastern
Region and Bihar and are higher in Haryana, Punjab, Madhya Pradesh,
Gujarat and Tamil Nadu.
30
31
Recovery percentage in relation to long term co-operative credit is
lower compared to short term co-operative credit generally. However,
recovery patterns are similar across states in case of short term and long term
co-operative credit.
Table 5.4 : Recovery Percentage of Long Term Cooperative
Credit (% of Collection to Demand)
states SCARDB PCARDBs
95- 96- 97- 98- 95- 96- 97- 98-
96 97 98 99 96 97 98 99
A.
Northern
Region
1. Haryana 95 96 93 94 66 70 65 69
2. Himachal 65 70 67 69 69 80 80 81
Pradesh
3. Jammu & 39 32 33 37 NA NA NA NA
Kashmir
4. Punjab 100 100 100 10 89 82 83 83
0
5. Rajasthan 80 84 85 82 69 72 67 65
6. 48 49 34 22 NA NA NA NA
Chandigarh
7. Delhi NA NA NA NA NA NA NA NA
B. Northern 1
-Easterr Regio
n
1, NA NA NA NA NA NA NA NA
Arunachal
Pradesh
2. Assam 2 24 16 1 NA NA NA NA
3. Manipur 11.91 11.1 4.99 NA NA NA NA NA
5
4. NA NA NA NA NA NA NA NA
Mehhalaya
5. Mizoram NA NA NA NA NA NA NA NA
6. Nagaland NA NA NA NA NA NA NA NA
7. Tripura 66 51 44 57 NA NA NA NA
C. Eastern
Region
1. Bihar 33 38 38 36 NA NA NA NA
2. Orissa 18 11 6 7 39 31 24 23
3. West 60 61 62 64 60 63 62 59
Bengal
4. Andaman NA NA NA NA NA NA NA NA
& Nicobar
D. Central
Region
1. iVIadhya 39 42 37 42 52 55 48 60
Pradesh
2. Uttar 79 80 81 82 NA NA NA NA
Pradesh
E. Western
Region
1. Goa
2. Gujarat 66 65 66 64 NA NA NA NA
3. 52 50 44 45 NA NA NA NA
Maharashtra
F.
Southern
Region
1. Andhra NA NA NA NA NA NA NA NA
Pradesh
2. 38 41 31 33 36 38 32 34
Karnatal<a
3. Kerala 92 93 93 95 75 76 73 73
4 Tamil 50 55 51 52 42 47 43 47
Nadu
5. 49 53 36 41 NA NA NA NA
Pondicherry
33
34
35
A. External
B. Internal
I. RFI Related:
Credit Decisions
36
CHAPTER VI RECOVERY
AND NPA MANAGEMENT
RFIs were never so serious in their efforts to ensure timely recovery
and consequent reduction of NPAs as they are today. It is important to
remember that recovery management, be of fresh loans or old loans, is
central to NPA management. This management process needs to start at the
loan initiating stage itself. Effective management of recovery and NPA
comprise two pronged strategy. First relates to arresting of the defaults and
creation of NPA thereof and the second is to handling of loan delinquencies.
The tenets of financial sector reforms were revolutionary which created a
sense of urgency in the minds of staff of RFIs and gave them a message that
either they perform or perish. The prudential norms has forced the RFIs to
look into the asset quality. The recovery and NPA management strategies
adopted by the RFIs may be classified into two broad categories viz. 1.
Preventive and 2. Corrective strategies. While preventive methods are aimed
at preventing the event of a default within the prescribed procedures, the
corrective methods are^ aimed at ensuring recoveries once credit is due for
payment.
6.1 Preventive Methods
The preventive methods include-
• More careful and responsible scrutiny and appraisal. This includes
timely sanction, realism in fixing repayment schedule and adequacy
of credit with efficient delivery.
• Evolving a broad loan recovery policy and implementing through the
cadres with adequate accountability and empowerment.
• Regular and effective follow up with borrowers and timely action on
sensing the likely default.
• Title, value, etc. and additional security are to be investigated before
the disbursement of loan.
• More detailed information about the borrowers is to be obtained in
terms of
37
39
50% of the total NPA of the bank so that Head Office can have control over
the recovery efforts initiated at the selected high NPA branches through
intensive monitoring. In some cases, top 100 NPA accounts of the bank
pertaining to various branches are identified and monitored directly from
the Head Office in co-ordination with branches. Following steps are taken.
• Executives of RRBs visit selected 100 NPA parties and establish direct
personal contact for ensuring recovery. The RRBs arrange for
customers' meet especially of NPA clients at various important
centres to discuss and address their problems.
The RRBs arrange periodical lawyers' meet to review the status of
suit filed cases.
Pragmatic approach is followed for out of court settlement of loan
accounts and bringing compromise proposals to logical end at the
earliest. Identification of potential NPAs Is done by the end of the
first quarter of the financial year so that preventive measures could be
initiated at the beginning. Staff mobility is ensured and the recovery
staff is allowed to hire transport to suit their needs and no questions
are asked.
Staff are deputed to Sub Divisional Officer (SDO) orTehsil courts to
assist the court staff for issuing notices to borrowers In case of
overdue loans. Periodical recovery camps are held In villages In co-
ordination with Government officials.
The borrowers are constantly reminded about their overdues and
notice to clear them are regularly sent.
List of defaulters is displayed in the notice board of the branch
without disclosing the account number, amount of loan, overdue, etc.
The Idea is simply to draw attention of the defaulters to contact the
Branch Manager. A copy of the list Is also given to the counter clerk
so that he/she can ask the defaulters whenever they come to the
branch to transact to meet the Branch Manager.
40
I
jnd
I
'en
I
Identify critical branches for intensive recovery
t
Fix targets of recovery and draw timebound action programme
i
gtf
i
Select proper strategy for solving the problem of each NPA account
I
Monitor implementation of time bound action plan
reimbursement once the decree is executed from out of sale proceeds as per
decree. However, in most cases the cost aJlowed is far less than the actual,
inflicting high expenditure to the banks. It is seen that in case of RFIs, the
legal process is not only long drawn buK also expensive.ln the meantime, as
per prudent accounting procedure, the money will remain in the books of
accounts without earning anyinterest. Also, making it imperative to make
provisions as per directives. The following points are worth mentioning.
i The law does not allow sale as an automatic right of the creditor -
except
through a court process even in the case of mortgage, i The procedure
for seizure and foreclosure is involved and costly, ii In many cases, such
as tribals, property alienation is not permitted, iv In case of small loans
to poor, there is no asset available for attachments.
Therefore, proper and effective legal process is very crucial in
creating a repayment atmosphere. If it is proved that the legal process is
time consuming and long, it would make the security ineffective. Once this
is well known, borrowers would not hesitate to offer security as they can
default with impunity and get compromises. Maharastra Land Development
Bank (LDB) has, in fact put the entire compromise process in the form of
Bye-Laws which encourage a borrower to default to and then settle the dues
after getting substantial interest waiver. Nowadays, compromise proposals
are on the increase. For the compromise process to start the RFI will have to
complete the legal process and obtain the decree. Once the borrower is
apprehensive of losing the security he comes to the compromise table. In
case of loan accounts where there are no assets to proceed against, the
compromise is a non-starter.
6.3.2 Use of Collaterals and Collateral Substitute
It is seen that the recovery process through legal system with or
without collateral is equally costly and lengthy. The court fee is payable on
the amount of default or on the amount to be recovered and not on the value
of the security. Judiciary and Revenue machinery have been generally
unable to help the RFIs in recovery. The sheer volume of cases weighs them
down even if the system has the intention. Except for the demonstrative
effect, filing of summary or money suit for unsecured loans does not
45
provide any tangible benefit for the RFIs. RFIs observe that pursuing such
suits to a logical end is not prudent as it involves higher administrative and
risk costs for them.
The expenses made on the court lie in the books of accounts until their
recovery is made by effecting the sale. This is a drain on the RFI's resources
and
is often without any return for the RFI during the period. The RFIs feel that
the cost of executing the collateral is quite high for the RFIs.
6.3.3 Efficacy of Cooperative Law
Under State enactments, the Cooperative Banks and Credit Societies
enjoy certain privileges like 'change' and priority over other creditors for
recovery of dues from members. They also enjoy exemption from payment
of stamp duty and registration charges for mortgaged land while availing
agricultural loans (upto some financial ceiling) and the creation of mortgage
by the borrower by simple declaration.
In addition, the Cooperative Banks enjoy special facilities to expedite
the process of recovery of their dues without recourse to civil courts. State
Laws authorise some officials of the Government (Registrars of Cooperative
Societies) to exercise the powers of a civil court to order attachment and
sale of property of debtor to fulfill the repayment obligation to a cooperative
society.
The essence of these special facilities, usually referred to as summary
procedure, is that the authorised officials are empowered to issue an order
having the force of a decree of a civil court for payment of any sum due to
the banks by sale of the property changed or mortgaged in favour of the
bank. These powers have been granted to facilitate recovery of dues of
cooperatives without having to resort to time consuming litigation in civil
courts. The Recovery performance of the cooperatives is not improving
despite the above special facilities showing the inept handling by
government machinery. The cost, despite the easy procedure, is high as the
high cost of the departmental officials for the semi judiciary process is met
by these banks in addition to recovery officers of the bank. Further, the
execution of awards
46
through sale gets, most often, vitiated by external forces, as being the
government agency, cutting the root of the efficacy of the special facilities
supposedly given to co-operatives.
6.3.4 Revenue Recovery Acts
An Expert Group headed by Shri R.K. Talwar in 1970 had
recommended extension of similar facilities to commercial banks by
appropriate State legislation (TalwarCommittee, 1970). On the basis of the
recommendations of the Talwar Committee, the State Governments (barring
nine) have passed the Agricultural Credit Operations and Miscellaneous
Provisions (Banks) Act, The act empowers designated officials of Revenue
Department to issue an order having a force of decree of a civil court for
payments of any sum due to a bank by sale of the property charged or
mortgaged in favour of the bank. This facilitates foreclosure of mortgage on
land in bank's favour and brings the property for sale. Under the act a
nominal fee and not the entire salary of the government official, is charged
to the bank.
The recovery officers under the Act have helped in recovering small
loans of the banks. The banks, in States like Uttar Pradesh, Karnataka, have
taken proactive steps to fund the cost (salary of recovery officers and other
incidental expenses) by making a collective contribution for their
establishment and/or allowing a recovery fee of 5% to 10% of the recovered
amount towards their maintenance. But the above system has not worked
uniformly well in all the states. The state governments had found it difficult
to spare officials possessing zeal for this type of work which is a
prerequisite for a supporting machinery to work efficiently. Use of
government official machinery helps in infusion of the threat perception
amongst people, but the political interference becomes a part of it.
Therefore, the lack of political will beconrles a hindering factor in the
process. It would perhaps be necessary to study the relative efficiency of the
system across the country, so that improvements wherever possible, could
be made.
47
and more RFIs feel the pressure of NPAs such improvements are crucial to
the success of rural financial intermediation.
One of the most important causes hampering the recoveries of NPAs,
among other things is a long-winded and ineffective legal recourse available
to RFIs in India. A legal framework that clearly defines the rights and
liabilities of parties to contracts and provides for a speedy resolution of
disputes is essential for efficient financial intermediation. It is true that
existing legal framework is archaic, slow and outright non-productive as
discussed above. It is also not in tune with the changing commercial
practices and banking refonns. Some of the legal acts which were enacted in
nineteenth century and therefore require immediate overhauling are Indian
Contract Act 1872, Transfer of Property Act 1882 and Indian Stamp Act
1899.
It is understood that RBI has already constituted committees for
looking into the necessary amendments to various banking related Acts.
Simultaneously, there is a committee which is looking into the amendments
necessary in the plethora of Acts that affect the collateral and collateral
efficiency.
Improvements in the legal process involving collaterals will have no
impact in the case of small loans where the borrowers have no collaterals to
offer. It is here that the propagation of various models of microfinance will
be welcome.
6.4 Macro Policy issues
6.4.1 Central Government and State Governments
The great contribution central and state governments can make in
improving recovery management of RFIs is by not announcing politically
motivated schemes like distribution of loans through loan melas, loan
waivers, interest waivers, etc.
State government have to ensure that no state law governing the
business of co-operative banking is curtailing the liabilities provided under
B.R. Act by RBI. That is, state governments need to liberate banking co-
operatives in line with B.R.Act. This includes freedom on interest rate
matters, terms of lending etc.
49
Regarding the law of mortgage, the response has been to enact the
separate enactments by many states to remove difficulties in recovery of
loans and to speed up the process of enforcement and foreclosure. Besides,
suggesting amendments in the various legal Acts, Narasimham Committee
II (1998) has recommended two approaches to recover NPAs and thus, to
cleanse the balance sheet of the banks. They are:
(i) Setting up of Special Tribunals for recovery of dues to banks and
financial institutions. (Originally suggested by the Tiwari Committee
(1984) and subsequently endorsed by both the Narasimham
Committees) (ii) Forming of special purpose vehicle like Asset
Reconstruction Company (ARC) for each bank or a group of banks.
The special tribunals known as debt recovery tribunals (DRT) have
been set up under the DRT Act as mentioned earlier. Recently, Government
of India has approved granting more teeth to DRT act by moving some
important amendments. These relate to empowerment of tribunals to attach
property on filing of complaint of default by the bank. Besides, it also
empowers the processing officers to execute the decree based on a
certificate issued by the DRT. These two steps together would ensure
speedy recovery of dues, iron out delays at the DRT end as well as prompt
action without waiting for the venture to go sick.
Some important areas where the support of the GOI/ RBI/ NABARD
is required for improved recovery management are outlined as follows.
i) RFIs should be governed by the state Act for empowering recovery
initiatives with specific provisions. A Rural Credit Recovery
Act could cover all loans issued in the state but not covered by
Debt Recovery Tribunals. Empowered Rural Credit courts
financed by all RFIs, as a percentage of rural credit portfolios
may be established. Or
ii) The state governments may speedily devise suitable mechanisms
under the existing legislation such as Revenue Recovery
50
Act, Public Debt Recovery Act etc., for providing recovery assistance
to RFIs. iii) The RFIs need to be allowed to offer social security
financial products, like rehabilitation loans, insurance, etc. directly or
indirectly in collaboration with other agencies offering such products.
This would broad base the functioning of RFIs at village level and
would improve the recovery climate.
6.4.2 Internal Policies of RFIs
In the changed circumstances of financial reforms, more and more
freedom to RFI in decision making is expected. RFIs will have to act
promptly to benefit from such freedom in decision making.
For speedy recovery management, decentralisation of decision making
regarding resheduling of loans and repayments due to local events of
drought, floods, etc. should be with regional, zonal or branch managers in
the area. Similarly, decisions regarding compromises and write offs should
also be decentralised to branch level. This decentralisation in terms of
decision making is not limited to just taking decisions at branch level but
making branch staff accountable to their decisions. There is also an urgent
need to train the bank staff on prudent decisions making.
Innovative methods of involving panchayats, good non government
organisations (NGOs), self help groups (SHGs), Vikas Volunteer Vahini
(VW) farmers' clubs, etc. for recovery of loans need to be evolved. This is
because these local level institutions - be formal legal entities like
panchayats and NGOs or informal entities like SHGs and \AA/ farmer clubs
have the advantage of understanding the local conditions better. The RFIs
could benefit from this advantage if these are involved in informing and
educating the borrowers the benefits of prompt recovery for continued
financial services in a sustainable manner.
RFIs have to involve themselves more in propagating rural
technology, rural
51
health etc. to exhibit their concern for rural development for mutual benefit
rather than just the credit alone. It is this feature of credit that has potential
to distinguish RFIs from others, increase their relevance in the rural setting
and improve the recovery climate in rural areas.
It is sincerely hoped that RFIs working in rural India shall be able to
manage recovery to reduce NPAs effectively by adopting suitable
preventive and corrective recovery methods specific to their area and
clientele.
6.5 Sum Up
Legal support is critical to effective recovery management. However,
the experience with legal support has not been very encouraging as it has
been prolonged, ineffective and expensive for the RFIs. A legal system that
clearly defines the rights and liabilities of parties to contracts and provides
for timely resolution of disputes is essential for efficient recovery
management. Existence of legal framework is one thing and its enforcement
is quite another. Changes are required on both fronts. Outdated laws need to
be changed and laws enacted need to be properly enforced. It is heartening
to note that RBI has already taken initiatives in this direction.
The role of governments (Central and State) is crucial for creating
and maintaining proper recovery environment in society. India being a
democratic country, politically motivated but otherwise damaging public
announcements like loan waivers, interest waivers, etc. pollute the recovery
environment. Governments have to learn to respect the professionalism of
RFIs and should not interfere in their business affairs.
In the era of financial reforms involving liberalization and
decentralisation in decision making, it is important that it percolates down
to branches of RFIs. Decisions relating to rescheduling of loans and
repayments at branch level due to local conditions of drought, floods, etc. is
an example to illustrate the point. Similarly, decisions regarding
compromises and write offs also need to be decentralised to branch level.
This decentralisation in terms of decision making is not only limited to
decision
52
making alone but is about making branch staff accountable to their
decisions.
With renewed emphasis on participatory development process, it is
relevant that RFIs involve panchayats, NGOs, SHGs and VW farmer clubs
for recovery of loans. This is a mutually advantageous partnership. These
grassroot level institutions have the knowledge about local people and
conditions which RFIs do not have. In return, rural people get financial
services on a continuous basis if good recoveries are effected with
involvement of village level institutions.
53
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