Mrs. Chandra Shaardha Research Scholar, SRM University, Delhi NCR Campus, Modinagar-Ghaziabad Uttar Pradesh , India.

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1 The Impact of SARFAESI Act 2002 in recovering the Non Performance Assets in Public Sector Banks: A study on Recovery in SBI, CBI, CB, BOB and PNB (2008 to 2014) Mrs. Chandra Shaardha Research Scholar, SRM University, Delhi NCR Campus, Modinagar-Ghaziabad Uttar Pradesh , India. Dr. Ajay Jain Assistant Professor, Guide SRM University, Delhi NCR Campus, Modinagar-Ghaziabad Uttar Pradesh , India. Abstract: The banking sector in India is in a crisis with the increase in burden of bad loans provisioning and the decline in profitability of commercial sector banks particularly Public sector banks. Bankers are the heart and soul of any business. The economy of the country also mostly depends on the functioning of banking institutions. As per RBI Statistics, annual growth of bank credit in India, which had crossed 30% in the boom years of , has declined to 9.7% in and further to 9.4% in the first half of The decline in credit growth has affect the profitability of scheduled commercial banks, with public sector banks suffering the most in this profit wring. A breather in the form of SARFAESI ACT 2002 was introduced by the recommendation of Narasimham Committee II has been instrumental to recover the identified NPA without intervention of the court. It allows the bank to recover the loan by acquiring / possessing the financial assets pledged or mortgaged with the bankers at the time of availing of loans by borrowers. This paper attempts to study the process and effect of SARFASEI Act 2002 and its impact in recovering the non-performing assets in public sector banks in India. To ascertain the recovery process of SARFAESI Act with the other recovery methods adopted viz; Lok Adalats, DRT and CDR in chosen public sector banks. The study has been made to find out the percentage of recovery made in SARFAESI Act 2002 in compare with Lok Adalat and DRT and also to identify the number of cases referred to the Lok Adalat, DRT & SARFAESI Act 2002 with respect to the banks State Bank of India, Canara Bank, Central Bank of India, Bank of Baroda and Punjab National Bank taken for the study. Key words: SARFAESI Act 2002, NPA, Recovery, Lending, DRT, Lok Adalat, Narsimham Committee. Introduction Non-Performing Assets (NPA)-a defaulted credit facility-is an important factor to identify the performance and strength of the banks. NPAs is one of the bench mark to value the banking performance. Banks are the backbone for the development and economic growth of the country. The banking performance has been categorized by the percentage level Non performance assets as it is the indicator for the profit measurement for the banking industry. The Banking sector has come across turmoil s to recover the bad debts from the borrowers. These not only impact badly on a banks account but also adversely impact the national economy. To reduce the NPA level, the assets have to be recovered and restructured properly. These procedures require more legislation to accelerate the process. The normal process of recovery of NPAs from borrowers was to get a decree before Civil Court, both banks and borrowers have to file the suit before a Civil court. Notice issue and after trial, the court pass an order of Decree. Then, decree again challenged by means of appeal to Supreme Court and to finalize the judgment it takes nearly between 5 years to 20 years. After the decree was passed by appellate court the same would be put into execution by filing E.P. The Execution Court after service of notice would bring the property of the debtor/guarantor for sale through auction. Even there would be possibility of dismissal of suit also and certainty was not there to recover the NPAs from borrower. To make the systems easier for the recovery of the loans or NPAs from the defaulters, Narasimham Committee II recommended the formation of SARFAESI Act 2002, where the NPAs could be recovered from the defaulter without intervention of court by possessing the assets of the borrowers. The bankers could sell the possessed assets to ARC or restructured as the case may be. The latest write off of bad loans to the tune of Rs lakh crores during by bankers shaken not only profitability s, also the economic and GDP growth of the country. An enormous amount of Rs 1.14 lakh crore of bad loans (NPAs) have been written off by 27 public sector banks (PSBs) during FY , with the last fiscal alone witnessing a sharp 53% increase in write-offs as part of the balance sheet clean-up. For the fiscal ended March 2015, public sector banks have written off loans amounting to Rs 52,542 crore, an increase of 52.6 % over the previous fiscal, 5218

2 as per the RBI data. About one-fifth of bad loans was written off in as the gross non-performing assets (NPAs) at the end of March 2015 rose to Rs 2,67,065 crore. These 27 banks had written off Rs 34,409 crore in while Rs 27,231 crore in So in aggregate, a staggering Rs 1.14 lakh crore were written off in the last three fiscals. S.No Year Public Sector Banks Amount in Crores State Bank of India Punjab National Bank Central Bank of India Bank of Baroda Canara Bank PSU banks have been witnessing a continuous surge in bad loans. As on September 2015, the gross NPAs of PSBs have increased to Rs 3, 00,743 crore as against Rs 2.67 lakh crore in March The above figures and facts have been published in The Hindu news paper on 8 th Feb 2016 proves the performance of public sector banks in the country affects economic growth and also sheer profitability of the banks. The major role played in these bad loans are from corrupted business people, negligent and corrupt bankers, complicit auditors and loop holes in the laws of banking regulations. The Different types of recovery process for NPAs: 1. One Time Settlement Schemes 2. Lok Adalats. 3. Debt Recovery Tribunal (DRTs) 4. SARFAESI Act Assets Reconstruction Companies (ARC) 6. Corporate Debt Restructuring (CDR) 7. Information about the defaulters of loan by RBI 8. Credit Information Bureau Among the above various ways to recover measures, the most effective ways practiced for recovering NPAs from defaulters are SARFAESI ACT 2002, DRT, Lok Adalats and CDR are discussed below: Lok Adalat: Lok Adalat has developed in India by Legal Services Authorities Act, Otherwise it is called as "People's court". Encouraged by Justice P.N. Bhagwati, a former Chief Justice of India. Lok Adalat is a non-adversarial system, whereby mock courts (called Lok Adalats) are held by the State Authority, District Authority, Supreme Court Legal Services Committee, High Court Local Services Committee, or Taluk Legal Services Committee.. The first Lok Adalat was held on March 14, 1982 in Gujarat. Lok Adalat s help banks to settle the loans by way of compromising between bankers and defaulters of the bad loans through Lok Adalat. Debt Recovery tribunals have been authorized to form the Lok Adalat to decide on cases of NPAs of Rs. 10 lakhs and more. The systems seemed to be more effective for recovery of loans by immediate judgement on the cases referred. Lok Adalat have been useful for mostly recovery on smaller loans. Debt Recovery Tribunals (DRTs): Debts Recovery Tribunals (DRT) and Debts Recovery Appellate Tribunals (DRAT) were constituted under the provisions of the DRT Act for establishment of Tribunals for expeditious adjudication and recovery of debts due to Banks and Financial Institutions and for matters connected therewith. DRT has also been given the power to adjudicate the applications filed by the Borrower/Mortgagor against the action of the Secured Creditor initiated under the Securitization Act.The Debt Recovery Tribunals have been established in India under an Act of Parliament (act 51 of 1993) for speedy swift recovery of debts due to banks and financial institution s by GOI. The debt recovery tribunal is also the appellate authority for appeals filed against the proceedings initiated by secured creditors under SARFAESI Act Corporate Debt Recovery Cell / Restructuring: The Corporate Debt Restructuring System evolved and detailed guidelines issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks. The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million / 10 lakhs and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II. SARFAESI Act: The law did little until it discovered the magnamity of NPA s impact on the profitability of the bank. SARFAESI ACT was formed in Dec 2002 based on recommendations of a) Committee on Banking Sector reforms (Narasimham Committee Report II) and b) Restructuring of Weak Public sector Banks (Verma Committee). This Act aims at speedy recovery of defaulting loans and to reduce the mounting levels of Non-performing Assets of banks and financial institutions. The provisions of the Act enables the banks and financial institutions to realize long-term assets, manage problems of liquidity and asset liability disparities and to improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction. The Act provides three alternative methods for recovery of non-performing assets,viz; Securitization Asset Reconstruction Enforcement of Security without intervention of the court 5219

3 Securitization: Securitization implies the issue of security receipt by raising of funds or receipts by SCs / ARCs. The Securitization company or Reconstruction company raises from the Qualified Institutional Borrowers (QIBs) by way of schemes to acquire funds. They have to maintain proper book of accounts separately for each and every acquiring assets on the investments made by QIBs. Qualified Institutional Buyers are those who have expertise and sound knowledge to evaluate and make their investment in the Capital Markets. Assets Reconstruction: Assets Reconstruction companies buy the NPAs from Banks and take measures to recover the bad loans amount from the borrowers and also empower with, Proper Management of the borrower business, Change of management in the business Take Over Sale or lease, Restructuring the business of the borrower, Rescheduling of the repayments of debts payable by the borrower, Possession of Secured assets. RBI permitted ARCs to convert the debt / outstanding loans of borrowers in to Equities as a functional process of restructurings the loan amount of NPAs. Shareholding shall not exceed 26% of the post converted Debt Equity as a reconstruction. The companies under equity reconstruction, as a part of Enforcement of Security interest, the permission given by Secured Creditors holding should not be less than 60% of the amount outstanding to a borrower as against 75% as on date. The amount recovered through this process will used by ARCs, to reconstruct the company s management. Enforcement of Security Assets: The Act provides notwithstanding anything contained in the Registration Act 1908, for the enforcement of Security Interest without Court Intervention. 1) any security receipt issued by SC / ARC, under sec 7 of the Act, and not creating, declaring, assigning, any right, or title or interest to or immovable property except in so far as it entitles the holder of the registered instrument, or 2) any transfer of security receipts, shall not require compulsory registration. Review of the Literature Gurumoorthy T.R. AND Sufha B, (2012) Non- Performing Assets (A Study With Reference To Public Sector Banks),analyzes the classification of loan assets in PSBs, composition of NPAs in different sectors and NPAs position in PSBs. In this study, it is observed that PSBs exercised stringent control measures to reduce the level of NPAs. The author concludes that Non-Performing Assets may not turn banks into Non-Performing Banks; instead steps should be taken to convert Non-Performing Assets into Now-Performing Assets. As far as old NPAs are concerned, a bank can remove it on its own or sell the assets to Asset Management Companies (AMCs) to clean up its balance sheet. For preventing fresh NPAs, the bank itself should adopt proper policies. Balasubramaniam C.S.(2012) in his paper Non Performing Assets and Profitability of Commercial Banks In India: Assessment and Emerging Issues, assumes significance with the proposal by RBI to introduce Basel III norms in the banking sector from January Basel III framework of guidelines formulated by Bank for International Settlements (BIS) in consultation with central banks operating in a number of countries all over the world expect the participating banks in their respective economies to be following healthy financial and operational management policies. The paper is divided in four parts. The first part brings out a discussion on the concept of NPA in the context of identification and control procedures, impact of NPA on profitability and financial soundness of banks in general. The second part presents a trend analysis of NPAs followed by a series of in depth analyses on the high level of borrowings from banking sector indicating a buildup of sectoral credit booms in general and also raising concerns about financial performance and operations of the borrowers. The third part dwells on the impact of restructuring of advances by banks on the basis of asset classification. Finally, certain issues and perspectives/ challenges on the performance of banking sector and financial stability of the economy emerge as conclusion. Rani Chanchal (2013)-International Journal of Research in Economics and Social Sciences-Evaluation of various techniques used by the public sector banks for the management of non performing assets (NPAs)-was undertaken a study to know the impact of securitisation legislation in the management of NPAs in selected financial institutions. To attain this target following banking institutions operating at their local, regional and zonal levels have been approached to provide the requisite data and information. The study reveals that the NPAs have not only affected the profitability and productivity of the banks and financial institutions, but also put a stigma on the image of Indian banking and a drain on the very value system of the society. Samir and Deepa Kamra (2013) in their paper A Comparative Analysis of Non-Performing Assets (NPAs) of Selected Commercial Banks in India analyse the position of NPAs in selected banks namely State Bank of India (SBI), Punjab National Bank (PNB) and Central Bank of India (CBI).It also highlights the policies pursued by the banks to tackle the NPAs and suggests a multi-pronged strategy for speedy recovery of NPAs in banking sector. The study spans the period starting from FY to FY The authors analyze the trends in NPAs in terms of values, gross and net NPAs as a percentage of gross advances and net advances, gross and net NPAs as a percentage of Total Assets respectively. The paper details about the sector-wise classification of NPAs, reasons for their occurrence, the effects of NPAs on banks, and 5220

4 frequency distribution of public sector banks by ratio of net NPAs to net advances. Rationale of the Study The increase in level of non-performing assets in public sector banks alarming the growth and profitability of banking sectors. RBI have taken many measures to curtail the increase in level of NPAs in banking sector and implement techniques to manage the level of growth. Its affects the economic growth of the country. Due to increase in NPAs level, the process of lending also gets pretentious. Proper recovery of loans only will boost the lending and improve the profit growth of the banks. The implementation of SARFAESI Act 2002, has helped to manage the NPAs level at lower level and it gives the bankers to breathe free in the recovering process of defaulter s loans without the intervention of court. This study would try to identify the impact of implementation of SARFAESI Act 2002 in Public sector banks like SBI, CBI, CB, PNB ad BOB. Objective The main objective of the paper is to study the measures presently followed by Nationalised banks for recovery of NPA s. It specifically studies and compares the effectiveness of recovery methods viz; Lok Adalats, DRT and CDR with SARFAESI Act It attempts to study the impact of nonperforming assets in nationalised banks in India, and its impact on the economy of the country. SBI, CBI,BOB,CB and PNB. The data used in the present analysis is confined to the period between the years 2008 to The data obtained has been analyzed using appropriate descriptive and inferential measures specifically testing of hypothesis. Analysis and Interpretations Number of Cases of NPAs referred: Year Number of cases Number of cases Number of cases referred_lok Adalat referred_drt referred_ SARFAESI Act ` Hypothesis Ho: There is no incremental growth in the rate of recovery performance of NPAs in the Public Sector Banks post implementation of SARFAESI ACT 2002 with reference to the banks taken for study. H1:. There is incremental growth in the rate of recovery performance of NPAs in the Public Sector Banks post implementation of SARFAESI ACT 2002 with reference to the banks taken for study. Ho: There is no significant difference in the cases referred to recovery channels with reference to the banks taken for study. H1: There is significant difference in the cases referred to recovery channels with reference to the banks taken for study. Research Methodology The method of study adopted in this paper follows a mixed approach comprising the qualitative analysis as well as the quantitative analysis of the data collected from annual report of Reserve Bank of India publication including Trend & Progress of banking in India, statistical tables related to banks in India. For qualitative analysis the guidelines issued by RBI effective to the period of study, articles and papers published in different business journals, magazines, newspaper, periodicals were studied and data available through credible sources on NPAs recovery and causes have also been used for analysis. The present study has been conducted to identify and confirm the recovery aspects made in 5 major public sector banks of Dependent Variable: Total Cases Referred Source Type III Sum of Squares df Mean Square F Sig. Model a Act Error Total This is the table that shows the output of the ANOVA analysis and whether it is statistically significant difference between the cases referred to Lok Adalat, DRT and SARFAESI Act It is found that the significant level is.000 (p =.000), which is below.05 and hence therefore there is statistically significant difference in terms of average cases referred to 5221

5 Lok Adalat, DRT and SARFAESI Act Since, P <.05-It denotes that there is a statistically significant difference in terms of average cases referred. (I) Act (J) Act Mean Difference (I-J) Lok Adalat DRT Std. Error Sig * 1 0 SARFASI_ * DRT Lok Adalat SARFASI_ * SARFASI_ Lok Adalat * DRT *. The mean difference is significant at the 0.05 level. There is a statistically significant difference between groups by oneway ANOVA. Here, also we have observe that in reference to DRT and SARFAESI act the P value is >.05, that is.437, it means there is no statistical significant difference in the average cases referred in DRT and SARFAESI Act. Hence Ho is accepted. Amount Recovered through Various Channel: Year % of Recovery % of % of Recovery Lok Adalat Recovery DRT SARFAESI Act ` 2.4% 81.10% 33% % 32% 30% % 27.89% 37.78% % 17% 23.60% % 14% 27.10% % 9.50% 25.80% Dependent Variable: Percentage of Recovery Source Type III Sum of Squares df Mean Square F Sig. Model a Act Error Total This is the table that shows the output of the ANOVA analysis and whether it is statistically significant difference between the percentage of recovery through various channels, Lok Adalat, DRT and SARFAESI Act It is found that the significant level is.000 (p =.000), which is below.05 and hence therefore there is statistically significant difference in terms of percentage of recovery through various channels, Lok Adalat, DRT and SARFAESI Act Since P <.05, it means there is a statistically significant difference between the percentages of recovery in terms of Lok Adalat with DRT, Hence H1 is accepted.. Multiple Comparisons Dependent Variable: Percentage of Recovery (I) Act (J) Act Mean Difference (I-J) Std. Error Sig. 95% Confidence Interval Lower Bound Upper Bound Lok Adalat DRT * SARFASI_ * DRT Lok Adalat * SARFASI_ SARFASI_2002 Lok Adalat * DRT Based on observed means. The error term is Mean Square (Error) = *. The mean difference is significant at the 0.05 level. From the results, it is found that there are significant differences between the groups as a whole. The above table Multiple Comparisons shows which is differed from others. The Tukey HSD post-hoc test is used to observe the means of the percentage recovery of NPAs through Lok Addalat, DRT & SARFAESI Act The p value is.997 both with DDRT & SARFAESI Act Since, here P >.05, that means there is no statistical significant difference between DRT & SARFAESI Act in respect of average % of recovery with respect to banks under study. Hence H0 is accepted. 5222

6 Conclusion Revolutionary Changes have been made in the Indian Banking Sector after the liberalization and globalization emerged in the year The reforms were like interest rate regulation, reducing of reserve, prudential norms etc. The Indian banking sectors was facing with more than Rs crores in NPAs and banks were running under loss of profit due to provisions. Prior to 1991, the legal process to recover the bad loans was tiresome, since it takes several years legal civil proceedings for getting decree. Indian Banks improved their business and technology to meet the requirement of the customers at ease and made the banking systems as friendly user. Though, there is a progress, bankers are struggling (particularly Public Sector banks) to reduce their NPAs level to maintain the stability and profitability in the business. The increase in the ratio of Non Performance Assets (NPA) affects the profitability and of the banks, as they have to allocate provisions for the settlement of NPAs. The Gross NPAs level of the public sector banks in the year 2012 was 2.94% and increased in 2013 to 3.42% and in the year 2014 it has further increased to 4.40%. Under the Recovery of Debts to Banks and Financial Institutions Act 1993, Debt Recovery Tribunals (DRTs) were set up for recovery of loans of banks and financial institutions. This led to speedy recovery of loans in about 1 years time as against the average time of 5 to 7 years required in civil suits. While initially the DRTs performed well, their progress suffered as they got overburdened with the huge volume of cases referred to them. The formation of the SARFAESI Act has been a benchmark reform in the Indian banking sector. The progress under this Act had been significant, as evidenced by the fact that during when the Act came into effect, there was an overall reduction of non-performing loans to 9.4 per cent of gross advances from 14.0 per cent inc to 4.40% in When we see the recovery aspects of NPAs in public sector banks, inspite of having various recovery channels, like Lok Adalqat, DRT, SARFAESI Act 2002, this study shows that the perccenatge of recovery of NPAs and number of cases refreered to these channels, clearly denotes that SARFAESI Act 2002 and DRT does not have larger variations of recovering the amount in NPAs. Lok Adalats function by amicably settling disputes that are pending in a court of law or at a pre-litigation stage. According to RBI guidelines, banks can use Lok Adalats to recover loans upto Rs 20 lakh. Additionally, cases of cheque bouncing as well as motor insurance disputes are also understood to have been taken up. Of these, while the SARFESI Act helped recover 80 per cent of the amount, the lion's share of number of cases were referred to the Lok Adalat. The government has to take more effective measures to constraint the increasing level of NPAs in public sector by forming strict regulations in the systems. Bankers have to be trained to recover the loans in a systematic way before it turns to NPAs category. By proper follow-up, good rapport, having continuous watching on the movement of borrowers stocks and assets, proper identification and classification of assets etc. The latest recovery proceedings against the Kingfisher Airlines, Mr. Vijay Mallya, towards the recovery of total outstanding Rs crores,npa, DRT (Debt Recovery Tribunal) restrained from getting Rs. 515 crores that he received from the sale of the spirits business to Diageo Plc shows that the government is very much keen to recover the NPAs by utilizing the available recovery channels like DRT and SARFAESI Act The Kingfisher Airlines, Mr. Vijay Mallya has been identified as Wilful Defaulters by the bankers like State Bank of India, United Bank and others. It shows that recoveries in NPAs are made easier by the amendments of SARFAESI Act 2002 and open the door for the bankers to recover their overdue amounts which is been identified as non performing assets in their books of accounts. Reference [1] Centre for Public Policy Research-The Report on Banking Reforms, 1991, submitted to the Government of India [2] Arora, Usha, Vashisht, Bhavna and Bansal, Monica, An Analytical Study of Growth of Schemes of Selected Banks (March 26, 2009). The Icfai University Journal of Services Marketing, Vol. VII, No. 1, pp , March [3] Vikas and Tandon Sunman, Performance Evaluation of Public Sector Banks in India, Asia Pacific Journal of Research in Business Management, Vol.1, No.1, October 2010, pp [4] Jaya Shukla and Gaurav Bajpai, Mathematical Criteria for Stability of NPA growth Improving Quality of Service for Banks, International Journal of Trade, Economics and Finance, Vol. 1, No. 2, August, 2010, pp [5] Goyal Kanika, Empirical Study of Non-Performing Assets Management of Indian Public Sector Banks Asia Pacific Journal of Research in Business Management, Vol.1, No.1, October 2010, pp

7 [6] Ramesh.K.V, Sudhakar.A, NPA Management in Public Sector Banks: A Study of Canara Bank and State Bank of India, International Journal of Research in Commerce & Management, Vol. 3(11), 2012, pp 44-49, ISSN [7] Sandeep Aggarwal, Parul Mittal (2012) Non- Performing Assest: Comparative Position of Public and Private Sector Banks in India, International Journal of Business and Management Tomorrow Vol. 2 No.1,pp 1-7. [8] Gurumoorthy T.R. AND SUFHA B. Non- Performing Assets (A Study With Reference To Public Sector Banks), Indian Journal of Applied Research, Vol.2, No.2, November 2012, pp.7-9. [9] Vivek Srivastava1 Deepak Bansal (2012) A Study of trends of Non-Performing Assets in Private Banks in India SHIV SHAKTI International Journal in Multidisciplinary and Academic Research (SSIJMAR) Vol. 2, No. 2, March-April (ISSN ). [10] Balasubramaniam C.S. Non Performing Assets and Profitability of Commercial Banks In India: Assessment and Emerging Issues, Abhinav, Vol. No.1, NO.7, 2012, pp [11] [12] [13]