CHAPTER 6 NPA Recovery Measures

Transcription

1 CHAPTER 6 NPA Recovery Measures 6.1 NPA Scenario in Indian Banks 6.2 Hypothesis H I and Background 6.3 Recovery Measures - Current Practices 6.4 Testing o f Hypothesis HI 6.5 Effective o f Recovery Factors 6.6 Conclusion

2 Chapter 6 NPA Recovery Measures 6.1 NPA Scenario in Indian Banks. The quality o f assets is one major problem that continues to lurk within Indian banks. The banking industry (scheduled commercial banks) is burdened with gross NPAs to the tune o f Rs.580 billion; this is a huge threat to the industry s health, as banks have to create provisions from their current profits on these loans. In India, NPAs are considered to be at higher levels than those in other countries. The data in respect o f NPA levels available for countries like USA, Japan, Hongkong, Korea, Taiwan and Malayasia reveal that it ranged from 1% to 8% during , 0.9% to 5.5% during and Table 6.1: Ratio of Non-Performing Loans to Total Loans Countries Brazil Chile Mexico ' United Kingdom United States Japan France Germany Greece Italy Russia Turkey Argentina China India Indonesia Korea Malayasia Philippines , 15.2 Thailand Srilanka Bangladesh Pakistan Source: Global Financial Stability Report, Apri 2004, IMF. 201

3 0.85% to 3.9% during as against 23.6%, 19.5% and 17.3% respectively for Indian banks during these years (RBI Bulletin, July 1999). Table 6.1 in the previous page shows the performance o f different countries in respect o f their non-performing loans. The number of Public Sector Banks (PSB) having net NPAs to net advances ratios greater than 10 per cent, was 9 out of 27 in (RBI, ), but the number declined to 3, 2 and 1 in , and respectively. In the year 2005, except for one bank rest o f the PSBs had this ratio below 5 percent (Table 6.2). However, banks cannot relax with this performance and has to give a concerted effort to reduce the NPA levels further and be at par with international banks. Table 6.2: Ratio of Net NPA to Net Advances of PSBs Name of Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank 2, Dena Bank , Indian Bank Indian Overseas Bank 6, Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India s/ijaya Bank State Bank of India State Bank of Bikanar & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Source: Report on trend and Progress of Banking in India,

4 6.2 Hypothesis III and Background The growing blockage of huge funds in non-performing assets and the poor recoveries has compelled bankers to consider recovery as a key performance area. Consequently, banks have taken up various measures (refer to section 6.3 for details) to speed up the recovery of NPAs. However, very limited empirical studies are available as to what extent these measures are effective. Parmer (1995) has considered nine S independent controllable variables indicating recovery measures and found that one single variable that is number of follow-up visits, has positive correlation with recovery. He discovered that bank branches relied mainly on issuing notices instead of making sincere efforts to improve recovery by personally contacting the borrowers and suggested that maintaining continuous liaison with the borrowers is imperative. Banks recovery action starts with a reminder letter to the borrowers. Patel & Kaveri, 1998 observed that all borrowers do not respond and therefore it becomes essential to visit them personally which help in recovery. Compromise and out of court settlement has also been cited as effective measures of recovery by Murty ( ). On the other hand, suit filing as a measure of recovery was found to have a diminishing impact. A study by RBI on thirty-three banks relating to measures taken for recovery reveals that the recoveries made out of suit-filed cases during 1996, 1997 and 1998 were 7.33%, 4.74% and 4.32% of the suit-filed amounts (RBI, 1999). This shows a decreasing trend of recovery through this route. Thus, it appears that there is a limited research testing the effectiveness of various measures of recovery. In the light of the above, it has been found necessary to find out the effectiveness of the various recovery measures that are in practice. Thus, the study has taken the following hypothesis and research question. * Hypothesis HI: The number of follow-up visits by bank staff has positive correlation with recovery of NPAs. Question 3 : What is the level of effectiveness of the various measures taken up to recover non-performing assets (NPA) and to reduce the incidence of NPA? The rest of the chapter is organized as follows. Section 6.3 briefly discusses the different recovery measures currently banks use. Section 6.4 tests the hypothesis. Section 6.5 presents the findings of the research question mentioned above. Section 6.6 concludes. 203

5 6.3 Recovery Measures -Current Practices Recovery of NPA has become the critical performance area (CPA) for banks in India since NPA reduces the profitability of a bank, weaken its financial health and erode its solvency. The following paragraph discusses the various measures that the banks adopt to recover the non-performing assets. a) Reminders System - This is the simplest way to follow-up default cases. Generally, response' to this recovery measure particularly from honest borrowers is encouraging. b) Personal Visits / Contacts- It is an effective and simple mode for recovery. Banks experience has shown this as an effective measure especially in the case of small borrowal accounts. Involvement of staff at all levels in the bank branch is necessary. Frequent visits are called for in case of hardcore borrowers. Over the years it is observed that the number of visits to the borrower is going down due to cut in workforce in banks. c) Recovery Camps - In respect of agricultural advances, recovery camps are organized during the harvest season. In organizing recovery camps, bankers take the help of outsiders, particularly revenue officers in the state government, local panchayat officials, etc. Banks give publicity of the recovery camp to be organized in the area. d) Recovery Agents- Banks appoint outside professional agencies whose services are utilized to ascertain the whereabouts of the borrowers and enforcement of securities. There is some hesitancy on the part of public sector banks due to the unpleasant experience of some financial institutions in certain cases. e) Restructuring / Rehabilitation The rehabilitation programme is for raising the unit s capacity to generate adequate internal surplus so that a certain portion of internal surplus could then be used for reducing the irregularity in the account. The bank undertakes the following actions as part of this programme - developing information system, review of performance, monitoring areas of weakness. f) Corporate Debt Restructuring For large borrowers enjoying multiple banking accounts and with, credit facilities above Rs.20 crores, the Corporate Debt Restructuring (CDR) body has been created to facilitate debt restructuring. Cases of DRT, BIFR and willful defaults, doubtful and loss accounts and suit filed cases are outside the purview of the CDR. Thus, standard and sub- 204

6 standard accounts are only eligible to seek CDR shelter. No banker/ borrower can take recourse to any legal action during the stand-still period of days. g) Loan Compromise Once a NPA unit is evaluated and found that it cannot be revived, it becomes incumbent on the branch to initiate recovery proceedings. Since money has got time value whatever recovery means a branch adopts should result in quick repayment. As a recovery means, the, bank can either go to a court praying for a decree or negotiate with the customer for a compromised settlement. In general, it is experienced that filing suits and recovery of dues of banks through the process of courts is cumbersome, expensive and time consuming. A compromise in bank loans means agreeing to borrower s request of accepting a part of outstanding dues in the books of the bank as full and final payment or allowing for the non-compliance of the terms of the loan, after analyzing the alternative courses of action, genuineness and capacity of the borrower to repay. It is also called as voluntary debt reduction or scaling down of dues. Loan compromise helps the bank to recover dues with least passage of time and minimize further the loss of earning opportunities. h) Security Adjustment or Appropriation of Subsidy Where readily encashable securities ^such as Fixed deposits, LIC Policies, Government Securities, etc. are available and if borrowers are not responding to request for regularization of accounts, such securities are encashed after giving due notice to the borrowers, guarantors, etc. In case of sponsored schemes, the subsidy amount is kept in deposit accounts of the bank for appropriation after a specified lock-in period. In such cases where subsidy is available and the account is likely to become NPA, the subsidy amount is appropriated in the loan account. i) Recalling of Advances - When rigorous follow-up efforts do not yield any fruitful result, a final recall notice is usually served asking the party to rectify the irregularity in the account immediately. Recall notice should be sent only if the borrower is a willful defaulter, bank liability is significantly uncovered, borrower refusing to renew the credit limit, etc. The exercise of recalling of advances is one of the recovery strategies which have been found effective in respect of genuine borrowers who would avoid facing legal action through the courts. j) Sarfaesi 205

7 The Securitization and Reconstruction of Financial' assets and Enforcement of Security Interest Act 2002 (SARFAESI) came handy for banks to accelerate the recovery process. The Act empowers the banks to take possession, manage and sell securities without the intervention o f a court/ tribunal. k) Filing Suits Filing of suit is the last resort available to a bank for recovery considering the disadvantages of filing suit. It involves incurring court fees and expenses for providing the witness of the bank. The long drawn process of legal proceedings results in delay in disposal of securities, by which time, the value and conditions of the same may deteriorate. Generally, it may take 6-7 years to get the suits decreed. The money value would have eroded substantially by that time. Sale through court turns out to be distress sale on account of lack of bidders and hence no fair return is guaranteed. After filing the suit, borrowers/ guarantors start disposing of their personal assets and hence recovery of bank dues is likely to prove difficult. Moreover, the realized value sometimes does not meet even the expenses towards maintenance, safe keeping of the securities and liquidator s/ Commissioner s expense/ fees. (Canara Bank, 2001). In this light, the issue that needs deliberation is that despite banks resorting to filing of suits, whether the legal process has been beneficial in recovery of dues of banks and enforcement of credit discipline (RBI, 1999). l) Write-off If it is un-remunerative either to file suit and / or continue the account in the bank s books, banks waive off legal action and/ or write-off outstanding dues. By waiver of legal action, banks may take a decision not to pursue recovery through court of law. But for write-off, the banks decide to close the account by transfer of funds from their profits to the loan account. Write-off is proposed under certain circumstance such as : (i) borrowers are adjudicated as insolvents, (ii) revenue authorities under the State Public Recovery Act have recovered some amount and there is no further chances of any recovery, (iii) both borrower and guarantor are untraceable after selling their assets, and (iv) decrees remain unexecuted several times due to reasons beyond the control of the bank. However, even after write-offs, a bank continues its recovery efforts. 6.4 Testing of hypothesis III Methodology 206

8 For testing the third hypothesis, the percentage of recovery for the NPA cases as on the latest date has been taken from the records maintained by the recovery department of the respective banks on their NPA cases. Altogether 75 cases have been considered. For each of the NPA cases considered in the sample, frequency / intensity of follow-ups was found out through interviews of recovery officers handling these cases. In particular, the intensity was found out for personal visits made by concerned bank officials as a follow-up measure for each of the 75 cases. The correlation between the NPA recovery percentage and the frequency of follow-up visits for the 75 non-performing cases was observed through the Pearson correlation co-efficient. Further we have examined how frequency of visits influences the recovery measures mainly compromise, compromise with legal action and legal action. We assign 1 to the case if recovery is made through compromise, 0.5 if recovery is made through compromise with legal action and 0 if it is through legal action. The recovery measures are then regressed against frequency of visit Analysis and Findings The Pearson correlation coefficient between the frequency of visits and percentage recovery is 0.45 indicating that percentage of recovery depends on the intensity of visits. Higher the number of visits higher is the percentage of recovery. The correlation results are given in Table 6,3 (Appendix 6.1). An analysis of the regression between number of visits and recovery measures reveal that higher number of visits leads to compromise between banks and the defaulting borrowers which in turn leads to higher recovery (Table 6.4). Table 6.4: Regression between Frequency of visit and Recovery Measure F= 41.23(.000); R= 0.601; R2 =0.361; Adj R2 = B t significance Constant ' Frequency of visit As can be seen from the Tables 6.5a & 6.5bb (Appendix 6.2), compromise leads to average recovery of 57% against 17% recovery in case o f non-compromise cases. Thus intensity of visits help the banks in recovering the NPAs. As can be seen from the frequency distribution (Table 6.3), out of 75 cases, in 45 cases intensity of the 207

9 visit was satisfactory and for the rest, intensity of the visit w'as up to the expectation of the bank officials, 6.5 Effectiveness of Recovery Measures Methodology The third research question relating to the effectiveness of the recovery measures has been examined based on the responses of the branch heads and officials handling recovery matters. For answering this research question, these bank officials were asked to rate the various recovery measures on a three point scale - high, medium and low. Opinion of the respondents were seeked on two sets of recovery measures - 1) legal and 2) non-legal. A structured questionnaire given in Appendix 3.3 has been used for the purpose (items 2 and 3). Though seventy five questionnaires,,had been distributed only fifty-two had been returned and could be used. These respondents belonged to the banks covered in the study. The effectiveness has been examined for two sets of recovery measures- 1) initial follow-up measures taken prior to any compromise/ restructuring /up gradation and 2) legal and non-legal measures. The extent of effectiveness has been expressed as High. Medium and Low by the respondents for each of the recovery measures enlisted under the two sets of measures mentioned above. The first set of recovery measures that has been listed in the questionnaire (question No. 2) are a) reminders through letters, b) reminders through phone calls, c) personal visits, d) meetings with senior bank officers and e) recall notices as initial follow-up measures. The second set of measures listed out are a) restructuring / rescheduling, b) compromise, c) filing of suits through DRT and civil courts and, d) securitisation Analysis and Findings Out of the five initial measures that has been examined for their effectiveness, Personal Visit/ Personal Contacts is rated to be the most effective initial measure by the respondents as can be seen from Table 6.6a. This has further been supported by our previous finding indicated under the hypothesis. The second measure that is found to be effective is meetings arranged with senior bank officers. It appears that counseling by senior officers motivate borrowers for working out effective recovery measures mainly 208

10 compromise on the loan amount, Reminders through letters / telephone calls appear to bear little fruit as an initial measure and does not help the bank in recovering the NPAs. Table 6.6a: Effectiveness of follow-up measures prior to up gradation / compromise. Follow-up Measures Effectiveness (%) High Medium Low a. Reminders through letters b. Reminders through phone-calls c. Personal visits/contacts d. Meetings with senior bank officers e. Recall notice In the second part, the legal and non-legal measures that has been examined for their effectiveness are restructuring -or rescheduling, compromise, filing o f suits through DRT and civil courts, securitisation (Table 6.6b). Amongst these measures, Compromise is considered to be the most effective. It leads to higher recovery as can be seen from Table 6.5a (57%). Securitisation is considered to be second most effective measure where banks are authorized to seize the assets of the borrower without involving the legal machinery. Table 6.6b: Effectiveness of Recovery measures- Legal and Non-legal Recovery Measures Effectiveness (%) High Medium Low a. Restructuring/ rescheduling c. Compromise d. Filing Suits e, Securitisation Restructuring/ Rephasement of capital as well as restructuring of the organization also sometimes lead to good recovery though the strategy does not seem to work in most 209

11 of the cases. Filing of suits does not seem to help the banks in the recovery process. Both the amount as well as the speed of recovery is low in the case of legal measures. As a result bank officers consider Filing Suits as the last resort after all other measures fail to bring fruit. 6.6 Conclusion The results show that Personal Visits or Personal Contacts and Compromise are the most effective recovery measures. This has been established through regression analysis of facts and figures and also from the opinion survey of the bank officials. Both are interrelated and personal visits lead to compromise, which in turn leads to higher recovery. In view of the above findings, banks should intensify the visits with the intention of bringing the borrowers to compromise on the amount of loan to be paid. This strategy is found to be much better than resorting to legal measures. Legal measure is timeconsuming, expensive and does not lead to higher percentage of recovery even when court verdicts are in favour of the bank. Further it should not be denied that sometimeslegal action like filing suits, serving legal notice also compel borrowers to come forward for compromise. This is especially true in the case of wilful defaults. At the same time efforts should also be made not to encourage good borrowers to seek compromise route. To add, the mindset of the borrowers from the beginning should be tuned in such a way that he is willing to repay rather than turn into a willful defaulter. Banks should come forward to nurture and promote this cultural change among the borrowing public in order to ensure an effective recycling of the precious lendable resources. 210

12 Appendix 6.1 Table 6.3: Correlation Between Frequency of Visit and Recovery Percentage Npa Case Recovery percentage Freq.of v/isit Case Recovery percentage Freq.of Visit 1 21% Medium 57 0 Medium 2 50% High 58 0% Medium 3 6% Medium 59 20% Medium 4 80% High 60 44% High 5 0% Medium 61 30% High 6 81% Medium 62 39% High 7 0% Medium 63 48% Medium 8,0% High 64 50% High 9 60% High 65 0% Medium 10 60% High, 66 0 Medium 11 ' 50 High 67 40% High High 68 0% Medium High 69 80% High 14 0 High % High 15 0 Medium 71 40% High Medium 72 40% High 17 ' 83 High 73 5% Medium High 74-0% Medium Low 75 90% High 20 0 High High High Correlation between X and Y = Medium where X = Frequency of Vistt( 1- high, High medium & 0-Low ) High Y = Recovery percentage 26 0 Medium High High High Medium 31 0 Low High 33 0 High High High 36 o' High High High 39 0 High Medium 41 0 Low High High Medium 45 0 Medium High High 48 2 Medium High Medium 51 0 Medium 52 5 Low 53 10C High Medium 5 6 High High 21!

13 Appendix 6.2 Table 6.5a: Average Percentage Recovery Table 6.5b: Average % Recovery jromise Cases in Non-Compromise Cases Case Recovery % Recovery Measure Case Recovery % Recovery Measure 1 50% Compromise 1 21% Security adjustment+suit 2 80% Suit filed+compromise 2 6% Securuity adjustment 3 0% Suit filed+compromise 3 0 Suit filed,decreed 4 60% Compromise 4 81% Securuity adjustment 5 60% Compromise 5 0 Suit, hearing stage 6 50% Suit filed+compromise 6 0 DRT 7 100% Security adjustment+compromise 7 0 DRT 8 99% Suit filed+compromise 8 50% Security adjustment 9 83% Suit filed+compromise 9 60% Security adjustment 10 99% Security adjustment+compromise 10 0 suit 11 90% Security adjustment+compromise 11 0 suit filed 12 50% Compromise 12 46% DRT 13 7% Compromise 13 0 Write-off(no. security) 14 70% Suit filed+compromise 14 0 Write-off(no. security) 15 55% Compromise, 15 0 DRT 16 92% Suit filed+compromise 16 0 DRT 17.93% Securitisation notice+compromise % Suit filed 18 50% Securitisation notice+compromise 18 0 DRT 19 40% Suit filed+compromise 19 56% Securitisation 20 0% Securitisation notice+compromise 20 2% Suit filed % Securitisation +Compromise 21 66% Security adjustment 22 40% Suit filed+compromise 22 0 Suit, decreed 23 23% Securitisation notice+compromise 23 5% property attachment 24 41% Suit filed+compromise 24 14% Securitisation Notice 25 37% Suit filed+compromise 25 6% Security Adjustment 26 19% Security adjustment+compromise 26 0 DRT % Compromise 27 0 Securitisation Notice 28 60% Suit filed+compromise 28 20% Securitisation Notice 29 60% Compromise 29 48% Suit filed % Security adjustment+compromise 30 0 DRT, not decreed 31 11% Compromise 31 0 DRT, not decreed 32 44% Compromise 32 0 DRT 33 30% Compromise 33 0 Suit filed 34 39% Compromise 35 50% Compromise Average Recovery = % Suit filed+compromise 37 80% Compromise % Compromise 39 40% Suit filed+compromise 40 40% Suit filed+compromise 41 5% Suit filed+compromise 42 90% Compromise c E oo Average Recovery = 57% 212