MEMBERS' REFERENCE SERVICE LARRDIS LOK SABHA SECRETARIAT, NEW DELHI REFERENCE NOTE. No. 39/RN/Ref/October/2016

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1 MEMBERS' REFERENCE SERVICE LARRDIS LOK SABHA SECRETARIAT, NEW DELHI REFERENCE NOTE No. 39/RN/Ref/October/2016 For the use of Members of Parliament NOT FOR PUBLICATION 1 NON PERFORMING ASSETS IN PUBLIC SECTOR BANKS Prepared by Smt. Parama Chatterjee, Additional Director ( ) and Shri Harsh Banga, DD of Lok Sabha Secretariat under the supervision of Smt. Kalpana Sharma, Joint Secretary and Smt. Anita Khanna, Director. The reference material is for personal use of the Members in the discharge of their Parliamentary duties, and is not for publication. This Service is not to be quoted as the source of information as it is based on the sources indicated at the end/in the text. This Service does not accept any responsibility for the accuracy or veracity of the information or views contained in the note/collection.

2 Non Performing Assets in Public Sector Banks 2 Introduction The NPA situation is an important issue for the RBI...We will be dealing with the situation with firmness but also with pragmatism so that the economy does not feel any lack of credit...there are 4 stages, identification, recording and reporting of NPAs all of which have been done satisfactorily but we need to work more on resolution, 3 RBI Governor, Urjit Patel An asset, including a leased asset, according to the Reserve Bank of India (RBI) Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, becomes nonperforming when it ceases to generate income for the bank. A Non-Performing Asset (NPA) is a loan or an advance where among other things interest and/ or installments of principal remain overdue for a period of more than 90 days in respect of a term loan. In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. Sluggishness in growth, slowdown in recovery in the global economy and continuing uncertainty in the global markets are the main reasons for increase in NPAs of banks. Categories of NPAs A "Substandard Asset" is one which has remained NPA for a period less than or equal to 12 months and has well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. 2 The Reference Note is primarily based on the material received from the Department of Financial Services, Ministry of Finance, unless otherwise mentioned in the Note. Additional information available at Annexures. 3 "Urjit Patel may junk Rajan's NPA approach; may transfer stressed assets to bad bank entity", Economic Times, 4 October 2016, available at

3 2 An asset is classified as a "Doubtful Asset" if it has remained in the substandard category for a period of 12 months and has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable A "Loss Asset" is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly or an asset which is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. NPA Scenario in the Country According to RBI, Gross NPAs of the Scheduled Commercial Banks (SCBs), especially Public Sector Banks (PSBs) have shown an increase during the recent years. On account of good economic conditions, establishment of Debt Recovery Tribunals (DRTs) and enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, the Gross Non-Performing Assets (GNPAs) ratio of PSBs steadily declined from per cent in to 2.10 per cent in and GNPA ratio of SCBs steadily declined from per cent to 2.45 per cent. NPAs have stood at 7.72 per cent as on Dec 2015 and to 9.83 per cent as on ch, 2016 in respect of PSBs and the same have been at 4.62 per cent as on ch 2015 but have risen to 6.24 per cent as on Dec 2015 and to 7.79 per cent as on ch, 2016 in respect of SCBs. Taking GNPA and restructured advances together the stress on PSBs is per cent to total advances as on ch, 2016 and per cent to total advances as on ch, 2016 in respect of Scheduled Commercial Banks (SCBs).

4 3 Gross bad loans at commercial banks could increase to 8.5 per cent of total advances by ch 2017, from 7.6 per cent in ch , as per Projection by RBI. The Gross bad loans of public sector banks increased to 9.6 per cent as of ch 2016, from about 6 per cent a year earlier: RBI data 5 Gross non-performing assets (NPAs) rose to 9.5 per cent of total advances in , up from five per cent the year before 6. At the aggregate level, PSBs reported a loss of Rs 17,672 crore in , down from a profit of Rs 36,350 crore in Government has budgeted to provide Rs 25,000 crore in for bank recapitalisation, it ended up giving Rs 19,950 crore in Addressing NPAs In the event of default by the company, all the guarantors are liable to repay the loan with interest as the liability of the guarantor is co-extensive with the borrower. The Government has advised banks to take action against guarantors in event of default by borrower under relevant sections of SARFAESI Act, Indian Contract Act & Recovery of Debts due to Banks and Financial Institutions (RDDB&FI) Act. The general principle of any restructuring is that the shareholders bear the first loss rather than the debt holders and that restructuring package stipulates the timeline during which certain prescribed viability milestones would be achieved. Reserve Bank has issued guidelines on Strategic Debt Restructuring (SDR) Scheme, according to which inter alia at the time of restructuring, lenders 4 "Bank NPAs may hit 8.5% by ch", The Hindu, 28 June 2016, available at 5 ibid. 6 "Statsguru: Tackling the NPA Problem in Public Sector Banks", Business Standard, 25 July 2016, available at _1.html 7 ibid. 8 ibid.

5 4 must incorporate an enabling clause to convert their loans into equity if the borrower fails to achieve the viability milestones/critical conditions. Once decided to pursue SDR, lenders must approve the conversion package within 90 days and actual conversion shall be within another 90 days. Under SDR, lenders are also exempt from RBI s regulatory ceilings/restrictions on Capital ket Exposures, investment in Para- Banking activities and intra-group exposure. The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems, outside the purview of Board of Industrial Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and other legal proceedings, for the benefit of all concerned. The CDR Mechanism is an organizational framework institutionalized for speedy disposal of restructuring proposals of large borrowers availing finance from more than one banks/fis. CDR System has a three tier structure which includes the CDR Standing Forum, the CDR Empowered Group and CDR Cell and are at present housed in Industrial Development Bank of India Ltd. Various legal mechanisms for early recovery of loans include the SARFAESI Act, 2002; RDDB&FI Act, 1993 and the Lok Adalats. The SARFAESI Act, 2002, inter alia provides for enforcement of security interest for realisation of dues without the intervention of courts or tribunals. RDDB&FI Act, 1993 provides for setting up of DRTs and Debt Recovery Appellate Tribunals (DRATs) for expeditious and exclusive disposal of suit filed by banks/fis for recovery of their dues in NPA accounts with outstanding amount of Rs.10 lacs and above. Lok Adalat mechanism offers expeditious, in-expensive and mutually acceptable way of settlement of disputes. Section 89 of the Civil Procedure Code provides resolution of disputes through Alternative Dispute Resolution (ADR) methods such as Arbitration, Conciliation, Lok Adalats and mediation.

6 Conclusion 5 The sharp increase in stressed assets has adversely impacted the profitability of the banks; with annual return on assets coming down from 1.09 per cent during to 0.78 per cent during There is an urgent need for banks to reduce their stressed assets and clean up their balance sheets lest they become a drag on the economy. It has been observed that having a regulatory limit on the number of members in a consortium or multiple banking arrangements so that every member has at least 10 per cent of the exposure, will lead to serious independent credit appraisal and credit monitoring 10. Managing asset quality is always very important and becomes a prominent objective especially during a period of economic downturn. Recognizing the importance of effective asset quality management, Reserve Bank has issued various guidelines to banks, from time to time, on various aspects of asset quality management. RBI has been urging Banks to ensure that while granting loans and advances, realistic repayment schedules are fixed on the basis of cash flows with borrowers. It is anticipated that Government's reforms in the core sectors such as infrastructure, power, telecom and mining would help reduce the stress in the banking sector. References "Asset Quality of banks: Evidence from India"; by Arpita Ghosh, Indian Institute of Banking and Finance; available at d_sent.pdf e-set-for-banks-to-take-effective-action-on-npas-arunjaitley/articleshow/ cms 9 "Asset Reconstruction and NPA Management in India", Shri R. Gandhi, Deputy Governor, RBI, available at 10 Ibid.

7 Material received from Department of Financial Services, Ministry of Finance, Govt. of India.

8 ANNEXURES Bank Group PSBs Private Banks Source: RBI Gross NPAs, Gross NPA to Gross Advances and Total Gross Advances of PSBs/ SCBs as on June 2016 (Prov.): 2014 Gross NPA s June 2016 (prov.) Gross NPA to Gross Advances (%) June 2016 (prov.) SCBs Period Total References Received by CDR Cell No. of cases (In ` crore) Total Gross Advances June 2016 (prov. ) Source: RBI: OSMOS Database (Based on latest updation) Corporate Debt Restructuring Cell (Progress report as on June 30, 2016) Cases Rejected before Admission or Approval Cases under consideration of CDR EG (`` crore) Total Cases Approved (1) (2) (3) (4) Aggregate No. of Aggregate No. of Aggregate No. of Debt cases Debt cases Debt cases Aggregate Debt

9 Sep Dec Jun Sep Dec Jun (Source: CDR Cell) NPAs of PSBs recovered through various channels (` ` crore) Channels of Recovery No of cases referred Amoun No of Amoun No of Amoun t recovered cases t recovered cases t involve * referred involve * referred involve d d d recovered * Lok Adalat 11,67, , ,44, DRTs 24, , SARFAE SI #1,81, ,66, ,59, Total 13,73, ,81, ,23, Source: RBI Channels of Recovery No of cases referred NPAs of SCBs recovered through various channels (` crore) involved recovere d* No of cases referred involved Amou nt recove red* No of cases referred involved recover ed* Lok Adalat 16,36, ,58, ,56, DRTs 28, , , SARFAESI #1,94, ,75, ,73, Total 18,59, ,55, ,54, Source: RBI * Refers to amount recovered during the given year, which could be with reference to cases referred during the given year as well as during the earlier years. # No. of notices issued.

10 DRTs- Debt Recovery Tribunals 9