The finance ministry has asked public sector banks (PSB) to increase the usage of Sarfaesi Act provisions to quickly recover bad loans.
It also wants PSBs to adopt the latest sophisticated risk management tools (RMT) to effectively measure risks in lending and price loans accordingly so that there is an improvement in the asset quality. These were measures suggested by the new financial services secretary GS Sandhu to the PSB chiefs in a recent letter, banking industry sources told FE.
This development comes in the backdrop of rising non-performing assets (NPA) of PSBs and the difficulties being faced by the government in infusing more capital, owing to fiscal constraints. The ministry has been asking PSBs to strengthen their efforts to recover bad loans.
Under the Sarfaesi Act, lenders have the power to enforce the security interest by taking possession of the assets from the defaulting borrower without court intervention, following the expiry of a 60-day notice period on the loan being classified an NPA.
The ministry has now said wherever possible the PSBs must exercise their rights under Section 13(4) of the Sarfaesi Act, which empowers the lenders to take possession of the secured assets of the borrower (whose accounts have turned NPA) and sell the assets before their value deteriorates. The section also empowers lenders to takeover the management of the business of the borrower and sell the assets if needed.
Data for 2012-13 showed that out of the three methods for NPA recovery ? Sarfaesi Act, Debt Recovery Tribunals (DRT) and Lok Adalats ? Sarfaesi Act route was the most effective. In 2012-13, around Rs 18,500 crore was recovered through the Sarfaesi Act route, while DRTs helped in the recovery of just Rs 4,400 crore and Lok Adalats only Rs 400 crore. The delays happens in the DRT channel due to the stay orders being granted by the tribunals, bankers said.
For the upgradation of risk management tools, the department of financial services wants that PSBs must study the business models of the companies closely to assess risks internally using analytics before extending loans.
The ministry also wants PSBs to ensure that the companies do not divert loans for purposes other than the one for which the loans was taken. Besides, it has pointed out the need to have separate RMTs for retail, wholesale, infrastructure and big-ticket loans.
The concern is because of the many instances of ‘quick mortality’, where within six months of the bank extending the loan, the company has become sick, the sources said. ?This shows that the current RMTs are not working,? an official said.
However, officers of some leading PSBs said they are working on sensitising the industry on RMTs and the need for charging the high-risk borrowers a risk premium on the loans.
Many banks have been focusing on increasing their balance sheet size by extending loans at competitive prices even to high-risk borrowers instead of focusing on profits and the risks involved in lending to such clients, they said.
Gross NPAs of PSBs had suddenly gone up to 5.17% of their advances in December-end 2013 from 3.84% at March-end 2013 (and 4.18% in end-December 2012), while their restructured assets increased to 7.44% from from 7.18% during the period. Besides, PSBs were able to bring down NPAs by only Rs 60,426 crore in the December quarter (or just 28.3% of those in the September quarter), of which recoveries were only Rs 18,933 crore while upgrades were to the tune of Rs 21,988 crore and written-off loans were Rs 19,505 crore.
Significantly, at June-end 2013, the gross NPAs on account of the top 30 accounts of 26 PSBs were worth Rs 63,671 crore or around 35% of their total gross NPAs of Rs 1,82,829 crore.