Procedural streamlining could help reduce recovery time of bad loans, says Fitch

At a time when rising level of non-performing assets pose a near-term threat to the banks, there is something that could generate some amount of cushioning for them. The average time taken for debt recovery tribunals (DRT) to issue recovery certificates has been reduced to 2-3 years recently from seven years for applications filed in 1990s.

According to a study by Fitch Ratings, the reduction in time to recover debt has resulted from changes in existing laws despite legal challenges to their implementation since its adoption. The recovery time in DRT could be further reduced by streamlining procedures at every stage so that delays could be pinpointed and remedial measures are taken.

Fitch has analysed the historical trends for recoveries achieved using the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, which allows the secured creditors to enforce their security interest without recourse to court law.

The amount recovered have broadly been in the range of 30-60% of the amount involved, which is more efficient than recoveries gained by using the provisions of the Board of Industrial and Financial Reconstruction (BIFR) with regard to time taken for realisation of recovery.

International trends show, recoveries are in the range of 70-80% of the amount owed with a shorter time frame of 1-3 years. In order to facilitate recovery of bad debt fast and efficiently by financial institutions, the government constituted 33 Debt Recovery Tribunal and five Debt Recovery Appellate Tribunal across the country. After an application is filed by any bank against any borrower, DRT can issue recovery certificate, which empowers the bank to seize assets of the borrower to recover the loan amount.

The DRTs are located across the country. Some cities have more than one DRTs like in New Delhi and Mumbai, Chennai and Kolkata.

However, there is still some way to go so that restructuring happens in a defined timeframe, feels the Fitch study. It suggests that steps could also be taken to gauge the effectiveness of the provisions of the different statutes so that corrective measures could be taken like allowing asset reconstruction companies the right of refusal if they have acquired a threshold percentage of debt to ease the process of debt aggregation to enhance the effectiveness of the SARFAESI Act.