Sarfaesi outperforms IBC in FY21 loan recovery: RBI data

While fresh referrals under the insolvency law were suspended for a year up to March 2021, that had no bearing on these figures as they reflect recoveries from cases already admitted by the National Company Law Tribunal (NCLT).

Allowing a pre-pack resolution window for micro, small and medium enterprises (MSMEs) is expected to assuage the mounting pressure of pending cases before NCLTs, reduce haircuts and improve declining recovery rates, it added.
Allowing a pre-pack resolution window for micro, small and medium enterprises (MSMEs) is expected to assuage the mounting pressure of pending cases before NCLTs, reduce haircuts and improve declining recovery rates, it added.

Banks managed to recover more of their bad loans through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, compared with the Insolvency and Bankruptcy Code (IBC) during FY21, according to the Reserve Bank of India (RBI)’s latest report on trend and progress of banking in India.

Through the Sarfaesi route, banks recovered 41% of the amount involved, while the extent of recovery stood at just 20.2% via the IBC. The other modes of recovery, Lok Adalats and debt recovery tribunals (DRTs), yielded even less – 4% and 3.6% respectively – during FY21. Overall, banks were able to recover only 14% of their dues through the four modes.

While fresh referrals under the insolvency law were suspended for a year up to March 2021, that had no bearing on these figures as they reflect recoveries from cases already admitted by the National Company Law Tribunal (NCLT).

In FY20, the IBC had been the leader among the four modes of recovery, returning to banks 46.3% of their dues. The Sarfaesi Act was a distant second, with 17.4% of the amount involved being recovered. Overall, recoveries were better at 22%.

In the report, the RBI said during FY21, all the recovery channels, most notably Lok Adalats, witnessed a sizable decline in the cases referred for resolution. “Even though initiation of fresh insolvency proceedings under the IBC was suspended for a year till March 2021 and Covid-19-related debt was excluded from the definition of default, it constituted one of the major modes of recoveries in terms of amount recovered,” the report said.

Allowing a pre-pack resolution window for micro, small and medium enterprises (MSMEs) is expected to assuage the mounting pressure of pending cases before NCLTs, reduce haircuts and improve declining recovery rates, it added.

Another important mode of asset resolution for banks, especially private lenders, has been sale of non-performing assets (NPAs) to asset reconstruction companies (ARCs) by taking haircuts. In recent years, however, the preference of banks has shifted to alternative avenues, with asset sales declining as a proportion of outstanding gross NPAs across bank groups, the RBI report said, adding, “This was partly due to the worsening acquisition cost of ARCs as a proportion of book value of assets, reflecting higher haircuts and lower realisable values in respect of their acquired assets.”

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