Non-performing assets: Worsening recovery of bad loans


The Indian Express
Sunny Verma 
December 26, 2017 
New Delhi

After peaking in 2009 and remaining well above 40 per cent in the earlier years, banks’ NPA recovery rate has declined over the years to just 20.8% at the end of March.

In an indication of deteriorating management of non-performing assets (NPAs), the rate of recovery of banks’ gross NPAs has been steadily declining for the past 12 years and hit the lowest level of 20.8 per cent in 2016-17, according to the latest data from the Reserve Bank of India (RBI). Recovery of written-off loans through various channels, such as debt recovery tribunals (DRTs), has also been falling year-on-year. While the loan recovery rate has been falling, the number of cases being referred to the National Company Law Tribunal (NCLT) benches for insolvency resolution has been correspondingly rising since the enactment of the Insolvency and Bankruptcy Code (IBC) last year.

“Recovery of banks’ NPAs remains poor, having declined to 20.8 per cent by end-March 2017 from 61.8 per cent in 2009,” the RBI said in its Report on Trend and Progress of Banking in India 2016-17 released last Thursday. After peaking in 2009 and remaining well above 40 per cent in the earlier years, the recovery rate has declined over the years, the data show. Banks were able to recover higher amount through secured loans, term loans and exposure to real estate.

During the 2015-17 period, the average recovery ratio of Indian banks was 26.4 per cent, with recovery by private sector banks at 41 per cent being much higher than by public sector banks (PSBs) at 25.1 per cent. Banks continue to pursue various recovery measures for NPAs as well as written-off loans. A higher recovery rate indicates the ability of banks to prune their NPAs. During this two-year period, banks and financial institutions recovered an average of around 10 per cent through the existing legal recovery channels, including DRTs, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and Lok Adalats.

The recovery percentage through these three channels fell to 9.8 per cent in 2016-17, down from 10.3 per cent in 2015-16. Out of Rs 2.86 lakh crore worth of bad loans being chased through DRTs, SARFAESI and Lok Adalats, banks were able to recover Rs 28,000 crore worth of loans in 2016-17. In the previous financial year, the banks and financial institutions could recover Rs 22,800 crore worth of bad loans out of total Rs 2.21 lakh crore being chased through these legal channels.

The highest recovery rate of 24.4 per cent was recorded in DRTs in 2016-17, up from 9.2 per cent in 2015-16. “The significant improvement in the case of DRTs was due to opening of new tribunals, strengthening existing infrastructure and computerised processing of court cases,” the RBI said. In the current financial year, banks have been largely focussing on NPA recovery through resolution under the IBC. Under the direction from the RBI, the banks have taken 12 large NPA cases for resolution under the IBC, accounting for a combined debt of around Rs 2.5 lakh crore.

Apart from DRT, SARFAESI and IBC, banks also recover their amounts stuck in NPAs through sale of stressed assets to securitisation companies and reconstruction companies with lenders taking haircut on every sale. While private banks and foreign banks have been aggressive in selling stressed assets to securitisation and reconstruction companies, such “sale of NPAs by public sector banks remain lukewarm,” the report said. This could be due to PSBs unwilling to sell their assets at a significant discount. An analysis of purchase of NPAs by asset reconstruction companies (ARCs), however, indicates that acquisition cost as a proportion of the book value of assets increased from 28.7 per cent in March 2014 to 36 per cent in March 2017, indicating that the banks had to incur lower haircuts on account of sale of NPAs, the RBI said.

Even as the loan recovery remained weak, PSBs wrote off a record Rs 81,683 crore worth of bad loans in the financial year ended March 2017 – a jump of more than 41 per cent over the previous year’s write-off amount of Rs 57,586 crore. Banks wrote off a total of Rs 2.46 lakh crore worth of loans in the past five years.


Rising bad loans, shrinking profitability and weak recovery of written-off loans necessitated the need for higher capital infusion in the PSBs. Out of the total 22 PSBs, as many as eight banks currently have GNPAs above 15 per cent and 14 have GNPA of more than 12 per cent. To address these issues and to improve credit deployment in the economy, the government in October announced a mega capital infusion plan of Rs 2.11 lakh crore, comprising Rs 1.35 lakh crore worth of recapitalisation bonds, Rs 18,000 crore through budgetary support and Rs 58,000 crore to be raised by the banks from the market. The recapitalisation will be done in 2017-18 and 2018-19 with the government planning to frontload capital injections. The amount of capital infusion will be higher than the Rs 79,700 crore provided by the government in the eight-year period between 2007-08 and 2014-15.

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