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Menace of NPA for Banking and need of Online Settlement Solutions

Non performing Assets (NPA) is the root cause of global financial crisis and the regularly increasing volumes of NPA in banks and sluggish recovery of NPAs has hit the bottom line of Banks. It requires a look for the solution from a new perspective and means as the net non-performing assets (NPAs) of banks had gone up 51% in FY13 to RS.92825/- crores. According to a recent CRISIL report, the gross NPAs of banks are slated to increase from 3.3% in March 2013 to 4% by March 2014. The data, shared with the Standing Committee, shows that NPAs in the corporate sector are far higher than those in the priority or agriculture sector. RBI governor Mr. Raghuram Rajan has recently said that NPAs must be curbed before the problem becomes alarming.

NPAs at the Global Level

A closer look at the Non-performing Loans (NPL), as they are called in many nations, reveals in collecting data that the NPL at the global level was US$ 1,300 billion. India ranks fourth with NPL of around US$ 30 billion (2.3 per cent of the global NPL), while Japan has the highest NPL of US$ 330 billion (25.4 per cent of the global NPL) and Turkey has the lowest NPL of US$ 8 billion (0.6 percent of global NPL).

Table 1: Global Non-performing Loans

Countries NPLs (US$ billion) Share in Global (per cent)
Japan 330 25.4
China 307 23.6
Taiwan 19.1 1.5
Thailand 18.8 1.5
Philippines 9 0.7
Indonesia 16.9 1.3
India 30 2.3
Korea 15 1.2
Germany 283 21.8
Turkey 8 0.6
Global 1300 100

Source: Global NPL Report 2004, Ernst and Young.

Legal Mechanism to recover NPA: SARFAESI Act

This act was passed with the aim of enabling banks and financial institutions to realise long-term assets, manage the problem of liquidity, reduce asset liability mismatches and improve recovery by taking possession of securities, selling them and reducing NPAs. The ordinance also allows banks and financial institutions to utilise the services of ARCs/SCs for speedy recovery of dues from defaulters. In addition to passing the SARFAESI Act, certain other legal reforms were also introduced to speed up the loan recovery process.

Now the question arises whether the banks were able to reduce the pendency of NPA accounts inspite of introducing of such acts. The statics shows that it is increasing and introduction of said act has not serve their purpose fully.

Table : NPAs Recovered by SCBs through Various Channels (Rs crores)

One-time Settlement/ LokAdalats DRTs SARFAESI Act
compromise Scheme
2003-04
No of cases referred 139,562 186,100 7,544 2,661
Amount involved 1,510 1,063 12,305 7,847
Amount recovered 617 149 2,117 1,156
2004-05
No of cases referred 132,781 185,395 4,744 39,288
Amount involved 1,332 801 14,317 13,224
Amount recovered 880 113 2,688 2,391
2005-06
No of cases referred 10,262 2,68,090 3,534 41,180
Amount involved 772 2,144 6,273 8,517
Amount recovered 608 265 4,735 3,363
2006-07
No of cases referred 1,60,368 4,028 60,178
Amount involved 758 9,156 9,058
Amount recovered 106 3,463 3,749
2007-08
No of cases referred 1,86,535 3,728 83,942
Amount involved 2,142 5,819 7,263
Amount recovered 176 3,020 4,429
2008-09
No of cases referred 5,48,308 2,004 61,760
Amount involved 4,023 4,130 12,067
Amount recovered 96 3,348 3,982

Source: RBI

How effective are these changes? This calls for a closer look at the NPA trends in the recent past.

New Innovative Solutions

We have to improve the efficiency of the recovery system and an online settlement platform seems to be a new dependable mechanism and can prove to be a very effective solution for NPA’s. It will find many defaulters at a click of the mouse who intend to settle their account moreover, there will be no face to face meeting during negotiation which the defaulter usually avoided after the declaration of his/her account as NPA. Moving to online settlements is likely to give a substantial boost to present sluggish recovery of NPA s and hence an effective solution to ever increasing perennial problem of banking sector and the borrowers. Also this step can be helpful for the curing the disease of NPAs.

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