Handling Non-Performing Assets (NPAs) is the greatest problem for the banking sector world over. the problem is predominantly acute in India with NPAs accounting to thousands of crores. The spiralling NPAs cut off funds to potential borrowers thereby affecting the capital formation and limit the optimal use of one of the important factors of productioncapital. For banks, especially the effect of large NPAs is devastatingmeans reduced interest income, additional provisioning, erosion in capital and reduction in competitiveness.
The
government and the banks have put in a lot of effort
to address the serious problem posed by the NPAs. Debt
Recovery Tribunals (DRTs) were set up to recover the
bad loans. The banks also came up with One Time
Settlement systems to settle the problems once and for
all with the defaulting borrowers. Though these
tribunals and schemes were partly successful, they did
not go to the extent of solving the problem.
Just
when things were reaching a critical level the
government came up with the ultimate weapon, the
Securitization Act. It was not only a comprehensive
piece of legislation but also a reassuring sign of
government commitment to reforms. The Act empowered
banks to change or takeover the management or even
take possession on the secured assets of borrowers and
sell or lease out their assets. For the first time,
banks can takeover immovable assets of the defaulting
borrower without the intervention of the court, claim
future receivables, and supersede the board of
directors. What more, no court other than DRT can
entertain any appeal in such situations.
When
this act became enforceable it was seen as the panacea
to the problems of NPAs. The banks were euphoric and
they started taking action swiftly. Notices were sent
to thousands of defaulting borrowers. Some of the
borrowers who did not respond earlier started
responding positively and the cash recoveries started
becoming a reality. |
