Volume 15, Number 1 Article by Kausick Saha March, 2003
Award Winning Student Essay Can the Ordinance Recover NPAs? :
In India, banks and financial institutions are the principal providers of credit to the commercial sector. Lax project appraisal, banker-political-promoter nexus and inaccurate future demand projections in the industrial sector, coupled with a downturn in the business climate, have resulted in the accumulation of huge non-performing assets (NPAs) for the banking sector. NPAs have a detrimental impact on the accounts of any financial institution by not allowing interest income to be booked on loans declared as NPA. Provisioning against NPAs creates further losses.
The main handicap afflicting Indian banks in recovering their dues is the legal framework, with long-winded bankruptcy and liquidation processes. However, in June 2002, an Ordinance was promulgated for the ‘Securitisation, Reconstruction of Financial Assets and Enforcement of Security’, an important initiative to recover NPAs. The Ordinance empowers creditors to take possession of, sell or lease assets financed by them and provides a framework for asset securitisation. It also charts a path for the formation of dedicated asset-reconstruction companies (ARCs).
In an award winning student essay, Kausick Saha examines the financing pattern of the Indian commercial sector, how an NPA is defined, classified and provided for according to banking norms, the scale of the NPAs and the principal reasons for high NPA accumulation. The salient features of the Ordinance and the reactions of industry associations and bankers to it are then described, which raises some areas of concern as regards its implementation. While it is a bold step in getting rid of the NPA menace, the Ordinance will not be effective without a major overhaul of supporting infrastructure and existing statutes, says Saha. In order to give the Ordinance more teeth, we first need to radically change our bankruptcy and recovery laws and procedures, including the Sick Industrial Companies Act, the Board for Industrial and Financial Restructuring norms, debt recovery, foreclosure and liquidation rules. Secondly, ARCs need to be structured very carefully like professional, private sector run mutual funds. Thirdly, if banks are to act on the provisions of the Ordinance, we need to build an array of ancillary industries: liquidators, receivers, seizing and securitising agencies and industry doctors.
Reprint No 03102
