Only 31% Npas Can Be Recovered Under Act

Rating agency Crisil said the new foreclosure law -- the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act -- had a limited impact on the existing non-performing loans (NPL) in the banking system.

It will facilitate recovery from about 31 per cent of the outstanding net non-performing loans of the banking system.

A Crisil analysis shows that about 36 per cent of the outstanding NPLs are outside the jurisdiction of the Act on account of exemptions provided by it.

Additionally, banks may not be able to initiate action on about 33 per cent of the outstanding NPLs because of factors like concentration of NPLs in a few industries, the decline in capital equipment prices and the economic downturn.

 

"Hence, banks can possibly enforce security interest with respect to only about 31 per cent of the outstanding gross NPLs," a Crisil release said.

"The actual recovery rate against those assets on which action could be taken would be about 40 per cent. This is in line with the experience of other Asian asset reconstruction companies in resolving NPLs," said Raman Uberoi, director, Financial Sector Ratings, Crisil.

In effect, final recoveries using the Act will be only about 12 per cent of the reported gross NPLs in the banking system.

Roopa Kudva, executive director and chief rating officer, Crisil, pointed out: "The new foreclosure laws have clearly tilted the scales in favour of banks. Armed with this law, banks shall have a much better chance of ensuring lower default levels in future. But it shall only have a limited impact on the banking system's existing NPLs. In Crisil's opinion, the efficacy of the Act can be improved by bringing loans below Rs 1 lakh within the ambit of the Act and allowing the enforcement of agricultural land, where it is a collateral."

The effectiveness of the new foreclosure laws in tackling the banking system's NPL problem is marred by some significant exclusions in the Foreclosure laws. For instance, the Act does not contain and provision for tackling unsecured NPLs.

Then, the Act also excludes the enforcement of any security interest created in farm land. Crisil estimates that over 12 per cent of the NPLs are in the agricultural sector.

Banks have also not been allowed to enforce aircraft or shipping vessels. Moreover, the Act does not cover any security interest for recovering any financial asset that is below Rs 100,000.

The Crisil study indicates that about 18 per cent of the non-performing assets are below Rs 100,000.

These NPLs will not come within the ambit of the Act and banks will have to resort to traditional measures of recovery in such cases.

Crisil said the efficacy of the new foreclosure laws can be enhanced by bringing more NPAs within its ambit.

To do so, the Act should bring loans below Rs 100,000 within its ambit and allow enforcement of agricultural land, where it is a collateral, a Crisil release said.