Page 217 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes 13.5.3 External Factors

An important reason for the bulging of NPAs was the ‘euphoria’ generated following
liberalization, a dream of globalization leading to huge investments, which unfortunately could
not be utilized due to hesitant liberalization policies. Dominance of traditional industries in
credit portfolios, industrial sickness, labour problems, the overall economic slowdown—global
as well as domestic—particularly in the industrial sector have until recently adversely affected
the bottom line of borrower units and their capacity to service the debt leading to slippage of
standard asset into NPA.
Among other external factors, the RBI study noted that non-availability of raw materials, power
shortage, transport bottlenecks, financial bottlenecks, changes in government policy, natural
calamities, industrial sickness, increase in import costs, increase in overhead costs, market
saturation, product obsolescence, fall in demand and others were responsible for weak
performance in 48 percent of units assisted by the banks resulting into advances given to them
turning bad.
An ineffective legal system is the most important factor contributing to enormously high level
of NPAs in Indian commercial banks. Antiquated defaulter friendly legal system, extremely
slow judicial system, and dismal record of enforcement machineries have also contributed
significantly to high level of NPAs in India.
Commenting on the current legal system of the country, FITCHIBCA, an international rating
agency, observed that “The Indian legal system is sympathetic towards the borrowers and
works against the banks’ interest. Despite most of their loans being backed by security, banks
are unable to enforce their claims on the collateral when the loans turn non-performing and
therefore, loans recoveries have been insignificant”. The Pannir Selvam Committee of the IBA
on NPAs clearly brought out that it takes decades for courts to decide cases and even after
decrees are obtained execution of decrees is virtually an impossible task. Languishing of thousands
of cases in courts for decades is sad reflection of the speed of recoveries through the filing of
suits.

An RBI study on effectiveness of suit filing and recovery measures in the prescribed procedure
for recovery of debts due to banks reveals that has resulted in blocking significant portion of
their funds in unproductive assets, the value of which deteriorated with the passage of time. The
multiple litigation opportunities available to the borrower units delaying the verdicts/
enforcement, courts being burdened, as they are, with heavy work coupled with tardy decision-
making process in the banks, have rendered legal process less useful.
Pending of significantly large number of suits speaks volumes about the recoveries made through
the suit filing. In some cases, suits were pending for 15 to 20 years, but no progress was made in
the suit. Out of all the suits filed cases of ` 1 crore and above studied by the RBI in 15 banks, there
was only one case in which the suit filing was taken to the logical end.
As at June end 1998, the PSBs had as much as 5.12 lakh suits involving an amount of about
` 12, 000 crores pending before the courts. As regards the time taken for disposal of suits filed by
the banks, RBI study reveals that it took many years, in many cases more than a decade, for the
courts to settle the suits. Even after passing of court order, due to the multiple litigation
opportunities, long-time is taken for settlement of the cases.

The legal process gets further elongated /complex in cases where legal actions are either delayed
or the matter comes under the purview of the Board for Industrial and Financial Reconstruction
(BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). BIFR
generally takes a very long time to decide the case and approve rehabilitation package in case of
sick units.

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