One of the most important and major roles played by banking sector is that of lending business. It is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which also results into economic growth. The failure of the banking sector may have an adverse impact on other sectors. Non- performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPAs growth involves the necessity of provisions, which reduces the overall profits and shareholders’ value. The issue of Non Performing Assets has been discussed at length for financial system all over the world.

The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by Financial Institutions, etc. Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive. To ensure proper functioning of the banking system in the economy, we need to see that the level of NPAs is kept down. Non-Performing Assets are an area of concern, as they adversely affect the financial health of the banks. Banks were never so serious in their efforts to ensure timely recovery and consequent reduction of Non-Performing Assets (NPAs) as they are today. It is important to remember that recovery management, be of fresh loans or old loans, is central to NPAs management. This management process needs to start at the loan initiating stage itself. Effective management of recovery and Non-Performing Assets comprise two pronged strategy. First relates to arresting of the defaults and creation of NPAs thereof and the second is to handling of loan delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of urgency in the minds of staff of bank and gave them a message that either they perform or perish. The prudential norm has forced the bank to look into the asset quality.

Reserve Bank of India has asked banks to introduce Watch/Special Watch category accounts to segregate accounts, which show signs of sickness. An account has to pass through this stage before it is classified as NPAs. But, in practice, this does not often happen. This can lead to surprises at the end of the year for controlling offices, statutory auditors and the RBI, who then point out that an account has become an NPAs, that provision needs to be made and a memorandum of change in provision given by the auditor or the central bank. It often transpires that the account had not passed through the Watch category stage. It is possible that the branch management either overlooked it, or thought that the statutory auditor would also overlook it. The branch management fights last minute duels with the auditor or RBI justifying lower provision. The controller, namely the RBI, does not agree and ultimately provision is made for a higher amount as insisted by the RBI. In the interest of corporate governance and proper disclosure, it is necessary that the systems are more transparent and reflect the true state of affairs.

Banks now have a monthly NPAs recovery management information system (MIS), which gives the NPAs level at the beginning and end of the month, and includes other additions, cash recoveries and upgrades during the month. This MIS is not system-generated but prepared manually. Budgets are given for branches for cash recovery and the position is monitored at the end of the month. Identification of staff lapses and accountability when an account becomes bad is still a relative term with PSBs. There is still no foolproof system at PSBs for identification of staff lapses. But how can you prevent an account becoming a NPAs when it throws early warning signals and how can you manage a NPAs better?

“Recovery is defined as the process of regaining and saving something lost or in danger of becoming costs.”

Recovery is a key to the stability of the banking sector there should be no hesitation in stating that Indian banks have done a remarkable job in containment of Non-Performing Assets considering the overall difficult environment. Recovery management is also linked to the bank’s interest margin’s we must recognize that cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. No doubt, improving recovery management in India is an area requiring expeditions and effective actions in legal institutional and judicial processes. Banks at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to banks has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time.

Importance of Debt Recovery:

Speedy debt recovery is importance for the following reasons:

· A bank’s money can be termed ‘public money’. The funds of the banks are intended to be served to the general public and for the commercial initiatives that largely influences the people, who depends on it. When money is trapped, a bank faces difficulty in funding projects, which it could earlier do

· NPAs affect the profitability of the bank; hence debt recovery is made essential to ensure that it functions smoothly

· If the bank succumbs to a financial crisis, it will leave the employees, management, and all the stakeholders in the dark

· A large amount of NPAs will tarnish the image of the bank, and can discourage investors

· Return on Investments of the bank decreases, if the NPAs is not recovered speedily

· Cost of Capital (interest) gets stranded. It is the bank’s prime source of income

REVIEW OF LITERATURE:

Debanth (1994)¹ analysed the approach of commercial banks, in managing the non-performing assets. It was observed that the credit management efforts of the banks so far have proved ineffective in checking the problem of growing non-performing assets and altogether new managerial approach was suggested for managing credit assets.

Satyanarayana K. (1997)²has discussed the feasible non-performing asset (NPA) levels of banks for capital account convertibility. It is observed that public sector banks in India may not be able to bring down their gross nonperforming assets to 5%. It is also observed that while the strong banks exhibit confidence, moving towards internationally competitive levels of capital adequacy, profitability and adequate coverage of non-performing assets, the position of weak bank is precious in this regard.

Nettime and Kuruba (2000)³ observed that the pace of reforms in banking sector in India is definitely encouraging and giving positive signals of structural changes in the financial sector. However, it was opined that the reforms would be successful only if the level of NPA is reduced. In order to tackle the problem of NPAs there is need for legal reforms. It is the attitude and efficiency of banking authorities, which have to go a long way in making the banking reforms operationally and functionally effective.

Kaveri (2001)⁴ attempted to ascertain whether enough signals of weakness were indicated much before the event. Researcher considered nine efficiency parameters - Capital Adequacy Ratio, Net Non-performance assets/Net Adequacy, Net profit/Total Assets, Gross Profit/ Working Funds, Net interest income/Total Assets, Interest Expended/Total Assets, Provisions and contingencies/Total Assets, computed on the data collected from the RBI publications.

Bidani (2002)⁵dealt with the practical aspects of the problem of management of NPAs right from identification stage till recovery of the dues including other aspects connected with the subject like asset classification, assessment of provision, pre-sanction appraisal and post-sanction appraisal and post sanction supervision, monitoring system for existing and likely NPAs, capital adequacy, reduction of NPAs, rehabilitation of sick nonperforming units etc.

Raghupathy (2001)⁶ studied 23 South Indian Banks for the year 1999-2000 and ranked them on the basis of internationally acclaimed set of CAMEL indicators. The analysis found Karur Vysya Bank as the best performing among the South Indian Banks followed by Corporation Bank and Global Trust Bank. The study concluded that in order to sustain their ranking, they should focus on liquidity and earnings performance, management performance, technology and growth strategies in the long run.

Abhiman Das (2002)⁷found the relationship among capital, NPAs and productivity using data on PSBs for the period 1995-96 to 2000-01. Credit risk was measured by the ratios of net NPAs to net Advances. Financial leverage was measured by the ratio of capital to risk weighted assets (CRAR). Researcher postulated a simultaneous equation system comprising of three linear equations, representing the empirical model. The explanatory power of capital equation has significance but has high variability.

Ram Mohan (2002)⁸evaluated the performance of public, private and foreign banks since deregulation in absolute and in relative terms. It was observed that the efficiency of the banking system as a whole measured by declining spreads has improved. The performance of public sector banks has improved both in absolute and relative terms. He applauds the Indian Banking industry for its ability to keep its head above water log after deregulation. Further, author discussed about the issues of trade-off between efficiency and stability in banking.

Rajput (2003)⁹suggested that Indian banks especially public sector banks will have to learn to live up with competitive environment. They must make persistent efforts to improve their profitability. On the revenue side, they should increase non-interest income by diversifying their operation into Para banking activities on the lines of new private banks. On the expenditure side, they must bring efficiency in their operations to minimize cost and strive hard to control the booming NPAs.

Kumar (2003)¹⁰discussed in detail the need, process, summary and positive as well as negative aspects of the SARFAESI Act. Researcher analyzed that this Act empowered banks and financial institutions to directly enforce the security interest which was pledged to them at the time of sanctioning the loan without going through the judicial process of DRT or Civil Courts

Analysis:

Recovery of NPAs in Public and Private sector Banks:

Proper incentive to the banking system is necessary for achieving a higher recovery percentage. In view of several options available to banks for dealing with NPAs, banks have been able to recover a significant amount of NPAs (Table 1). An improved industrial climate contributed to a better recovery position. The recourse to aggressive restructuring by banks in 2004-05 also helped in reducing the level of NPAs. Both public and private sector banks recovered a higher amount of NPAs during 2009-10 than that during the previous year. The total amount recovered Rs. 37,160crore by Public sector banks and Rs. 5,417crore by private sector banks in 20010-11 which was higher in Public sector banks. Banks have been able to recover NPAs through the use of legal a measure which is a very good sign for Banks. Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms of amount recovered.

TABLE 1-Recovery of NPAS In Public and Private Sector Banks

(Amount in Rs. Crore)

Year	Public sector Banks	% increase/decrease	Private sector Banks	% increase/decrease
1998-99	8,438.00	-	NA	--
1999-00	10,367.00	22.9	NA	--
2000-01	13,628.00	31.5	NA	--
2001-02	13,833.24	1.5	2238.90	--
2002-03	18,452.00	33.38	3686.00	64.63
2003-04	20,685.00	12.1	6156.00	67.01
2004-05	19,080.00	(0.07)	3274.00	(46.82)
2005-06	23040.00	20.75	4320.00	31.95
2006-07	22004.00	(4.5)	3157.00	(26.93)
2007-08	22466.00	2.1	3773.00	19.51
2008-09	26,271.00	16.94	8089.00	114.39
2009-10	12,293.00	(53)	8,782.00	8.6
2010-11	37,160.00	202	5,417.00	(38.31)

Source: (RBI) Report on Trend and Progress of Banking in India, various issues.^11-14

NPAs Recovered by SCBs through various channels:

The Table - 2 shows that DRTs have been very fruitful in recovering claims. The figure of the claims involved with DRT gradually increased from the FY of 2003-04 to 2005-06, i.e. for three consecutive years till the FY2006-07 which showcased a steep fall in the recoveries through DRT and again increased from the FY of 2006-07 to 2008-09 for three years. The FY 2009-10 years characterizes general fall in the recovery of secured assets using all the methods of recoveries available for banks and financial institutions. Recoveries through Lok Adalats have shown a constant fall since FY 2003-04. This shows that neither Tribunals nor banks prefer Lok Adalats. It has been a close race between SARFAESI Act and DRTs in picking up the largest share of contribution to the banks in recovery criteria. The direct act of taking possession of the secured asset of the defaulter is still the preferred method for banks in India. NPAs. In 2010-11, there was 51 per cent increase in the number of cases referred to under the SARFAESI Act. Further, out of the total amount involved, more than one third was recovered in 2010-11. In 2010-11, the number of cases referred to DRT registered a whopping growth of 114 per cent over the previous year. Due to the speedy recovery in Lok Adalats, the number of cases referred to Lok Adalats is much more as compared with other channels of recovery. However, in 2010-11, the number of cases referred to Lok Adalats witnessed a decline over the previous year. Moreover, the percentage of amount recovered to amount involved was comparatively lower in Lok Adalats as compared with DRT in 2010-11, though there was an improvement over the previous year.

Conclusion:

Non-performing assets have negative impact on the profitability, productivity, capital adequacy and competitiveness of commercial banks. Hence, it is important to reduce the level of NPAs in commercial banks. Various steps have been taken by government to reduce the NPAs. The NPAs level of our banks is still high as compared to the international standards. It is highly impossible to have zero percentage NPAs. It is needless to mention, that a lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk management mechanism. It is necessary that the banking system is to be equipped with prudential norms to minimize if not completely to avoid the problem of NPAs. The onus for containing the factors leading to NPAs rests with banks themselves. This will necessitates organizational restructuring, improvement in the managerial efficiency and skill up gradation for proper assessment of credit worthiness. The banks should identify cases of willful default, frauds etc. and initiate prompt action against them.

This will led to decline in the level of NPAs of the Indian banking sector. But a lot more needs to be done. The NPAs in the public sector banks are well above the normal level. The consequences envisaged during the past several years are many. It has become a difficult task for the banks to reduce the lending rate due to the presence of large NPAs. Ultimately this is affecting the competitiveness of the Indian banks.

References:

1 Debanth and Kalyan, “Managing Non-Performing Assets: A Professional Approach for Better Asset Management”, IBA Bulletin, Vol.XVI, No.5, May, 1994.

2 Satyanaraya Convertibility”, Prajnan, Vol.XXVI, No.3, 1997, pp.325-45.

3 Nettime N. and Kuruba G., “Reforming Banking and Financial Sector in the Context of Economic Restructuring”, Ibid, 2000, pp.39-51.

4 Kaveri V.S., “Loan Default and Profitability of Banks”, IBA Bulletin, Vol.23, No.1, Jan 2001.

5 Bidani, "Managing Non-Performing Assets in Banks", Vision Books, 2002.

6 Raghupathy S., “South Indian Banks: A brief price new look”, Industrial Economist, 30th Jan - 14th Feb, 2001.

7 Abhiman Das, “Risk and Productivity Change of Public Sector Banks”, Economic and political weekly, Feb 2-8,2002, pp.437-47.

8 Ram Mohan T.T. “Deregulation and Performance of Public Sector Banks”, Economic and Political Weekly, Vol.XXXVII, No.5, Feb 2-8 2002, pp.393-97.

9 Rajput, "Banking Sector Reforms in India - A study of Post-Liberalization Period”, 2003.

10 Kumar, "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002", 2003.

Reports:

11. RBI Report on Currency and Finance 1998-2011

12. Report on Trend and Progress on Banking in India 1998-2011

Web Sites:

13. www.rbi.org.in

14. www.indianjournals.com/ijor.aspx?target=ijor:jmr&volume =7&issue=1&article=004

Received on 19.07.2013 Modified on 25.07.2013

Asian J. Management 4(4): October –December, 2013 page 293-296

Recovery Channel	2003-04	2004-05	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11
i) Lok Adalats	14	14.1	12.36	14	8.2	2.4	1.5	2.87
ii) DRTs	17.2	18.77	75.48	41.4	59.1	81.3	32	27.89
iii)SARFAESI Act	14.74	18.1	39.48	37.8	61	33	30	37.78