Studies in Indian Place Names ISSN: 2394-3114

Vol-40-Issue-50-March -2020
(UGC Care Journal)

Recovery channels of Non-Performing Assets in Indian Scheduled

Commercial Banks

Dr. Ajit Kumar

Assistant Professor,
AMITY University, Patna, Bihar,
mailajitkumar@gmail.com

Mr. Mubashir Alam

Research Scholar,
Department of Applied Economics and Commerce,
Patna University, Patna, Bihar
alam02mubashir@gmail.com

Abstract

One of the parameter of performance of a bank is timely recovery of loans and advances.
Currently banks are facing the problem of increasing amount of NPAs.
Not only does it erode banks ' productivity, it also impacts banks ' liquidity and competitiveness.
A major stumbling block for the banks to reduce their NPAs has been the prevailing legal system
in the country. A proper recovery channel is very necessary for the recovery of these bad loans.
In this paper the recovery of NPAs are analyzed with the LOK Adalat, DRTs, and SARAESI Act
from the period 2005-06 to 2017 - 18. Secondary data is used for this study, which were
collected from the RBI Data Bank. In this study, it was found that the performance of the
recovery channel is not up to the mark. Banks should take some strict actions against defaulter
under the guidance of the RBI.

Keywords: - NPAs, Prompt Corrective Action, Lok Adalat, DRTs, SARFAESI Act etc.

1. Introduction
Accepting deposits and granting loans are the major functions of a bank. Due to inherent nature
of banking business, the reduction of NPAs to zero level is not possible. So, with the help of risk
management, credit assessment and recovery channel bank can reduce the level of NPAs. For a
bank it is better to recover their loan before it becomes NPAs. Because once it becomes NPAs
the recovery will be costly for the bank that will increase the operational cost and reduce the
profitability. For the recovery of NPAs a strong and proper recovery channel is very important.
Lok Adalat, DRTs and SARFAESI Act are the current recovery channels which help the bank
for the recovery of NPAs. To settle disputes in doubtful and loss categories account these
Adalats are set up to help Banks. The Lok Adalats organized by civil courts can handle loan
accounts with outstanding balances of up to INR 20 lacs. To reduce the amount of NPAs Debt
Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATS) for resolving
cases of INR 10 lacs and above organized Lok Adalats, Banks also a participant in such adalats.
SARFAESI Act came into existence in the year 2002. Securitisation, asset reconstruction and

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Studies in Indian Place Names ISSN: 2394-3114
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security enforcement are the three aspects which are dealt under this Act. SARFAESI Act, itself
proven one of the effective tools for the recovery of the loans for banks.

These recovery channels are existence in the system though they are not performing up to mark.
In the year 2018- 19 in total these recovery channels have recovered only 34 percent of the total
amount involved as NPAs. Out of these three channels the SARFAESI Act is showing a better
performance than Lok Adalats and DRTs. Individually the banks have recovered 25 percent out
of 34 percent through SARFAESI Act.

There are three main sources i.e. interest, commission and brokerage which generate income for
the bank. The interest income accounts for more than 80% of the profits. Interest income is
entirely dependent on the loans and advances being recovered. Thus the banks ' performance
depends on the loans and advances being recovered. The efficacy of the recovery channel is
measured as well as accessed in this study whether or not they work up to the mark.

Research Gap

In the past, so many researchers have worked on the current recovery channels for the recovery
of bad loans in the Indian banking system. Most of the researchers have work on the introduction
of the various recovery channels or the channels for the recovery of NPAs. In this paper mainly
three recovery channels i.e DRTs, Lok Adalats and SARFAESI Act are considered for the study.
Inthis study the performance of the all these channels are measured with the help of number of
cases referred to each channel as well as the amount involved and recovered through these
channels.

The objective of the study is –

To study the performance of the recovery channel in the recovery of loans and advances.

The study has been conducted to measure the efficiency of the recovery channels in Indian
scheduled commercial banks. The data undertaken in the analysis is limited to the period
between 2005- 06 to 2017-18.

The rest of this paper will be organized as follows. Section two discusses the literature in
question and establishes the theoretical model and hypotheses. Section 3 explains the methods of
the study. Empirical findings are stated in section 4. Section 5 addresses the conclusions and the
article is concluded in section 6.

2. Literature Review

Kumar (2003) explained the importance of SARFAESI Act. Further

Researcher said this Act allowed financial institutions to explicitly implement the security
interest that they were guaranteed when the loan was approved without going through the DRT
or Civil Courts judicial process.

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Studies in Indian Place Names ISSN: 2394-3114
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(UGC Care Journal)

Bose (2005) explained that, while several schemes for facilitating recovery from NPAs have
been in place in the past, they are not satisfactory in terms of reducing NPAs. It was hoped that
the introduction of the SARFAESI Act would help banks to reduce and recover money from
NPAs. But it creates apprehension among banks and financial institutions due to certain
limitations.The root causes of NPAs, which were apparent in the framework, may need to be tack
led first in order to get the full benefit of this Act.
Ahmed, J.U (2008) found that
the management of the NPA recovery and clarified that the debt recovery tribunals and the
SARFAESI Act were the most productive recovery channels available in terms of the amount rec
overed between the different recovery channels.
Sharma, M (2005) noted that the most important step in resolving the NPA issue is the timeliness
of steps as it would save the system from greater damage, preventing significant macroeconomic
costs. Different measures and recovery mechanisms in the Indian banking system were
implemented in post-liberalization period.
NPA problems in banking can not be completely eliminated; it can be controlled by proactive an
d reactive measures.Effective risk assessment, credit assessment and monitoring techniques are
proactive measures, while reactive measures are various recovery measures, including Asset
Reconstruction Companies (ARCs), Debt Recovery Tribunals (DRTs), Lok Adalats, SARFAESI
Act, etc. The 2002 SARFAESI Act requires banks and other financial institutions to recover
NPA accounts without the Court's interference. It provided three different methods for recovery
of non-performing assets, namely: -
 Securitization,
 Asset Reconstruction,
 Enforcement of Security without the intervention of the Court
Thus it may be observed that SARFAESI helped to toughen the banking sector and allows them
to securitize recovery of NPAs.
Singh (2013) argued
Indian banking sector faces a serious NPA problem. NPAs should be reduced and controlled in
order to improve banks ' efficiency and profitability.
Shaardha and Jain
(2016)Investigating the mechanism and effect of the 2002 SARFASEI Act and its effects on the
recovery of nonperforming assets in public sector banks in India, Researcher also found that the
implementation of the 2002 SARFASEI Act made recovery of NPAs easier.
Gupta and Kesari (2016) found that the main reason for rising of NPAs in Indian Banks is global
economic slowdown and its impact on Indian economy.
Thomas and Vyas (2016) developed 5 – E early warning system to prevent loan slippage and
also explained the framework of loan recovery mechanism in Indian banking sector.
Banana and Chepuri (2016) discover that SARFAESI Act is performing better than the other
channels of recovery.

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Swain et al (2017) explained that out of all other channels constituted by the government,
SARFAESI Act-2002 is the most effective channel in recovering NPAs.
On the basis of above literature review following hypothesizes have been framed:
H1: There are significant differences among cases referred to Lok Adalats, DRTs and SARFAESI
Act.

H2: There are significant differences among the Amount Recovered through Lok Adalats, DRTs
and SARFAESI Act.

3. Research Methodology

The research is based on secondary data obtained from the published financial reports and
statements of the bank. Data has been extracted from the IBA Bulletin and RBI data bank.

3.1 Analytical Tools

The study is based on information on recovery of NPA using DRTs, Lok Adalat and SARFAESI
Act during the period 2005-06 to 2017-18. To check the validity of the hypotheses ANOVA
(one way) analysis is used.

4. Analysis and Findings

Secondary data has been used for the analysis. Further with the help of descriptive
statistic the importance of the various recovery channels have been assessed. The analysis
has been done by using ANOVA 20. As this study totally depend on the collection of
numerical date and will be analyzed with the help of statistical methods. The data
collected in this research is in the form of numeric’s which are closely related to the end
result and can be explained with the help of mathematically based method that’s why
quantitative approach is used along with the deductive approach.

4.1.1 Analysis of recovery channels on the basis of cases referred

Table 1: Number of cases of NPAs referred

YEAR LOK ADALATS DRTS SARFAESI ACT

2017-18 3317897 29551 91330
2016-17 2152895 28902 80076
2015-16 4456634 24537 173582
2014-15 2958313 22004 175355
2013-14 1636957 28258 194707
2012-13 840691 13408 190537
2011-12 476073 13365 140990
2010-11 616018 12872 118642
2009-10 778833 6019 78366

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2008-09 548308 2004 61760

2007-08 186535 3728 83942
2006-07 160368 4028 60178
2005-06 268090 3534 41180

The above table explains the number of cases referred to different recovery channels. In terms of number
of cases Lok Adalat has referred maximum number of cases related to NPAs and its almost increasing
year after year.

5000000
4500000
4000000
3500000
3000000
2500000 LOK ADALATS
2000000 DRTS
1500000 SARFAESI ACT
1000000
500000
0

Figure 1: Number of cases of NPAs referred

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Studies in Indian Place Names ISSN: 2394-3114
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Table : 2 Descriptives

NPACASES

95% Confidence Interval for

Mean

N Mean Std. Deviation Std. Error Lower Bound Upper Bound Minimum Maximum

LOK
13 1.4152E6 1.39201E6 3.86075E5 574015.8639 2.2564E6 1.60E5 4.46E6
ADALAT

DRTS 13 1.4785E4 10639.49306 2.95086E3 8356.0033 21214.7659 2004.00 29551.00

SA 13 1.1466E5 54157.83414 1.50207E4 81937.7484 147392.2516 41180.00 1.95E5

Total 39 5.1488E5 1.01515E6 1.62554E5 185810.9865 843956.5520 2004.00 4.46E6

Table 2 shows the descriptive statistics of data for all the categories of group (Independent)
variables. All the three categories had different mean values where SA showed it’s least
importance (1.14) in comparison of other two categories. Based on these results it is required to
look forward whether the differences in mean scores are significant.

Table 3 : ANOVA

NPACASES

Sum of Squares df Mean Square F Sig.

Between Groups 1.587E13 2 7.935E12 12.267 .000

Within Groups 2.329E13 36 6.469E11

Total 3.916E13 38

Table 3 shows that result of ANOVA model which has a significant result. F value is 12.267
which is quite acceptable and reached the highly significant level with p value of 0.000. This
means that the null hypothesis is rejected and the result indicates the statistically significant
difference between the mean values of different levels of recovery channels.

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Table : 4 Multiple Comparisons

NPACASES

Tukey HSD

95% Confidence Interval

Mean Difference
(I) RC (J) RC (I-J) Std. Error Sig. Lower Bound Upper Bound
*
LOK ADALAT DRTS 1.40042E6 3.15477E5 .000 629297.0788 2.1715E6
*
SA 1.30054E6 3.15477E5 .001 529417.4634 2.0717E6
*
DRTS LOK ADALAT -1.40042E6 3.15477E5 .000 -2.1715E6 -6.2930E5
SA -99879.61538 3.15477E5 .946 -8.7100E5 671238.8443
*
SA LOK ADALAT -1.30054E6 3.15477E5 .001 -2.0717E6 -5.2942E5
DRTS 99879.61538 3.15477E5 .946 -6.7124E5 870998.0750
*. The mean difference is significant at the 0.05 level.

After getting satisfied with the significant result from ANOVA table we ran post Hoc test to look
at a multiple comparison among the mean differences between pairs of the three levels of
recovery channels. For this purpose, since our group categories have equal sample size, we chose
Turkey analysis. The result shows that Lok Adalat is significantly different from the DRTS and
SARFAESI Act. But DRTs is statistically not different from SARFAESI Act (p= 0.946)

4.2.2. Analysis of recovery channels on the basis of the amount recovered

Table 5: Amount involved and recovered through these three channels in percentage term

Lok SARFAESI
Years DRTs
Adalats Act

2017-18 4 5.4 24.8

2016-17 6.3 10.2 18.3

2015-16 4 9 17

2014-15 4.84 14.01 24.48

2013-14 6.03 9.58 26.55

2012-13 6.06 14.19 27.17

2011-12 11.76 17.01 28.61

2010-11 2.87 27.89 37.78

2009-10 1.55 31.98 29.96

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2008-09 2.39 81.07 33

2007-08 8.22 51.9 60.98

2006-07 13.98 37.82 41.39

2005-06 12.36 75.48 39.49

The table defines the amount involved and recovered through different channels in percentage
term. In terms of recovery the SARFAESI Act is performing better than the other two recovery
channals.

90
80
70
60
50
Lok Adalats
40
30 DRTs

20 SARFAESI Act

10
0

Figure: 2 Amount involved and recovered through these three channels in percentage term

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Table 6 :Descriptives

NPARECRS

95% Confidence Interval for

Mean

N Mean Std. Deviation Std. Error Lower Bound Upper Bound Minimum Maximum

LOK ADALAT 13 6.4892 3.99162 1.10708 4.0771 8.9013 1.55 13.98

DRTS 13 29.6562 25.41936 7.05006 14.2954 45.0169 5.40 81.07

SARFAESI ACT 13 31.5008 11.56520 3.20761 24.5120 38.4896 17.00 60.98

Total 39 22.5487 19.60214 3.13886 16.1944 28.9030 1.55 81.07

Table 6 shows the descriptive statistics of data for all the categories of group (Independent)
variables. All the three categories had different means values. Lok Adalat showed its least
importance (6.4892) in comparison of other two categories, whereas SARFAESI Act is the most
important recovery channel for the recovery of NPAs. Based on these results it is required to
look forward whether the differences in mean scores are significant.

Table 7: ANOVA

NPARECRS

Sum of Squares Df Mean Square F Sig.

Between Groups 5051.306 2 2525.653 9.521 .000

Within Groups 9549.968 36 265.277

Total 14601.274 38

Table 7 shows that result of ANOVA model which has a significant result F value is 9.521 which
is quite acceptable and reached the highly significant level with p value of 0.000. This means that
the null hypothesis is rejected and the result shows the statistically significant difference between
the mean values of different levels of recovery channels.

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Table 8 : Multiple Comparisons

NPARECRS

Tukey HSD

95% Confidence Interval

Mean Difference

(I) RC (J) RC (I-J) Std. Error Sig. Lower Bound Upper Bound

*
LOK ADALAT DRTS -23.16692 6.38841 .002 -38.7821 -7.5517

*
SARFAESI ACT -25.01154 6.38841 .001 -40.6267 -9.3964

DRTS LOK ADALAT 23.16692* 6.38841 .002 7.5517 38.7821

SARFAESI ACT -1.84462 6.38841 .955 -17.4598 13.7706

SARFAESI ACT LOK ADALAT 25.01154* 6.38841 .001 9.3964 40.6267

DRTS 1.84462 6.38841 .955 -13.7706 17.4598

*. The mean difference is significant at the 0.05 level.

After getting satisfied with the significant result from ANOVA table we run post Hoc test to look
at a multiple comparison among the mean differences between pairs of the three levels of
recovery channels. For this purpose, since our group categories have same sample size, we have
chosen Turkey analysis. The result shows that Lok Adalat is significantly different from the
DRTS and SARFAESI Act. But DRTs is statistically not different from SARFAESI Act (p=
0.955).

5. Discussion

The main function of a bank is to grant loans and advances. That is also the main source of the
income of the banks if these loans and advances are recovered on tome. For the recovery of these
loans and advances the banks have different recovery channels these are Lok Adalat, DRTs and
SARFAESI Act. Theses recovery channels come in to existence when the loans and advances
become due or it becomes NPAs. Performance of these Recovery channels affects profitability of
the banks. So, it is necessary for the banks that these recovery channels perform better.

In this study the researcher had analyze the performance of these recovery channels by the
number of cases referred and the amount recovered by these recovery channels. In terms of
number of cases referred to these recovery channels Lok adalat is more important for the banks.
As Lok Adalat has referred maximum number of cases related to NPAs and it is increasing year
after year.

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In case of the amount recovered through these recovery channels in term of percentage term for
recovery SARFAESI Act is performing much better than the other two channels of recovery.

6. Conclusion

Due to inherent nature of business operation, it is not possible for a bank to reduce the level of
NPAs to zero level. Lack in the credit management system creates the problem of growing
NPA’s. Bank should have to take the corrective action at the time of pre sanction stage rather
than post disbursement of loan or when the loan becomes NPAs. Because once it becomes NPAs
banks should have to incur some expenses for the recovery of these NPAs. Along with a proper
recovery channel is also necessary for the recovery of the NPAs.

This study indicates that SARFAESI Act, 2002 and DRTs does not have much variation in terms
of recovery. Lok Adalat has been ineffective as most of the cases are pending in the court. As a
result, DRTs and SARFAESI Act is more efficient in recovering NPAs. Of all the cases referred
to Lok Adalats, 80% are covered on an average every year but the amount recovered is not
substantial.

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12. www. rbi.org.in
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