NPAs - Law and Economic Analysis

Thakkar, H., Rami, G. & Sarmah, P.P. (n.d.
) ‘Legislative Framework to Tackle Non-Performing Assets (NPAs) in India: Law

and Economic Analysis’, International Journal of Economic Policy in Emerging Economies, Forthcoming articles. ©
5th International Conference on Law and Economics

Indian Institute of Management Bangalore
28th & 29th December 2019
Under the aegis of the

Indian Association of Law and Economics (IALE)
Legislative Framework to Tackle Non-Performing Assets (NPAs)

in India: Law and Economic Analysis
By:
Dr. Hiteshkumar Thakkar

Assistant Professor of Economics,
Gujarat National Law University,
Gandhinagar (Gujarat) INDIA
Email: hthakkar@gnlu.ac.in
Dr. Gaurang Rami,

Professor of Economics,
Veer Narmad South Gujarat University,
Surat, Gujarat (INDIA)
Email ID: grami@rediffmail.com
Mr. Pratik Parashar Sarmah

BCom LLB (Hons.) (2015-20 Batch),
Gujarat National Law University,
Gandhinagar (Gujarat) INDIA
Email: sarmah.pratik3@gmail.com
Thakkar, H., Rami, G. & Sarmah, P.P. (n.d.) ‘Legislative Framework to Tackle Non-Performing Assets (NPAs) in India: Law
Legislative Framework to Tackle Non-Performing Assets (NPAs) In India:

Law and Economic Analysis
ABSTRACT
India has been taking steps to tackle the problem of Non-

Performing Assets (‘NPAs’) or bad loans. The paper has tried to
analyse the process from a Breach of Contract point of view. Game
theory is used to understand the process wherein the asset is placed
with the debtor, who can either co-operate or appropriate. The
study focuses on the problems bad loans is significantly higher in
which sector-specific banks (Public Sector Bank, Private Sector
Bank and Foreign Bank). It wants to further narrow it down the
problem of bad loans in sub-sectors (i.e., Priority Sector, Non-
priority Sector and Public Sector). Though, there are various
Legislative framework to tackle Non-Performing Assets, this paper
stresses the effectiveness of Lok Adalats, Debt Recovery Tribunals
(‘DRTs’), and Securitisation and Reconstruction of Financial
Assets and Enforcement of Securities Interest Act, 2002
(‘SARFAESI Act’) based on time series data, put forth trend
regression analysis.
Keywords: Non-Performing Assets (‘NPAs’); Bad Loans; Breach of

Contract; Legislative framework; Lok Adalats; Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities
Interest Act, 2002 (‘SARFAESI Act’); Debt Recovery Tribunal
(‘DRT’)
1. INTRODUCTION
The Banking and Financial system forms the backbone of an economy. In order to ensure that
the nation has a healthy economy, it should ensure that it has a strong banking sector. The
banking sector is the primary source of credit in any organised sector. It also serves as a good
place of investment for people, as it guarantees that the investor gets assured returns. The Banks
through their process of credit creation ensures that the economy of the nation is geared to
achieve its goals.
In India, the banking sector has been witnessing the problem of rising NPAs over the years
which have eroded their profits. The operating profit of the Public Sector Banks (PSBs) saw a
downfall of 26%, as compared to the previous year, during the January to March quarter of
2018. Among the PSBs, 14 reported declines in its operating profit and one also reported a loss
during this period. In the private sector, on the other hand, banks reported an increase of 16.7%,
as compared to its previous year numbers (Bandyopadhyay, 2018).
There was an increase of 32% in the Net NPAs figures as compared to 2017, touching the
figures of INR 5.18 trillion. Majority of this was the contribution from the PSBs; around INR
4.5 trillion. Even after provisioning, three PSBs have 15% Net NPAs in their books while 11
have Net NPAs in single digits (Bandyopadhyay, 2018). Given this scenario, it has become
pertinent to study the problem of NPAs in India and to come up with some effective and
efficient solutions.
This study attempts to identify the problem of NPAs in the diversified ownership banking
sector, such as Public Sector Banks, Private Sector Banks and Foreign Sector Banks. It provides
a statistical analysis of NPAs crisis prevailing in sector-specific banking. Though the prima
facie evidence suggests that bad loans are significantly high in public sector banks, yet recent
trends of bad loans have changed in the sub-sectors, specific to Non-Priority Sector, from
previous trends of Priority Sector. However, this paper aims to investigate the efficiency of the
legislative framework to tackle the Non-Performing Assets (NPAs) through trend regression
analysis. The beta value of regression will evaluate the performance of Lok Adalats, Debt
Recovery Tribunals (‘DRTs’) and Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) in their recovery process. Over
and above, the performance of the three recovery mechanisms will be studied in light of
variables, such as, the number cases referred, amount involved, and amount recovered. Finally,
the data will be analysis and interpreted based on an appropriate statistical tool to examine the
legislative framework to tackle bad loans in Lok Adalat, DRTs and SARFAESI Act.
2. FRAMEWORK TO TACKLE NPAS IN INDIA
One-time
Settlements
Securitisation
and Lok Adalats
Reconstruction
Framework
to tackle
NPAs
Other NCLT &
Mechanisms NCLAT
Asset
Debt Recovery
Reconstruction
Tribunals
Companies
(DRTs)
(ARCs)
Figure 1: Framework to tackle NPAs
In India, the major methods and mechanisms that are undertaken include:
2.1. One-time Settlements
This option is used for sub-standards assets. The cases where the banks have initiated action
under the SARFAESI Act and also cases that are pending before Courts or Debt Recovery
Tribunals (DRTs) or Board for Industrial and Financial Reconstruction (BIFR) are covered
under it but it is subjected to consent decree obtained from the Courts or DRTs or BIFR as the
case may be. However, it does not cover the cases of wilful default, fraud, and malfeasance.
For settlements of NPAs up to INR 10 crores, the minimum amount that should be recovered
should be 100% of the outstanding balance in the account (Sabnavis, 2015).
2.2. Lok Adalats
Lok Adalat is an Alternate Dispute Resolution mechanism which is unique to India. It is an

effective mechanism to settle the disputes involving ‘doubtful assets’ and ‘loss assets’ with an
outstanding balance of INR 10 lakhs (Barge, 2012). It has proved to be a quite effective for
speedy justice and recovery of small loans (Prasad and Veena, 2011).
2.3. Debt Recovery Tribunals (DRTs)
DRTs were established by the Recovery of Debt Due to Banks and Financial Institutions Act,
1993 (RDDBFI Act). It was envisaged as a tool for faster recovery of debts. The Banks and
Financial Institutions which gave out credits could approach the Tribunals for expedite
adjudications. DRT has powers to grant injunctions against the disposal, transfer or creation of
third-party interest by debtors in the properties charged to the creditor and to pass attachment
orders in respect of charged properties. The DRT should be empowered to sell the assets of the
debtor companies and forward the proceeds to the winding-up court for distribution among the
lenders (Barge, 2012 & Prasad and Veena, 2011).
2.4. Securitisation and Reconstruction
The SARFAESI Act provides three mechanisms for the recovery of NPAs, namely,
‘Securitization, Asset Reconstruction, and Enforcement of Security Interest’. The Act deals
with the recovery of NPAs with an outstanding amount of more than INR 1 lakh. However, the
NPA account should contain more than 20% of the principal and interest. The Banks are
authorised, under the Act, to issue a notice to the defaulting borrower and his guarantor to
discharge their duties within 60 days. The Banks can also ask any person to surrender to the
Bank if he had taken any secured asset of the borrower.
With BASEL III norms imminently being implemented, banks are required to pool up huge
capital to offset the leverage levels. Securitization, therefore, is seen to be an effective and
vibrant tool for capital formation for Banks in future. Enforcement of Security Interest and
Recovery Debt Laws and Miscellaneous Provisions (Amendment) Act 2016 made changes to
the SARFAESI Act, 2002; RDDBFI Act, 1993; the Indian Stamp Act, 1899; and the
Depositories Act, 1996. The Act mandates that District Magistrate to take over the possession
of the collateral, in the event of the debtor defaulting in the payment in less than 30 days.
District Magistrates can also assist the Banks to take over the management of the defaulting
companies. It also provides for the creation of a Central Agency to maintain records with
respect to secured loans and no possession of collateral can take place unless it is registered
with this Agency. The Act confers supervisory powers upon the RBI to overlook the actions of
the Asset Reconstruction Companies (ARCs). The Act prescribed the procedure that the DRTs
need to follow.
2.5. Asset Reconstruction Companies (ARCs)
ARCs are companies that are created under the SARFAESI Act. These companies are created
with an aim to remove the NPAs from the books of the banks (Chakrabarti, 2015). The ARCs
can buy the NPAs from the Banks at a lower rate than the book value. The consideration paid
by the ARCs is majorly in the form of Security Receipts.
For acquiring NPA, an ARC forms a Special Purpose Vehicle (SPV). The SPV acts as the trust,
where the trustee as the trustee and manager. NPAs are acquired from Banks at fair value based
on the assessment of realisable amount and time to get a decree. The Banks may receive cash,
bonds, and debentures as consideration or may invest in Security Receipts (‘SRs’) issued by
the ARCs. After acquiring the NPA, the legal owner is the Trust and the security holders
become its immediate beneficiaries (Chakrabarti, 2015).
2.6. National Company Law Tribunal (NCLT) & National Company Law Appellate Tribunal
(NCLAT)
The power to judge the revival and rehabilitation of sick industries has been vested with the
BIFR under the Sick Industrial Companies (Special Provisions) Act 1985. The companies
seeking revival and rehabilitation have to submit a proposal of the same to BIFR. Banks can
also refer their NPA matters to the National Company Law Tribunals (‘NCLTs’). The
Insolvency and Bankruptcy Code is also seen to play a major role in helping NCLTs in dealing
with NPAs. If a corporate body has defaulted on a payment obligation, corporate insolvency
resolution process can be initiated by making an application before the NCLT along with the
evidence of default. If default is established, the NCLT admits the application and appoints an
insolvency professional (IP) who becomes the de facto managing director of the corporate and
exercises the powers of the Board of Directors. If a resolution plan is not approved within 180
days with 66% votes the entity goes into liquidation (Press Information Bureau, 2018). If it is
achieved, the same has to be approved by the NCLT.
On other side, the orders passed by the NCLT, the aggrieved party can make an appeal before
the NCLAT. The NCLAT hears appeals filed against the orders passed under the Insolvency
and Bankruptcy Code, 2016 and orders passed by the Insolvency and Bankruptcy Board of
India under Section 202 and Section 211 of the Code. Apart from insolvency, NCLAT also
hears matters related to company affairs. The orders of the NCLAT can be appealed before the
Supreme Court.
2.7. Other Mechanisms
Corporate Debt Restructuring is the mechanism of restructuring one’s debts without going into
the formal channels such as BIFR, DRT or other legal proceedings (Prasad and Veena, 2011).
It is a voluntary, non-statutory system. It was introduced in India in 2001. It allows a distressed
company with two or more lenders with a debt of more than Rs. 10 crores to restructure its debt
(RBI, 2005).
The 5/25 Scheme is a flexible structuring scheme which enables the lenders to provide longer
repayment period to the debtor. It is highly prevalent in infrastructure and core industrial
sectors. Repayment is done by bullet payment by providing refinance.
Under the Strategic Debt Restructuring Scheme, the lending banks are given an option to
convert their debt into equity. The creditor can choose to convert the entire debt or a part of the
debt. This action can be taken by the Joint Lenders Forum or the Corporate Restructuring Cell.
The Scheme for Sustainable Structuring of Stressed Assets allows restructuring of big debt
projects by allowing the lender to acquire equity of the stressed project. Sustainable level of
debt is one which the banks think the stressed borrower can service with its current cash flows
(RBI, 2016a). This sustainable level of debt should not be less than half the loans or funded
liabilities of the stressed entity. Banks can convert the unsustainable debt into equity or equity
related instruments, which are expected to provide upside to the lenders in case the borrower
cannot regain the glory and rework the financial structure.
The RBI has withdrawn these schemes and made resolution of defaults time bound with the
Insolvency and Bankruptcy Code becoming the main tool to deal with defaulters (RBI, 2018).
3. ENFORCEMENT OF LOAN CONTRACT: LAW AND ECONOMICS ANALYSIS

OF BAD LOANS
Providing loan to the debtors is one of the primary duties undertaken by the Banks. This is
done by the Banks by entering into a contract, with the debtor, which spells out the details as
to the rate of interest and the time duration for the repayment of the loan instalments, among
others. Hence, it becomes vital for the Banks to be able to enforce the contract easily and
effectively. In case, there is an effective law and judiciary providing for the enforcement of the
contract; there is no requirement of any special law for the recovery of debts. India currently
stands at the 163rd position in the world in terms of contract enforcement and hence there is a
need for better enforcement mechanisms (World Bank Group, 2019.).
According to the bargain theory, the courts need to enforce promises backed by consideration.
It is wholly irrelevant whether this consideration was equivalent to the promise in value. In
other words, law should enforce promises given in a bargain. For a promise to be enforceable,
it must be given as part of a bargain. Under the bargain theory, it is important for the promisor
to classify the consideration as adequate, so as to induce the promise. The Court should only
inquire as to the occurrence of the bargain and not on whether there was a fair bargain (Cooter
and Ullen, 2012).
On the other hand, according to the will theory, a binding contract requires an intention by the
parties to be bound. When each party intends the promise to bind, their wills meet, which
creates the contract. The meeting of minds resembles ‘Pareto Efficiency’. In the loan
agreements, the time plays an important role. The time factor adds to the uncertainty involved
in the transaction. The Banks are not sure as to whether the debtor will repay the loan amount
at the appropriate time. The debtor is at the same time is unsure about the security involved in
the process. Thus, the passage of time between the exchange of promises and their performance
creates uncertainties and risks. Both the parties want a legal obligation, not just a moral
obligation. The party may be willing to pay now for an enforceable promise, but not for an
unenforceable promise. Either party wants enforceability in order to induce the other party to
make the payment or provide protection to the security involved. An enforceable contract,
therefore, protects the rights of the parties against any breach by the other party. The Court by
enforcing the contract facilitates cooperation between the contracting parties as both get what
they contracted for (Cooter and Ullen, 2012).
The situation can be viewed as a game where the first party needs to decide on keeping his
valuable asset with the second player. If he decides to keep it with the second party, the second
party has two options, either to cooperate or to appropriate. Cooperation results in productive
outcome as both profit from the surplus created as both get what they want, the banks can
generate income and the debtor can fulfill the purpose for which he took the loan. On the other
hand, appropriation is redistributive in nature. It transfers the profit from the first player to the
second player. This can be remedied by enforcing the contract. It can, therefore, be said that an
enforceable contract converts a game with a non-cooperative solution into a game with a
cooperative solution. Contract law should be used as a tool to enable people to cooperate by
converting games with non-cooperative solutions into games with cooperative solutions.
When transaction costs are zero, the contract is a perfect instrument for exchange. Every
contingency is anticipated; every risk is internalized; all relevant information is communicated;
no gaps remain for courts to fill; no one needs the court’s protection from deceit or abuse;
nothing can go wrong. Perfect contracts pose no conundrums of interpretation. The parties need
the state to enforce a perfect contract according to its plain meaning, but nothing more is
required. Unlike perfect contracts, real contracts allocate risks imperfectly (Cooter and Ullen,
2012).
The actual bargain consists in the terms negotiated by the parties. The hypothetical bargain
consists in the terms the parties would have reached if they had filled the gaps in the contract
by negotiation. For maximum gain, the parties would have reached an efficient bargain. To
discover the hypothetical bargain, the court must establish the most efficient form of
cooperation. By imposing mandatory terms, the law regulates the contract. People often trade
because they have different expectations about whether the price of a good will rise or fall, as
in stock markets. In such circumstances, at least one of the parties is misinformed. If contracts
are entered into by basing one’s judgments upon any misinformation gathered by them, the law
does not excuse them from their contractual duties.
However, if situations change, not performing one’s obligations may be more efficient than
performing. Non-performance can be by way of breach of contract or renegotiation and
modification of contract to discharge one of its obligation. Renegotiation is possible when the
transaction costs are low as per the Coase Theorem. The renegotiation shall result in the parties
dividing the surplus amongst themselves, by substituting the original contract with a more
efficient one. This can include discharge of obligations depending on the circumstances and
the remedies available for the breach.
India, with an aim to ensure an efficient law for debt recovery, has developed different
mechanisms to effectively enforce the loan agreements between the parties. The Parliament
has passed legislations to help the banks and financial institutions to recover their debts. In this
section, three primary legislations dealing with debt recovery passed by the Parliament has
been discussed.
Co-operation
Productive Outcome
Asset
First Party Second Party
Redistributive
Appropriation Outcome
Figure 2: Outcomes of the loan game
4. LEGISLATIVE FRAMEWORK TO TACKLE BAD LOANS
Various studies on the efficiency of the judicial process in the debt recovery process has been
undertaken by different researchers and research associations. Prasanth V Regy and Shubho
Roy (2017) study on understanding Judicial delays in Debt Recovery Tribunals. They
emphasize on advanced understanding of the cost and benefit of delay in recovery debts, also
principles of economics and public administration approach will certainly improve debt
tribunal recovery process. Further, Regulatory Impact Assessment in Indian Financial Sector:
Improving Debt Recovery (2016) research has undertook an exercise of conducting regulatory
impact assessment of primary legislation in the banking sector, emphasizing on Non-
Performing Assets Law in India. They have proposed net costs and benefits of the alternatives
based on this impact assessment. Furthermore, Shreyan Chatterjee, Gausia Shaikh and Bargavi
Zaveri (2016) study on NCLT orders passed in December 2016 to May 2017 in the insolvency
case under new IBC regime. Their study has identified that the IBC has made a structural
change in the stakeholders, which are creating new gaps in the IBC regime.
However, this research is difference from the above-mentioned study, where it focuses on the
several legislative frameworks to tackle Non-Performing Assets. The study stresses the
effectiveness of Lok Adalats, Debt Recovery Tribunals (‘DRTs’), and Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
(‘SARFAESI Act’) put forth trend regression analysis over and above, the performance of the
Lok Adalat, DRTs and SARFAESI will be studied in light of tackling bad loans in India.
4.1.Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI) 1993
The enacted of the RDDBFI Act was the first attempt made by the legislature to ensure a formal
way of dealing with debts of banks and financial institution. The Act established DRTs and
DRATs for faster adjudication in matters relating to debt recovery. Only banks and financial
institutions were allowed to approach the Tribunals [RDDBFI Act, 1993, s. 2(g)]. Although
envisaged as mechanisms for faster disposal, yet due to some flaws within the structure, the
Tribunal took way more time than what was thought of. Some of the reasons for the delay in
the adjudication process include the constitution of the Tribunal, adoption of the civil court
procedure, frequent adjournments, and lack of mandatory time-limit for disposing of cases,
interference of the courts, and lack of proper enforcement mechanism for the decree passed by
the Tribunal and so on (CUTS International, 2016). The result of these drawbacks is that there
is a considerable amount of delay in the recovery of debt by the banks. It leads to banks
requiring making provisions against such bad debts. In a way, it nullifies the regulatory process
that was sought to be established by the Act.
4.2. Securitisationand Reconstruction of Financial Assets and Enforcement of Security Interest

Act (‘SARFAESI’) 2002
In the backdrop of the drawbacks of the RDDBFI Act and to remedy the same, the legislature
came up with the SARFAESI Act. This Act introduced the intervention-free regime in India
for debt recovery by banks. It also established ARCs in India [SARFAESI Act, 2002, S. 3] and
the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI)
[SARFAESI Act, 2002, S. 20].
The Act, like the previous one, was not successful in ensuring disposing of bad loans in a timely
manner. The intervention-free mechanism, in fact, led to more intervention as the discretionary
powers of the banks in giving notice and seeking to enforce security was challenged before the
judicial authorities. This was possible because the legislation did not provide any threshold
either for the discretionary powers or for approaching the courts of law (CUTS International,
2016).
The ARC mechanism did not turn out to be a game-changer as the banks transferring their
debts were still required to make provisions for the same (RBI, 2016b). Moreover, in the
absence of a market for trading the SRs, it was limited to a few players who were accustomed
to the game. It, therefore, becomes difficult for the ARCs to generate enough funds for
acquiring the NPAs.
4.3. Insolvency and Bankruptcy Code, (IBC or Code) 2016
The IBC is the recent addition to the list of legislations that provide for debt recovery in India.
The IBC provides for a time-bound insolvency process. In case, the insolvency process fails,
liquidation of the corporate entity shall take place [IBC, 2016, S. 33]. It has been observed that
the IBC has resulted in more liquidation than insolvency resolution. As per the data available
with the Insolvency and Bankruptcy Board of India (IBBI) as on September 2018, only 52
applications have been closed by resolution, whereas 212 cases have been closed by liquidation
(IBBI, 2018).
The IBC provides for the establishment of IBBI which shall overlook the insolvency
proceedings. It also provides for Insolvency Professionals who shall carry out the insolvency
process. The Insolvency Professionals need to be duly registered with IBBI.
The Code, although provides for better recovery by ensuring time-bound resolution, yet it fails
to ensure the rights of the corporate debtor after the Resolution Professional takes over. There
is no provision in the Code which allows the corporate debtor to sue the Resolution Professional
for any loss sustained by the company. A wide discretionary power is given to the Resolution
Professionals without any appropriate checks and balances. The Code also needs to clarify the
definition of creditors so as to include creditors that may not belong to either financial creditors
or operational creditors. The Code does not allow for the withdrawal of a petition, thereby,
nullifying the scope of any negotiation for settlement. The parties, therefore, cannot assess their
bargaining positions once the petition is admitted. Cross-border insolvency is another area
where the Code lacks.
The Code being relatively new is still evolving and one needs to observe the changes that have
been brought in so as to ascertain the functioning of it.
It can, therefore, be said that debt recover in India is still a lethargic process. The longer is the
recovery process, the more opportunity costs it imposes on the creditors as they forego the
interest component on it. In addition, longer disposal periods impose additional costs in the
form of legal fees, provisioning measures, depreciating the value of the underlying secured
asset and so on. Failure to recover dues from the borrowers also results in some spill-over costs.
There is no direct penal provision providing a disincentive for the borrower to repay the loan.
More than often, the burden of recovery is placed upon the banks to try and assail every possible
mechanism to get their dues. The role of the creditor being more, often allows a leeway to the
debtor to go out of the picture. Unless there are compelling reasons, the debtor is not placed
under a strict liability to bother for the repayment, even if he has sufficient funds. This results
in eroding the profits of the banks thereby imposing burden upon the people. The general public
may have to bear with additional taxes. This can result in a situation of having a confidence
crisis on the functioning of the banks as the public may not be willing to internalise the
externalities imposed by the defaulting debtors and the failing creditors. The social cost of such
a failure to recover the dues is also very high.
5. DATA ANALYSIS AND DATA INTERPRETATION
5.1. Sector-Wise NPAs : Scheduled Commercial Banks, Public Sector Banks, Old Private
Sector Banks, New Private Sector Banks And Foreign Banks In India
The overall performance and mean rank NPAs of Scheduled Commercial Banks, Public Sector
Banks, Old Private Sector Banks, New Private Sector Banks and Foreign Banks in India is
shown in following Descriptive Statistics and Kruskal-Wallis Test.
5.1.1. Descriptive Statistics
Descriptive
N Mean Std. Deviation Std. 95% Confidence Minim Maximu
Error Interval for Mean um m
Lower Upper
Bound Bound
(Rs. in Billi
Scheduled Commercial 21 473.00 7902.68

1561.11 1977.42 431.51 660.99 2461.22
Banks
NPAs
Gross
on)
Public Sector Banks 21 1319.79 1738.15 379.30 528.59 2110.98 389.68 6847.33
Old Private Sector Ban 17 23.25 52.10

37.68 8.15 1.98 33.48 41.87
ks
New Private Sector Ba 21 2.17 919.15
161.14 219.52 47.90 61.21 261.06
nks
Foreign Banks in India 21 54.07 42.70 9.32 34.63 73.51 11.81 158.05
Total 101 650.09 1361.37 135.46 381.33 918.84 2.17 7902.68
Scheduled Commercial 21 185.43 4330.10
803.85 1122.35 244.92 292.97 1314.74
Banks
Public Sector Banks 21 707.61 1016.78 221.88 244.78 1170.44 145.66 3830.89
Net NPAs (Rs. in Billion)
Old Private Sector Ban 17 7.40 30.13

17.47 7.03 1.70 13.86 21.08
ks
New Private Sector Ba 21 1.54 477.80
68.84 111.23 24.27 18.20 119.47
nks
Foreign Banks in India 21 14.83 9.03 1.97 10.72 18.94 5.16 31.60
Total 101 334.60 768.15 76.43 182.96 486.24 1.54 4330.10
Table 1: Descriptive Statistics : Sector-Wise NPAs
Mean : Gross and Net Non- Performing Assets (NPAs) of Scheduled, Public Sector,
Old Private Sector*, New Private Sector and Foreign Banks (1996-2017)
Mean
1561.11
1319.79
803.85 707.61
37.68 161.14 54.07 68.84

17.47 14.83
Commercial Banks
Public Sector Banks
Commercial Banks
Public Sector Banks

Old Private Sector
Old Private Sector

New Private Sector
New Private Sector

Foreign Banks in
Foreign Banks in
Scheduled
Scheduled
India
India
Banks
Banks
Banks
Banks
Gross Non-Performing Assets (NPAs) - Net Non-Performing Assets (NPAs) - (Rs.

(Rs. in Billion) in Billion)
*Old Private Sector Banks data is from 1996 to 2013

Figure 3 : Mean - Sector-Wise Gross and Net NPAs
Descriptive statistics do reflect with regard to Public Sector Banks and New Private Sector
Banks, that both Gross and Net NPAs value of mean, minimum, maximum and standard
deviation is higher throughout the period.There is also variation in the data of Old Private
Sector and Foreign Banks. To see the ranking, mean of different category of banks, Kruskal-
Wallis Test has been applied.
5.1.2. Kruskal-Wallis Test
Ranks Test Statisticsa,b

Bank Group N Mean Chi- df Asymp.
Rank Square Sig.
Scheduled Commercial Banks 21 82.95

Public Sector Banks 21 75.90
Gross Non- 71.034 4 .000
Old Private Sector Banks 17 25.47
Performing Assets (NPAs)
New Private Sector Banks 21 39.24
- (Rs. in Billion)
Foreign Banks in India 21 26.57
Total 101
Scheduled Commercial Banks 21 82.05
Public Sector Banks 21 76.67
Net Non- 4 .000
Old Private Sector Banks 17 28.88 71.497
Performing Assets (NPAs)
New Private Sector Banks 21 40.29
- (Rs. in Billion)
Foreign Banks in India 21 22.90
Total 101
a. Kruskal Wallis Test
b. Grouping Variable: Bank Group
Table 2 : Kruskal-Wallis Test and Test Statistics : Sector-Wise Gross and Net NPAs
Based on Kruskal-Wallis Test, it is clear that there issignificant mean rank difference (at 0.05
level of significance) of Gross NPAs and Net NPAs of Scheduled Commercial Banks, PSBs,
Old Private Sector Banks, New Private Sector Banks and Foreign Banks in India. However,
the problem of Gross and Net NPAs is much higher in PSBs> New Private Sector Banks >Old
Private Sector Banks >= Foreign Banks in India, as reflected in Kruskal-Wallis Test table.
5.2. NPAs of Public Sector Banks: Sub-Sector wise (Priority Sector, Non-priority Sector and
Public Sector)
Based on the previous test, it is clear that PSBs’ NPAs are significantly higher than other sector
banks. So, whether the increase NPAs of PSBs is due to problems in Priority Sector, Non-
priority Sector and Public Sector. The following descriptive statistics reflect the data of Sector
wise NPAs (Priority Sector, Non-priority Sector and Public Sector):
Descriptive
Gross NPA amount (billion)
95% Confidence
Interval for Mean
Std. Std. Lower Upper Maximu
N Mean Deviation Error Bound Bound Minimum m
Priority 21
Sector of
456.54 393.00 85.76 277.65 635.43 207.74 1609.42
Public Sector
Banks
Non-priority 21
Sector of
851.74 1360.62 296.91 232.40 1471.09 150.07 5237.91
Public Sector
Banks
Public Sector 21
of Public 17.35 32.51 7.09 2.55 32.15 1.30 154.66
Sector Banks
Total 84 661.35 1202.48 131.20 400.40 922.31 1.30 6847.33
Table 3 : Descriptive Statistics : Sub-Sector wise NPAs
Mean - NPAs of Public Sector Banks: Sub-Sector wise (Priority Sector,

Non-priority Sector and Public Sector)
Mean
851.74
456.54
17.35
Priority Sector of Non-priority Sector Public Sector of

Public Sector Banks of Public Sector Public Sector Banks
Banks
Figure 4: Mean : Sub-Sector wise NPAs

Based on the data of mean, standard deviation and minimum value and maximum value, there
is the possibility of significant mean difference in Priority Sector, Non-Priority Sector and
Public Sector during 1996 to 2017.
5.2.2. Hypothesis
H0 :There is no significant mean or mean rank difference of Gross NPAs of Priority Sector,
Non-priority Sector, and Public Sector of Public Sector Bank during 1996-2017.
H1:There is a significant mean or mean rank difference of Gross NPAs of Priority Sector, Non-
priority Sector, and Public Sector of Public Sector Bank during 1996-2017.
5.2.3. Testing of Normality

To decide amongst the parametric and non-parametric hypothesis testing procedure,
Kolmogorov-Smirnov is applied. Following are the results of the Kolmogorov-Smirnov test.
Tests of Normality
Kolmogorov-Smirnova Shapiro-Wilk
Statistic df Sig. Statistic df Sig.
Gross NPA amount (billion) .318 84 .000 .527 84 .000
a. Lilliefors Significance Correction
Table 4 : Tests of Normality : Sub-Sector wise NPAs

It can be seen from the above table, Significant value ofthe Kolmogorov-Smirnov test for all
variables are < 0.01; this indicates the null hypothesis of a normal distribution is rejected at
0.01 percent level; hence none of the variable listed above is normally distributed. Since
variables are non-normally distributed; non-parametric test (Kruskal-Wallis Test) is applied to
test the above-mentioned hypothesis. Results of the Kruskal-Wallis Test are as follows:
Ranks Test Statisticsa,b

Bank Group N Mean Rank Kruskal-Wallis H df Asymp. Sig.
Gross NPA amount Priority Sector of 21 41.43
(billion) Public Sector Banks
41.294 2 0
Non-priority Sector of 21 43.52
Public Sector Banks
Public Sector of Public 21 11.05

Sector Banks
Total 63
b. Grouping Variable: Bank Group
Table 5 : Kruskal-Wallis Test and Test Statistics : Sub-Sector wise NPAs
Based on the above result, it is distinct that there is a significant rank difference of Gross NPAs
of Priority Sector, Non-priority Sector, and Public Sector of PSBs during 1996-2017. Also, it
identifies that the problem of Non-Priority Sector NPAs is comparatively higher than the
priority sector. This has questioned the innovative way to resolve the problems of NPAs; such
as, Strategic Debt Restructuring (SDR) or Corporate Debt Restructuring (CDR). There are
evidences that such schemes have triggered NPAs in Non-Priority Sector Public Sector Banks.
5.3 NPAs of Scheduled Commercial Banks (SCBs) Recovered through Various Channels: Lok
Adalat, DRTs and SARFAESI Act. (2003-2004 to 2016-2017)
The efficacy of the functioning of the Lok Adalats have been analysed based on variables like
Status of Number of Cases Referred, Amount Involved and Amount Recovered in Lok Adalat,
DRTs and SARFAESI from the period of 2003-2004 to 2016-2017. The study focuses on 42
samples of each variables.
Based on the following Descriptive statistics, the Number of Cases Referred mean is higher for
Lok Adalat, subsequently SARFAESI and later DRT; standard deviation is also reflected in
similar patern.
In the category of the amount involved and amount recovered, the SARFAESI mean is higher,
subsequently amount involved and amount recovered mean is from DRT and Lok Adalat. From
this descriptive, it is clear that the greater number of cases are refereed in Lok Adalat. Whereas,
the amount recover is higher in case of SARFAESI and subsequently in DRT.
Descriptives
N Mean Std. Std. Error 95% Confidence Interval Minimum Maximu
Deviation for Mean m
Lower Upper
Bound Bound
Lok 14 1103657.86 1279916.94 342072.19 364655.82 1842659.89 160368 4460000

No. of Cases Ref Adalat
DRT 14 12347.43 9831.62 2627.61 6670.82 18024.04 2004 28902
SARFA 14 146271.86 183705.58 49097.38 40203.41 252340.30 2661 747532
ESI
erred
Total 42 420759.05 878681.52 135583.50 146942.61 694575.48 2004 4460000

Lok 14 188.40 316.98 84.72 5.38 371.42 7.58 1058
Amount Involve
Adalat
DRT 14 269.02 249.66 66.72 124.87 413.17 41.30 693
d (Billion)
SARFA 14 475.88 480.69 128.47 198.33 753.42 72.63 1568

ESI
Total 42 311.10 374.03 57.71 194.54 427.66 7.58 1568
Lok 14 8.01 12.11 3.24 1.02 15.00 0.96 38
Adalat
DRT 14 48.00 35.16 9.40 27.70 68.30 21.17 164
Recovered
(Billion)
Amount
SARFA 14 96.74 82.52 22.05 49.10 144.39 11.56 256

ESI
Total 42 50.92 62.82 9.69 31.34 70.49 0.96 256
Table 6: Descriptive Statistics : NPAs of SCBs Recovered through Various Channels
Mean - Amount Involved & Amount Recovered (Billion)
475.88
269.02
188.40
96.74
48.00
8.01
Lok Adalat DRT SARFAESI Lok Adalat DRT SARFAESI

Amount Involved (Billion) Amount Recovered (Billion)
Mean- No. of Cases Referred
1103657.86
146271.86
12347.43
Lok Adalat DRT SARFAESI

No. of Cases Referred
Figure 5 : Mean - Amount Involved, Amount Recovered and Number of Cases Referred in
Lok Adalat, DRTs and SARFAESI
Based on the above descriptive statistics analysis, the following hypothesis has been framed.
5.3.2. Hypothesis
H0 :There is no significant mean or mean rank difference as far as concern of Number of Cases
Referred, Amount Involved and Amount Recovered in Lok Adalat, DRTs and SARFAESI
from the period of 2003-2004 to 2016-2017.
H1 :There is a significant mean or mean rank difference as far as concern of Number of Cases
Referred, Amount Involved and Amount Recovered in Lok Adalat, DRTs and SARFAESI
from the period of 2003-2004 to 2016-2017.
5.3.3. Testing of Normality
To decide amongst the parametric and non-parametric hypothesis testing procedure; testing of
normality is very important as parametric tests assume a normal distribution. For this purpose,
Shapiro-Wilk is applied. Following are the results of the Shapiro-Wilk test.
Tests of Normality
Amount Recovered Kolmogorov-Smirnova Shapiro-Wilk
Through through Various Statistic df Sig. Statistic df Sig.
Various Channels
Mode
Cases Lok Adalat .296 14 .002 .757 14 .002
Referred DRT .187 14 .198 .861 14 .032
SARFAESI Act .325 14 .000 .609 14 .000
Amount Lok Adalat .357 14 .000 .634 14 .000
Involved DRT .267 14 .008 .794 14 .004
SARFAESI Act .256 14 .013 .827 14 .011
Amount Lok Adalat .344 14 .000 .637 14 .000
Recovered DRT .301 14 .001 .594 14 .000
SARFAESI Act .237 14 .031 .843 14 .018
a. Lilliefors Significance Correction
Table 7 : Tests of Normality : NPAs of SCBs Recovered through Various Channels

Results of the Shapiro-Wilk test suggest that in the cases of all variables null hypothesis of a
normal distribution is rejected at 0.05 (95% confidence) levels. Hence, it is advisable to use
non-parametric test for testing of hypothesis. Since variables are non-normally distributed;
non-parametric test (Kruskal-Wallis Test) is applied to test above mentioned hypothesis.
Results of Kruskal-Wallis Tests are as follows:
Ranks
No. of Cases Referred Amount Involved Amount Recovered
(Billion) (Billion)
Mode of N Mean Rank N Mean Rank N Mean Rank
Recovery
Lok Adalat 14 34.21 14 13.89 14 8.71
DRT 14 8.39 14 22.93 14 25.36
SARFAESI Act 14 21.89 14 27.68 14 30.43
Total 42 42 42
Test Statisticsa,b
No. of Cases R Amount Involved Amount Recovered
eferred (Billion) (Billion)
Chi-Square 31.036 9.126 24.009
df 2 2 2
Asymp. Sig. .000 .010 .000
b. Grouping Variable: Mode of Recovery
Table 8 : Kruskal-Wallis Test and Test Statistics : NPAs of SCBs Recovered through Various
Channels
There is a significant mean rank difference (at 0.05 level of significance) as far as concern of
Number of Cases Referred, Amount Involved and Amount Recovered in Lok Adalat, DRTs
and SARFAESI Act from the period of 2003-2004 to 2016-2017.
Moreover, Number of Cases Referred are higher in Lok Adalat, then SARFAESI Act and DRT;
standard deviation has also seen in a similar pattern.
With regard to the amount involved and the amount recovered in both categories, it is higher
in SARFAESI Act, then DRT and then Lok Adalat. From this descriptive analysis, it is clear
that a number of cases referred is more in Lok Adalat; however the amount recovered is higher
in case of SARFAESI Act and then in DRT.
5.4 Amount Recovered through Lok Adalat, DRT and SARFAESI Act
Amount Recovered through Lok Adalats, DRT and SARFAESI Act

300 (Rs. Billion) 2003-04 to 2016-17
250
200
Rs. Billion
150
100
50
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Lok Adalats Amount Recovered (Billion) DRT Amount Recovered (Billion)
SARFAESI Act Amount Recovered(Billion)
Figure 6 : Amount Recovered through Lok Adalat, DRT and SARFAESI Act
During the initial year (2003 to 2006), the amount recovered was higher from DRT,
subsequently Lok Adalat and SARFAESI Act. However, the trends have changed from 2007
onwards, where the amount recovered was higher from the SARFAESI Act, then DRT and Lok
Adalat. This pattern was continued till 2015. However, in 2016, the DRT-recovered amount
surpassed SARFAESI Act and then Lok Adalat as reflected in the above figure.
5.4.1 Trend Regression Model
Y=α+βt+ε
where;
Y = Dependent Variable
α = Intercept
β = Trend Coefficient
t = time i.e. 2003-04 to 2016-17
ε = Error or Residuals
Sr. Dependent Variable α β F- R- Remark

No Statistics Square
1 Gross NPA amount -1316.564 447.709 23.922 .666 Trend is positive and
(Billion) *** *** significant at 0.01
percent level
2 Gross Advances -4045.778 6293.996 502.068 .977 Trend is positive and
(Billion) *** *** significant at 0.01
percent level
3 Lok Adalats Amount -8.243 2.167 15.310 .561 Trend is positive and
Recovered (Billion) *** *** significant at 0.01
percent level
4 DRT Amount 7.704 5.373 8.295 .409 Trend is positive and
Recovered (Billion) *** *** significant at 0.01
percent level
5 SARFAESI Act -10.780 14.336 13.436 .528 Trend is positive and
Amount Recovered *** *** significant at 0.01
(Billion) percent level
Note: *** significant at 0.01% level
Table 9: Trend Regression Model : Gross NPA amount; Gross Advances; Lok Adalats
Amount Recovered; DRT Amount Recovered and SARFAESI Act Amount Recovered
5.4.2. Interpretations
R-Square
The value of R-Square indicates the explanatory power of the model.
(1) Around 66.6% variations in Gross NPA amount (Billion) is independently explained by
variations in time.
(2) Around 97.7% variations in Gross Advances amount (Billion) is independently explained
by variations in time.
(3) Around 56.1% variations in Lok Adalats Amount Recovered (Billion) is independently
explained by variations in time.
(4) Around 40.9% variations in DRT Amount Recovered (Billion) is independently explained
by variations in time.
(5) Around 52.8% variations in SARFAESI Act Amount Recovered (Billion) is independently
explained by variations in time.
F-Statistics
F test is a model specification test. The estimated value of F-Statistics in all models (Sr. No 1
to 5) and its associated significance value are significant at 0.01% level. This indicated model
is specified correctly, i.e. liner model at 99% confidence level.
α = Intercept
In all models value of α = Intercept is statistically insignificant. This indicates at origin or at
time zero there is a zero value of dependent variables.
β = Trend Coefficient
(1) Estimated coefficient of time is 447.70, and this indicates that every year there is an
increase in 447.70 billion in Gross NPA during 2003-04 to 2016-17 in India.
increase in 6293.996 billion in Gross NPA during 2003-04 to 2016-17 in India.
(3) Estimated coefficient of time is 2.167, and this indicates that every year there is an increase
in 2.167 billion in Lok Adalats Amount Recovered during 2003-04 to 2016-17 in India.
(4) Estimated coefficient of time is 5.373, and this indicates that every year there is an increase
in 5.373 billion in DRT Amount Recovered during 2003-04 to 2016-17 in India.
increase in 14.336 billion in SARFAESI Act Amount Recovered during 2003-04 to 2016-
17 in India.
From the above trend regression, it is evident that β coefficient value is higher for SARFAESI
Act (i.e., 14.34), subsequently DRT (i.e., 5.37) and then Lok Adalat (i.e., 2.16). Therefore,
every year there is an increase in the recovered amount of INR 14.34 billion in case of
SARFAESI Act, INR 5.37 billion in case of DRT and INR 2.16 billion in case of Lok Adalat
during period of 2003-04 to 2016-17 in India. Though, the amount is so massive, despite of
SARFAESI Act recovery proportion higher is also not sufficient. There are, therefore,
potentials to improve the enforcement mechanism of the SARFAESI Act, DRT and Lok
Adalat, so that existing legislative framework can address the problem of NPAs.
6. CONCLUSIONS AND SUGGESTIONS
Given the legislative framework mentioned in the previous section and the implementation
structure, provides us with an impression that the present scenario is one of Pareto sub-optimal
situation. The resolution process should, therefore, be developed in a way which incentivises
all the relevant stakeholders to deal with the situation at a faster pace. Incentivising just one of
the players in the game is not enough; corresponding incentives should be given to the other
players of the game as well. As loans are primarily contracts, hence in the resolution process
the creditor and the debtor should be the primary players of the game. The Courts and the
relevant authorities should act as the lubricants to the game, so as to assist and facilitate the
game to take place by removing the unnecessary hurdles that may come in its way.
The resolution of NPAs over the years bears ample evidence to reinforce the view that the
resolution mechanism operates at a sub-optimal level. From the data analysis, it is clear that
NPA problem is significantly higher in Public Sector Banks compare to Private Sector Bank
and Foreign Banks in India. The primary reason behind the higher proportion of NPAs is due
to breach of contract in Non-Priority Sector in comparison to Priority Sector. This result has
challenged the innovative way to resolve the problems of NPAs through Strategic Debt
Restructuring (SDR), Corporate Debt Restructuring (CDR), 5/25 Scheme, or Scheme for
Sustainable Structuring of Stressed Assets. There are evidence that such schemes have
triggered NPAs in Non-Priority Sector. As a result, the RBI has withdrawn these schemes and
made resolution of defaults time bound with the enactment of IBC. The IBC has become the
main tool to deal with defaulters.
Based on the descriptive statistics of Lok Adalat, DRTs and SARFAESI Act, it is clear that the
amount involved and the amount recovered, SARFAESI Act is the most preferred mode, then
DRT and Lok Adalat. However, with regard to the number cases referred, Lok Adalat is the
first preferred mode, then DRTs and SARFAESI Act. Lok Adalat or Alternate Dispute
Resolution mechanisms are gaining monument with regards to the initial stage of resolving
disputes. However, due to low recovery rate in Lok Adalat in comparison to DRTs and
SARFAESI Act, indeed questions the efficiency of Lok Adalat comes into question. Moreover,
the SAFRESI Act 2002 is perceived as a stringent law. However, the proportion amount
involved and the probability of amount recovered is not impressive based on data analysis.
Also, the breach of contract is not due to genuine default or externalities problem, but these
breaches are the result of wilful defaults or financial frauds/scams.
In the trend regression model, the β coefficient value is higher for SARFAESI Act
(14.34)>DRT (5.37) > Lok Adalat (2.16). It means that every year there is an increase in
recovered amount from SARFAESI Act, DRT and Lok Adalat are INR 14.34 billion, INR 5.37
billion and 2.16 billion respectively during the period of 2003-04 to 2016-17 in India. This
study believes that present bad loans crisis is an opportunity to improve the legislative
framework to tackle the problems of NPAs
The foregoing analysis in the previous sections points to the fact that loan agreements are not
enforced at an efficient rate. The present situation, therefore, suggests that the debtors are more
likely to appropriate the loan amounts than to repay. This leads to a situation of ‘Pareto
Inefficiency’ as there is no overall economic benefit flowing to the parties; it is only the debtor
who is benefitting here. The banks losing out their debt is actually the public losing out their
money. Hence, to remedy this situation, it is important that the loan agreements are drafted and
interpreted in such a way that the non-cooperative outcome can be transformed into a co-
operative outcome. The co-operative outcome suggests that both the parties benefitting from
the transaction in hand, thereby, leading to a productive outcome. The Courts while interpreting
the loan agreements must ensure that the debtor is made liable to discharge its duties under the
loan agreement, unless the situation is of such a nature that the contract itself stands frustrated.
Another pertinent step that needs to be taken by the Courts is that it should ensure that cases
coming to be litigated must be genuine and not just to delay the enforcement of the contract. A
delay in the enforcement of the contract shall motivate the debtor to appropriate rather than co-
operate. An easily enforceable contract, on the other hand, incentivises the debtor to co-
operate. A significant step taken to ensure an efficient outcome is the enactment of the IBC.
However, it being still in an evolving step, its impact needs to be analysed over a period of
time. The hope being that it shall help India to ensure a time-bound resolution process.
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ANNEXURES
Annexure 1: Bank Group-wise Gross and Net Non-Performing Assets (NPAs) of Scheduled Commercial
Banks in India (1996-1997 to 2016-2017) (Amount : Rs. in Billion)
Non-Performing Assets (NPAs)

Gross Net
As %age of As %age of As %age As %age

of Total
Gross Total of Net Assets
Year (End-March) Amount Advances Assets Amount Advances
Scheduled Commercial Banks
1996-1997 473.00 15.7 7.0 223.40 8.1 3.3
1997-1998 508.15 14.4 6.4 237.61 7.3 3.0
1998-1999 587.22 14.7 6.2 280.20 7.6 2.9
1999-2000 604.08 12.7 5.5 300.73 6.8 2.7
2000-2001 637.41 11.4 4.9 324.61 6.2 2.5
2001-2002 708.61 10.4 4.6 355.54 5.5 2.3
2002-2003 687.17 8.8 4.1 296.92 4.0 1.8
2003-2004 648.12 7.2 3.3 243.96 2.8 1.2
2004-2005 593.73 5.2 2.5 217.54 2.0 0.9
2005-2006 510.97 3.3 1.8 185.43 1.2 0.7
2006-2007 504.86 2.5 1.5 201.01 1.0 0.6
2007-2008 563.09 2.3 1.3 247.30 1.0 0.6
2008-2009 683.28 2.3 1.3 315.64 1.1 0.6
2009-2010 846.98 2.4 1.4 387.23 1.1 0.6
2010-2011 979.00 2.5 1.4 417.00 1.1 0.6
2011-2012 1423.26 3.1 1.7 650.19 1.3 0.8
2012-2013 1935.09 3.2 2.0 986.09 1.7 1.0
2013-2014 2633.72 3.8 2.4 1423.83 2.1 1.3
2014-2015 3233.35 4.3 2.7 1758.41 2.4 1.5
2015-2016 6119.47 7.5 4.7 3498.20 4.4 2.7
2016-2017 7902.68 9.3 5.6 4330.1 5.3 3.1
Public Sector Banks
1996-1997 435.77 17.8 7.8 202.85 9.2 3.6
1997-1998 456.53 16.0 7.0 212.32 8.2 3.3
1998-1999 517.10 15.9 6.7 242.11 8.1 3.1
1999-2000 530.33 14.0 6.0 261.87 7.4 2.9
2000-2001 546.72 12.4 5.3 279.77 6.7 2.7
2001-2002 564.73 11.1 4.9 279.58 5.8 2.4
2002-2003 540.90 9.4 4.2 248.77 4.5 1.9
2003-2004 515.37 7.8 3.5 193.35 3.1 1.3
2004-2005 483.99 5.5 2.7 169.04 2.1 1.0
2005-2006 413.58 3.6 2.1 145.66 1.3 0.7
2006-2007 389.68 2.7 1.6 151.45 1.1 0.6
2007-2008 404.52 2.2 1.3 178.36 1.0 0.6
2008-2009 449.57 2.0 1.2 211.55 0.9 0.6
2009-2010 599.26 2.2 1.3 293.75 1.1 0.7
2010-2011 746.00 2.4 1.4 360.00 1.2 0.7
2011-2012 1172.62 3.3 1.9 592.05 1.5 1.0
2012-2013 1644.61 3.6 2.4 899.52 2.0 1.3
2013-2014 2272.64 4.4 2.9 1303.62 2.6 1.6
2014-2015 2784.68 5.0 3.2 1599.51 2.9 1.8

2015-2016 5399.56 9.3 6.0 3203.76 5.7 3.5
2016-2017 6847.33 11.7 7 3830.89 6.9 3.9
Old Private Sector Banks
1996-1997 23.25 10.7 5.2 13.85 6.6 3.1
1997-1998 27.94 10.9 5.1 15.72 6.5 2.9
1998-1999 37.84 13.1 5.8 23.32 9.0 3.6
1999-2000 38.15 10.8 5.2 23.93 7.1 3.3
2000-2001 43.46 10.9 5.1 27.71 7.3 3.3
2001-2002 48.51 11.0 5.2 30.13 7.1 3.2
2002-2003 45.50 8.9 4.3 25.98 5.2 2.5
2003-2004 43.98 7.6 3.6 21.42 3.8 1.8
2004-2005 42.00 6.0 3.1 18.59 2.7 1.4
2005-2006 37.59 4.4 2.5 13.75 1.7 0.9
2006-2007 29.69 3.1 1.8 8.91 1.0 0.6
2007-2008 25.57 2.3 1.3 7.40 0.7 0.4
2008-2009 30.72 2.4 1.3 11.59 0.9 0.5
2009-2010 36.22 2.3 1.3 12.71 0.8 0.5
2010-2011 36.00 1.9 1.2 9.00 0.5 0.3
2011-2012 42.00 1.8 1.1 13.00 0.6 0.3
2012-2013 52.10 1.9 1.2 20.00 0.7 0.4
New Private Sector Banks
1996-1997 2.17 2.6 1.3 1.54 2.0 1.0
1997-1998 3.92 3.5 1.5 2.91 2.6 1.1
1998-1999 8.71 6.2 2.3 6.11 4.5 1.6
1999-2000 9.46 4.1 1.6 6.38 2.9 1.1
2000-2001 16.17 5.1 2.1 9.29 3.1 1.2
2001-2002 68.11 8.9 3.9 36.63 4.9 2.1
2002-2003 72.32 7.6 3.8 13.65 1.5 0.7
2003-2004 59.83 5.0 2.4 19.86 1.7 0.8
2004-2005 45.82 3.6 1.6 23.53 1.9 0.8
2005-2006 40.52 1.7 1.0 17.96 0.8 0.4
2006-2007 62.87 1.9 1.1 31.37 1.0 0.5
2007-2008 104.40 2.5 1.4 49.07 1.2 0.7
2008-2009 138.54 3.1 1.7 62.52 1.4 0.8
2009-2010 140.17 2.9 1.6 52.34 1.1 0.6
2010-2011 145.00 2.7 1.3 34.00 0.6 0.3
2011-2012 187.68 2.2 1.1 44.01 0.6 0.3
2012-2013 210.71 1.8 1.1 59.94 0.7 0.3
2013-2014 245.42 1.8 1.1 88.62 0.7 0.4
2014-2015 341.06 2.1 1.3 141.28 0.9 0.5
2015-2016 561.86 2.8 1.8 266.77 1.4 0.9
2016-2017 919.15 4.1 2.6 477.8 2.2 1.3
Foreign Banks in India
1996-1997 11.81 4.3 2.1 5.16 1.9 0.9
1997-1998 19.76 6.4 3.0 6.66 2.2 1.0
1998-1999 23.57 7.6 3.1 8.66 2.9 1.1
1999-2000 26.14 7.0 3.2 8.55 2.4 1.0
2000-2001 31.06 6.8 3.0 7.85 1.8 0.8
2001-2002 27.26 5.4 2.4 9.20 1.9 0.8
2002-2003 28.45 5.3 2.4 9.03 1.7 0.8
2003-2004 28.94 4.6 2.1 9.33 1.5 0.7
2004-2005 21.92 2.8 1.4 6.39 0.8 0.4
2005-2006 19.28 1.9 1.0 8.08 0.8 0.4
2006-2007 22.63 1.8 0.8 9.27 0.7 0.3
2007-2008 28.59 1.8 0.8 12.47 0.8 0.3
2008-2009 64.44 3.8 1.5 29.96 1.8 0.7
2009-2010 71.33 4.3 1.6 29.77 1.8 0.7
2010-2011 50.00 2.5 1.0 12.00 0.6 0.3
2011-2012 62.97 2.8 1.1 14.12 0.6 0.2

2012-2013 79.77 3.1 1.3 26.63 1.0 0.4
2013-2014 115.65 3.9 1.5 31.60 1.1 0.4
2014-2015 107.61 3.2 1.4 17.62 0.5 0.2
2015-2016 158.05 4.2 1.9 27.67 0.8 0.3
2016-2017 136.21 4 1.7 21.41 0.6 0.3
Source: Reserve Bank of India. (ON848) & (ON1637)
Annexure 2 :Sector-wise Non-Performing Assets (NPAs) of Public Sector Banks in India(1995 to

2017)(Amount: Rs. in Billion)
Priority Sector Non-priority Sector Public Sector

Bank
Percent Percent Percent Total Amount
Group/Years Amount Amount Amount
Share Share Share
1995 192.09 50.00 178.61 46.50 13.16 3.40 383.85

1996 191.06 48.30 190.67 48.20 14.11 3.60 395.84
1997 207.74 47.70 213.41 49.00 14.61 3.40 435.77
1998 211.84 46.40 231.07 50.60 13.62 3.00 456.53
1999 226.06 43.70 276.08 53.40 14.96 2.90 517.10
2000 237.15 44.50 285.24 53.50 10.55 2.00 532.94
2001 241.56 45.40 273.07 51.40 17.11 3.20 531.74
2002 251.5 46.20 284.05 52.20 9.03 1.70 544.58
2003 249.39 47.20 267.81 50.70 10.87 2.10 52807
2004 238.41 47.50 256.98 51.20 6.1 1.20 501.49
2005 215.36 45.22 254.94 53.53 5.92 1.24 476.22
2006 222.36 53.75 182.79 44.18 8.55 2.07 413.70
2007 225.19 57.96 156.03 40.16 7.32 1.88 388.54
2008 248.74 61.48 150.07 37.10 5.74 1.42 404.56
2009 242.01 53.75 205.28 45.59 2.97 0.66 450.26
2010 304.96 50.89 291.14 48.58 3.14 0.52 599.24
2011 401.86 53.82 342.35 45.85 2.43 0.32 746.64
2012 557.8 47.57 588.26 50.17 26.56 2.27 1172.62
2013 672.76 40.91 960.31 58.39 11.55 0.70 1644.61
2014 798.99 35.16 1472.35 64.79 1.3 0.06 2272.64
2015 966.11 34.69 1815.98 65.21 2.59 0.09 2784.68
2016 1258.09 23.30 4141.48 76.70 34.82 0.64 5399.57
2017 1609.42 23.50 5237.91 76.50 154.66 2.26 6847.32
Source: Reserve Bank of India.
Annexure 3: Recovery of NPAs of Scheduled Commercial Banks through Various Channels in India
(2003-04 to 2016-17) (Amount: Rs. in Billion)
Year Recovery Channel Lok Adalats DRTs SARFAESI Act.
1. No. of Cases Referred 186100 7544 2661
2. Amount Involved 10.63 123.05 78.47

2003-04
3. Amount Recovered* 1.49 21.17 11.56

2. Amount Involved 8.01 78.47 132.24
2004-05
2005-06 2. Amount Involved 21.44 62.73 85.17


2. Amount Involved 7.58 91.56 90.58
2006-07
2. Amount Involved 21.42 58.19 72.63

2007-08
2. Amount Involved 40.23 41.3 120.67
2008-09
2. Amount Involved 72.35 97.97 142.49
2009-10
2. Amount Involved 53 141 306
2010-11
3. Amount Recovered* 2 39 116
2011-12
2012-13 3. Amount Recovered* 4 44 185
1. No. of Cases Referred 1636957 28258 194707#

2013-14
2014-15
2015-16 2. Amount Involved 720 693 801
2016-17 2. Amount Involved 1058 671 1131
Source : Reserve Bank of India
Annexure 4: Trend Regression Model: Gross NPA amount; Gross Advances; Lok Adalats Amount
Recovered; DRT Amount Recovered and SARFAESI Act Amount Recovered
Gross NPA amount (Billion)

9000
8000
7000
y = 447.71 t - 1316.6
6000
R² = 0.6659
5000
4000
3000
2000
1000
0
-1000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-2000
Gross NPA amount (Billion) Linear (Gross NPA amount (Billion))
Gross Advances (Billion)

90000
80000
70000 y = 6294 t - 4045.8
R² = 0.9767
60000
50000
40000
30000
20000
10000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Gross Advances (Billion) Linear (Gross Advances (Billion))

Lok Adalats Amount Recovered (Billion)

45
40
35
30
25
20
y = 2.1673 t - 8.2427
15 R² = 0.5606
10
5
0
-5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-10
Lok Adalats Amount Recovered (Billion) Linear (Lok Adalats Amount Recovered (Billion))
DRT Amount Recovered (Billion)

180
160
140
120
100
80
y = 5.3731 t + 7.7043
60 R² = 0.4087
40
20
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
DRT Amount Recovered (Billion) Linear (DRT Amount Recovered (Billion))

300
250
200
y = 14.336 t - 10.78
150
R² = 0.5282
100
50
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

NPAs - Law and Economic Analysis

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Thakkar, H., Rami, G. & Sarmah, P.P. (n.d.

) ‘Legislative Framework to Tackle Non-Performing Assets (NPAs) in India: Law

5th International Conference on Law and Economics

Under the aegis of the

Legislative Framework to Tackle Non-Performing Assets (NPAs)

Dr. Hiteshkumar Thakkar

Dr. Gaurang Rami,

Mr. Pratik Parashar Sarmah

Legislative Framework to Tackle Non-Performing Assets (NPAs) In India:

India has been taking steps to tackle the problem of Non-

Keywords: Non-Performing Assets (‘NPAs’); Bad Loans; Breach of

2. FRAMEWORK TO TACKLE NPAS IN INDIA

Figure 1: Framework to tackle NPAs

2.1. One-time Settlements

2.2. Lok Adalats

Lok Adalat is an Alternate Dispute Resolution mechanism which is unique to India. It is an

2.3. Debt Recovery Tribunals (DRTs)

2.4. Securitisation and Reconstruction

2.5. Asset Reconstruction Companies (ARCs)

2.7. Other Mechanisms

3. ENFORCEMENT OF LOAN CONTRACT: LAW AND ECONOMICS ANALYSIS

First Party Second Party

Figure 2: Outcomes of the loan game

4. LEGISLATIVE FRAMEWORK TO TACKLE BAD LOANS

4.2. Securitisationand Reconstruction of Financial Assets and Enforcement of Security Interest

4.3. Insolvency and Bankruptcy Code, (IBC or Code) 2016

5. DATA ANALYSIS AND DATA INTERPRETATION

5.1.1. Descriptive Statistics

Scheduled Commercial 21 473.00 7902.68

Old Private Sector Ban 17 23.25 52.10

Old Private Sector Ban 17 7.40 30.13

Table 1: Descriptive Statistics : Sector-Wise NPAs

37.68 161.14 54.07 68.84

Public Sector Banks

Public Sector Banks

Old Private Sector

New Private Sector

Gross Non-Performing Assets (NPAs) - Net Non-Performing Assets (NPAs) - (Rs.

*Old Private Sector Banks data is from 1996 to 2013

5.1.2. Kruskal-Wallis Test

Ranks Test Statisticsa,b

Scheduled Commercial Banks 21 82.95

Table 3 : Descriptive Statistics : Sub-Sector wise NPAs

Mean - NPAs of Public Sector Banks: Sub-Sector wise (Priority Sector,

Priority Sector of Non-priority Sector Public Sector of

Figure 4: Mean : Sub-Sector wise NPAs

5.2.3. Testing of Normality

Table 4 : Tests of Normality : Sub-Sector wise NPAs

5.2.4. Kruskal-Wallis Test

Ranks Test Statisticsa,b

Public Sector of Public 21 11.05

5.3.1. Descriptive Statistics

Lok 14 1103657.86 1279916.94 342072.19 364655.82 1842659.89 160368 4460000

Total 42 420759.05 878681.52 135583.50 146942.61 694575.48 2004 4460000

SARFA 14 475.88 480.69 128.47 198.33 753.42 72.63 1568

SARFA 14 96.74 82.52 22.05 49.10 144.39 11.56 256

Table 6: Descriptive Statistics : NPAs of SCBs Recovered through Various Channels

Mean - Amount Involved & Amount Recovered (Billion)

Lok Adalat DRT SARFAESI Lok Adalat DRT SARFAESI

Mean- No. of Cases Referred

Lok Adalat DRT SARFAESI

5.3.3. Testing of Normality

Table 7 : Tests of Normality : NPAs of SCBs Recovered through Various Channels