Loan Recoveries, Resolutions Improved After Insolvency Law, Says RBI

The Reserve Bank of India said recoveries and resolutions improved in the year ended March 2018, primarily because of evolution of the new bankruptcy law and individual efforts of banks.

In 2017-18, banks reported better recoveries from stressed assets owing to the implementation of the Insolvency & Bankruptcy Code and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests or Sarfaesi Act, according to the central bank's annual Trend and Progress of Banking report. Moreover, data from supervisory returns also suggest a decline in the ratio of write-offs to gross non-performing assets during April-September 2018 across banks and an improvement in actual recoveries.

Apart from the vigorous efforts by banks for speedier recovery, the RBI said, “Amending the Sarfaesi Act to bring in a provision of three months' imprisonment in case the borrower does not provide asset details and for the lender to get possession of mortgaged property within 30 days may have contributed to better recovery.”

India implemented the new insolvency law two years ago as bad loans piled up after the RBI initiated an asset quality review to clean up Indian banks' balance sheets in December 2015.

• Financial creditors including banks were able to recover Rs 4,900 crore under the insolvency law in 2017-18, according to data provided by the RBI. Through the Sarfaesi route, they recovered Rs 26,500 crore. Total recoveries for the year from all routes stood at Rs 40,400 crore from disputed loans worth 2,95,600 crore.
• That compares with Rs 38,500 crore recovered from Rs 2,78,300 crore worth of loans involved via channels like Lok Adalats, debt recovery tribunals and the Sarfaesi Act in 2016-17.

To be sure, accounts under insolvency proceedings may not necessarily be non-performing assets and financial creditors could include non-bank lenders.

Higher Sales To ARCs

Banks also used the asset reconstruction company route to considerably improve their balance sheet through sale of bad loans. In FY18, the acquisition cost of ARCs as a proportion to the book value of assets increased, indicating better realisations by banks on sale of stressed assets.

While private lenders were the most aggressive in ARC sales, public sector banks lagged mainly owing to large haircuts and management issues, the RBI said. Some public sector banks did manage to improve their internal bad-loan recovery processes, the report said.

But quarterly data suggest that sale of stressed assets to ARCs by public and private banks slowed in April-September 2018.

Banks Under PCA Show Improvement

RBI said the prompt corrective action framework, which places operational restrictions on weak lenders, helped improve their performance. One private and 11 public sector banks are under the framework.

PCA banks' share of current account and savings account deposits improved, while the reduction in the share of bulk deposits helped them lower cost of deposits, the report said.

These banks also increased recoveries from bad loans, while containing the growth in advances and deposits, according to the RBI. They also showed lower growth in gross bad loans compared to lenders not under the PCA framework, it said.

Still, bad loan ratios and capital positions of PCA banks deteriorated, according to the regulator. That was primarily due to decline in advances, which hurt profitability.

(Updates an earlier version after the RBI corrected data for recoveries through the IBC route)