Asset reconstruction: An Indian perspective

Abstract

The problem of non-performing asset (NPA) is a global problem and has been receiving attention of banks, economists, regulators and the public alike over the past few years. From the international experience we have seen that non-performing assets arise primarily due to two reasons – bad lending decisions and a systemic banking crisis. At the heart of the solution lies the creation of asset reconstruction companies in a bid to resolve the crisis by acquisition and resolution of NPAs. ARCs in most countries were finite life agencies acting either as warehouse of NPAs or adopting a rapid fire strategy attempting to resolve the crisis in a short time. Adopting a mix of bank based and government model in the asset reconstruction companies so created, India has been quite proactive in institutionalizing the management of NPAs compared to the other countries. NPA level in India was the least (10.5%) at the time of introduction of ARCs. Though Indian NPA problem too was scary at a time in the 1990s where banks saw Gross NPA/Gross Advances running as high as 22%, the problem was addressed only during late 1990s and early 2000s when a proactive response of Government and RBI averted a crisis. At that time banks were directed by RBI to reduce their NPA with faster provisioning and were allowed to amortize the losses upon transfer. The enactment of SARFAESI act was a instrumental is creation of ARCs as it rationalized the securitization laws. Indian experience is remarkably different from other countries as India has so far not used private tax payer’s money to resolve the crisis. To improve the health of the banking system a slew of measures were taken to reduce the amount of NPAs on the bank balance sheets. The cumulative effect of these is apparent in the reduction of Gross NPAs (GNPAs) since 2001. Analyzing the time period from 2001 to 2009 we concluded that it was a slew of measures taken by RBI in early 2000s that helped to reduce the NPA in the system rather than the creation of ARCs at that time. During 2002 -2005 banks made huge treasury profits which was used for cross subsidizing the losses resulting out of write offs and huge provisioning on NPAs (under the direction of RBI) leading to a significant fall on NPA to Advances ratio. We further analyzed the performance of Asset Reconstructing Company India Ltd. (ARCIL) with respect to the two banks it deals with – ICICI and SBI. Coupling it with the analysis of the performance of ARCs from 2004-2005, we concluded that the value addition in terms of the resolution has been minimal. As per the latest data total amount of SRs redeemed is only Rs 1299 crores, which is only 3% of the GNPAs acquired so far. Also, ARCs have not been able to fully absorb the NPAs in the system. ARCs in India are still immature and evolving and to effectively deal. This should not be attributed to the inefficiency of the ARCs straight away and one must consider the unfriendly environment ARCs operate in. The primary problem as we have identified is inappropriate price discovery which in turn is due to a nonexistent stressed asset market apart from lack of adequate bankruptcy laws and grey areas resulting due to inadequate regulations. We believe that the existence of a well developed stressed asset market is the prime cause of all the above issues and problems faced. Also floating provisioning norms should be adopted for monitoring the Banks with increasing NPAs. A permanent solution to an NPA problem, however should be addressed by prevention rather than cure by minimizing the issues related to information asymmetry and moral hazard. This would ensure development of a mature ecosystem for lending and borrowing – thereby providing a conducive environment for fueling the growth of a country’s economy.