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Quality of bank assets has visibly improved - standard assets as percent of all loan assets for SCBs moved from 96.5% in FY06 to 97.5% in FY07, with decline reported in sub standard, doubtful and loss assets. Standard assets for all SCBs in FY07 were higher by Rs 4,209 bn compared to FY06, at Rs 18,432 bn. The proportion of standard assets rose across all bank groups in FY07 with public sector banks showing a greater recovery compared to the other two groups.

Source: RBI

As on 31 Mar 07, gross NPAs of SCBs were at Rs 505 bn, which was marginally lower compared to Mar 06, as NPAs recovered and written-off exceeded the fresh addition of NPAs during the year.

Asset Classification in Banks

Source: RBI

The ratio of NPAs in overall advances has been declining and has touched 2.8% as on Mar 07 - Standard assets formed 97.2% of the total advances vis-à-vis 96.1 % in FY06 while sub-standard assets formed 1%.

The value of gross NPAs for FY07 at Rs 505 bn was lower by 2.6% compared with FY06. This declining trend has been seen for the last four fiscal years. Not only has the value of gross NPAs fallen but also the recovery as a percent of gross NPA has been increasing. Guidelines on sale/purchase of NPAs were issued in Jul 05, covering the procedures for purchase/sale of NPAs, including valuation and pricing. The guidelines were partially modified in 2007, wherein it was stipulated that at least 10% of the estimated cash flows should be realised in the first year and at least 5% in each half year thereafter, subject to full recovery in three years.

Source: RBI, D&B Research

The ratio of recovery to Gross NPAs has consistently been higher than addition of NPAs. Even in absolute terms, the recoveries were higher compared to the additions, though FY07 was an exception. For FY07, the recovery of NPAs for the SCBs stood at Rs 261.6 bn, which was marginally lower by Rs 0.5 bn compared to additions of NPAs.

NPA Recovery Trends of SCBs

Source: RBI, D&B Research

Scheduled commercial banks stepped up recovery efforts through numerous methods. In addition to their own internal recovery processes, banks since 2004 have recovered to the tune of Rs 12,250 mn through one-time settlement and compromise schemes for SMEs, Rs 6,330 mn through Lok Adalats, LVI Rs 130,030 mn through Debt Recovery Tribunals and Rs 106,590 mn through SARFAESI Act. Through these four schemes SCBs have recovered Rs 255,200 mn of non-performing loans between FY04-FY07, the rest recovered through other internal schemes. In FY07, the total recovered amount was Rs 73,180 mn. Over the years, the recovery methods adopted by SCBs have obviously paid-off.

Note: NPA recovery through OTS/DRTs/Lok Adalats/SARFAESI Act
Source: RBI, D&B Research

Loan restructuring

There has been a perceptible increase in the structuring of loans, both corporate as well as noncorporate debt, which have been disbursed by Banks.

The restructuring has been done largely under the Corporate Debt Restructuring (CDR) Mechanism. The total loan structured under this mechanism, since 2004 to 2007, is an impressive Rs 89,420.5 mn.

Note: Total structured loan is the sum of non-corporate debt structured by SCBs and loans under CDR
Source: RBI, D&B Research

As on Oct 2006, 152 cases have been approved by CDR cell amounting to Rs 786.1 bn. Further, taking into account the withdrawal cases along with exited and merged ones, the net cases under CDR stood at 108 with total debt consideration of Rs 526.9 bn.

Source: Corporate Debt Restructuring Cell

Securitisation via the SARFAESI Act has been the much-preferred route among banks in recovering bad debts. According to RBI, as on Jun 07, the book value of total amount of assets acquired by the SCs/ ARCs stood at Rs 255 bn. The security receipts subscribed to by banks amounted to Rs 69 bn, while the security receipts redeemed amounted to Rs 6 bn. Though the use of this route has largely been among the private and foreign banks.