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IMPACT OF NON-PERFORMING ASSETS IN INDIA IN THE PHASE OF NATIONALISATION OF BANKS
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IMPACT OF NON-PERFORMING ASSETS IN
INDIA IN THE PHASE OF NATIONALISATION OF BANKS
AUTHORED BY
- NEETI GOYAL[1]
NATIONALISATION OF BANKS
Government decided to nationalize 14 major
commercial banks on 19th July, 1969. All commercial banks with a deposit base
over Rs.50 crores were nationalized. It was considered that banks were
controlled by business houses and thus failed in catering to the credit needs
of poor sections such as cottage industry, village industry, farmers, craft
men, etc. The second dose of nationalisation came in April 1980 when banks were
nationalized. Nationalisation is
basically the takeover of the ownership of the bank by the government. Though
social control is different from the nationalisation. In nationalisation the
control and ownership both are taken up by the government while in the social
control the ownership does not rest with the government. Social control implies
restricted freedom to the bankers; it imposes duty on the banks to credit the
rural areas in pursuance to the social welfare.
MAIN OBJECTIVE OF NATIONALISATION OF BANKS:
·
CONTROLLING PRIVATE MONOPOLIES:-It removed the control
of the industrialists from the banks. Before the nationalisation many banks
were controlled by the private individuals and the corporate families which
lead to the monopoly. Nationalisation helped in checking the monopoly to ensure
a continuous supply of credit to the socially desirable sections.
·
It ensures the use of bank credit for the productive
purpose.
·
PRIORITY SECTOR LENDING: Credit was given to the
priority sector which was neglected before the nationalisation. By opening new branches and by taking the
control over the banks has helped to give credit to the needy people.
·
It encouraged the new entrepreneurs.
·
It provided adequate training as well as reasonable
terms of service to bank staff.
·
The nationalisation of banks aims to spread the
banking habits of the people who are living in rural or remote areas which
contribute to the large population of the country (like people engaged in the
business of agriculture).
·
DIRECTED
CREDIT AND NPA
If we take an example in which
borrowers are industrialist and the farmer. The bank who wants to earn profit
by high interest rate and lending more shall go to the one who can pay high
interest rate but in case of India who concentrated lending practices in favour
of priority sector which was farmers and the rural area with less interest rate
led the bank crisis and the financial crisis.
Directed credit was a policy of the
government of india to direct certain percentage of the credit to important and
prior sector of the economy that government felt disadvantaged by the banking
system.[3]
Directed credit has its origins in
the “social control” policy of the government in 1967. At this time, it was
felt that banks were engaged largely in financing the industries and the high
income businesses without giving any attention to the needs of the agriculture
and other needy sectors. Government had the idea to finance the small ventures
and agriculture sector. Social control was first theory of the government to made
it mandatory for the banks to provide credit to certain sectors. However, this
policy is widely viewed as ineffective and one of the motivations behind the
bank nationalisation of 1969 was its ineffectiveness. “After 1969, the government mandated that 33%
of all credit extended by banks be reserved to strategic sectors of the
economy. And since banks have more choices in which they lend to, economic
theory tells us that banks will have less NPAs (Non Performing Assets) and
greater profits.
After nationalisation banks went in
the government sector. Ordinarily political strengths pressurized them. banking
could not done on expert and moral grounds. It came about into lower
proficiency and poor gainfulness of banks. Numerous public sector banks
severely endured because of the political impedance. It was found in managing
the laons. It eventually brought about tremendous non-performing asests (NPA)
of these banks and wastefulness.
Since bank nationalisation in 1969,
banks have performed very poorly from an economic point of view. According to S
L Rao, “the country’s banking system became a playground for political
interference with loan ‘melas’ and loan write offs, and consequent decline in
the quality of assets of the banks and financial institutions.” In the year
1993/1994, nonperforming assets comprised 22% of banks loan portfolios. And in
1995, 50% of all NPAs were invested in priority sectors, while banks were only
required to lend 40% of available funds to priority sectors. Since the
government was creating artificial distortions in the market for loanable
funds, economic theory tells us that this will lead to inefficient investment.
Truth be told, this is precisely what we watch. For the Indian economy in
general, the normal rate of profit for assets in the period 1985-1990 was a
negligible 15%, which is entirely poor by global models. As banks are the
essential vehicle for giving venture reserves, we can absolutely expect that a
bank worried with its own particular budgetary execution would diminish the quantity
of non-performing aassets and along these lines upgrade the productivity of
assets.
The former table shows two essential
actualities: domestic banks have a higher extent of their assets in NPAs than
outside banks and the proportion of NPAs to total asset has been declining from
1998-1999 to 2000-2001. One conceivable purpose behind the lower extent of NPAs
for foreign banks is the less lending requirenments are imposed on these banks.
NPAs as a rate of aggregate resources has diminished over all banks for the two
years taking after RBI's coordinated credit change. Lamentably, since the
directed credit reforms were instituted under four years back as of mid-2002,
there is lacking information to exhibit in a factually thorough way that RBI's
changes have prompted less non-performing resources and more noteworthy bank
benefit. In any case, the damage that directed credit did in the past is
generally clear and uncontroversial. The information give a few hints that NPAs
as an extent of aggregate resources are diminishing and that the rate of NPAs
in the need part is diminishing, yet additional time is expected to deduce an
unmistakable, causal relationship.
The government’s policy of directed
credit resulted in less monitoring of repayment and loan risk on the part of
Indian banks (Rangarajan, pp 113). Also, the lack of autonomy of public sector
banks is often blamed for the lower profitability of these institutions. We can
conclude that the high degree of non-performing assets and low productivity of
capital that we observed in the Indian economy in the late 80s and early 90s
was caused in part by directed credit.
·
NPA classification & settlement
of issues at an early stage itself
The first issue is relating to the
classification of the non-profit assets. Some borrower have the opinion that
the banks harass them under the SARFAESI act, 2002. According to them they are
not wilful defaulter and even in case of default they are willing to pay the loan amount but bank classify their loan
as non-performing assets even there is possibility of recovery of the payment.
As there no standardised regulations relating to the rule for classifying any
loan as bad loan. Though RBI has issued some guild lines in relation to this
subject-matter but question is raised as to how RBI should use these guild
lines to classify non-performing asset.
In a case of Andhra Pradesh high court in M/s. Sri Srinivasa Rice and Floor
Mill Vs. State Bank of India[4] held that “A wide margin of discretion is available to the respondent
bank as the secured creditor, within the legislative presents of the Act, to
assess and classify a debt but within the legislative framework. This Court is
not constituted an appellate authority over the bank’s exercise of discretion
in this area. The respondent bank, as legislatively recognized is an
institution having the requisite expertise to form a commercial judgment on
known principles of banking practices and procedures fertilized by R.B.I
directions and guidelines to assess and classify a debt as NPA.”
In my opinion loan account delt by
the banks is not mandatory for them to intimate their clients about the
classification of the NPA but some of the banks do so to maintain good relations
with their customers. But on some cases the banks get resort directly under
section 13 of the act though bank can at this stage consider the proposal for
regularization of accounts.
·
Powers of DRT:
Under section 17 of the SARFAESI act
2002 a appeal can be preferred by the borrower if he is satisfied with the
possession under section 13(4) of the said act within a prescribed time.
However, courts have rightly made it clear that borrower can initiated appeal
in any matter relating to the action taken by banks in pursuant to section
13but the procedural aspect and the powers of DRT is in issue. . From the stage
of maintaining that ‘the DRT is supposed to only look into the procedural
issues’, with the interpretation of Courts, the scope of powers of DRT under
section 17 of SARFAESI Act, 2002 is significantly expanded though certain issues still requires consideration.
The foremost point is the power of DRT to set aside the order of possession and
transaction including sale. the criticism here is the tribunal helps the bank
to deal in the technical grounds and to deal with the customer. The procedure
should be that borrower should have the privilege that tribunal will deal with
banks. If the DRT is hesitant or not effective in addressing all the issues raised
by the borrower in his appeal under section 17, then, the borrower will be left
with no remedy and he can not also approach the Civil Court in view of section
34 and even if he approaches the Civil Court, it is very difficult to convince
and maintain a Civil Suit in respect of a loan transaction where the Bank has
initiated SARFAESI proceedings.
·
Sale of assets by banks:
The main problem borrowers are facing
is that they don’t get fair value of their assets. Banks who took the
possession of the assets are the trustee of the assets and they have the
responsibility to sale the asset at the best price in the auction but due to
the failure of the banks the debtors do not get the fair value of the asset and
it becomes very difficult for the borrowers to fight with the banks. There may
be a case where the bidder and the purchaser has paid the whole consideration
and when the case comes under the court’s litigation, it leads to the
non-conferment of complete ownership right. If the gap between the payment of
sale consideration and conferment is more the bidder or purchaser is also in
trouble as he will only get a minimum interest over his investment if the Sale
is finally set-aside and the Bank is asked to repay the Sale Consideration to
the auction-purchaser.
[1] Assistant Professor- Senior Scale, UPES, School of
Law, Knowledge acres, Kandoli, Dehradun- 248007, Uttrakhand, India.
[2] M L Tannan, Banking: Law and Practice 306 .(Lexis Nexis, Nagpur, 23rd
edn, 2010)
[3] Mark Miller, “Political economy of
directed control”, available at
http://ccs.in/internship_papers/2002/30.pdf
(last Modified on April 4, 2016)
[4] AIR 2007 AP 252
Article Information
IMPACT OF NON-PERFORMING ASSETS IN INDIA IN THE PHASE OF NATIONALISATION OF BANKS
Authors: NEETI GOYAL
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/12/28
- Issue 7
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International Journal for Legal Research and Analysis
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