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Recovery Management in Rural Credit

National Bank for Agriculture and Rural Developnnent



Occasional Paper - 21

Recovery Management in Rural Credit


National Bonk for Agriculture and Rural Development


Published by National Bank for Agriculture and Rural Development, Department of Economic Analysis and
Research, 4th floor, 'C Wing, Plot No. C-24, 'G' Block, Bandra-Kuria Complex, P.B. No. 8121, Bandra(East),
Mumbai - 400 051. Printed at Shubhamkaroti Printers, Ghatkopar (E), Mumbai.

Authors are grateful to National Bank for Agriculture and Rural

Development (NABARD) for commissioning this occasional paper to
Bankers Institute of Rural Development (BIRD). Authors prepared the paper
as a team. The views expressed are those of the authors and are not in any
way attributed to the Institute they belong. The authors are thankful to
DEAR, NABARD for reviewing the paper and offering critical comments
for revision. Some revision has been done but all could not be done due to
lack of relevant disaggregated data. Many thanks to Arindam Chakrabarty
for his patient typing and cheerful attitude while carrying out editorial
corrections over many drafts of the paper.

October, 2001 Authors

BIRD, Lucknow


K.C. Sharma, P.Josh, R.Amaiorpavanathan and J.C.MIshra are Faculty
Members, BIRD, Lucknow. Sanjay Kumar Is Faculty Associate, BIRD,
Lucknow R.Bhaskaran Is Joint Director, BIRD, Lucknow.

The usual disclaimer about the responsibility of the National Bank as to the
facts cited and views expressed in the paper is implied.



Page No



11 15





This occasional paper on recovery management in rural credit is
prepared at the behest of National Bank for Agriculture and Rural
Development (NABARD), Head Office, Mumbai. The focus is on rural
financial institutions (RFIs). Regional Rural Banks (RRBs), Co-operative
banks and rural branches of Commercial Banks (CBs) are the RFIs for the
purpose of this paper.
The Broad Objectives of the Paper are
• To discuss the conceptual aspects of overdues, recovery and prudential
• To analyse the pattern of build up of overdues in Rural Financial
• To discuss the factors affecting recovery of loans in Rural Financial
• To suggest methods and strategies for better recovery and NPA
Management in Rural Financial Institutions.
The paper is based on the review of earlier work in the area of
overdues and recovery management. Empirical analysis in the paper is
based on relevant data and information that are available to throw light on
the issue of overdues and recovery management in Rural Financial
Institutions (RFIs).
Rural credit relates to credit for agriculture and non-agricultural
purposes, the former being the major component (about 85% of the total
disbursement during 1998-99). The relative share of commercial banks, co-
operative banks and RRBs in the total institutional credit disbursement to
agriculture is about 49, 44 and 7 per cent respectively for TE 1998-99
(Economic Survey 2000-01).
For in-depth understanding of the problem of overdues in RFIs,
NABARD had earlier sponsored three studies in Karnataka, Orissa and
Madhya Pradesh. These studies were undertaken by the National Institute of
Rural Development (NIRD 1999), Hyderabad; National Institute of Bank
Management (NIBM 1996),

Pune; and the Bankers Institute of Rural Development (BIRD 1997),

Lucknow, respectively. This occasional paper makes use of these three study
reports in addition to other literature available on the subject. The
information from RRBs and co-operative banks (short term and long term
stnjcture) is available in some detail and has been used in the paper.
However, the exact position in rural branches of CBs is not readily
This occasional paper is organised in six Chapters. Chapters 2 and 3
present the conceptual aspects of overdues, recovery, prudential norms and
non-performing assets (NPAs) that impact on the financial health of RFIs.
Chapters 4 and 5 deal with empirical analysis of NPAs and recovery
performance across institutions, states and regions. Chapter 6 deals with
recovery and NPA management along with macro policy issues including
legal changes required for better recovery.

2.1 Overdues, Recovery and NPAs
2.1.1 Overdues and Recovery
The magnitude of recovery amount overdue is one of the most
important indicators of financial health of RFIs. Currently, the accepted
standard of measurement of overdues is in relation to demand. The logic for
the demand as the basis is that it is the amount which has become due and
not the amount which is yet to become due for repayment. This distinction
is important because loans will have varying due dates for instalments as
they are issued on the basis of future cash flow from investments.
The term "overdues" is used to convey the meaning that instalments
of loans and Interest thereon are not paid on due date. The term "recovery"
of dues relates to repayments of loans and interest thereon in time.
Therefore, overdues exist if recovery of loans is not in time.
There exists a provision in RFIs to block the part of defaults that are
legally disputed or against which legal proceedings have been initiated. This
amount does not get included in the total amount due for repayment i.e.
"demand". For example, if a RFI has Rs. 100 in default including Rs. 20, on
which legal case is filed and recovery out of Rs. 80 is Rs. 50. The recovery
percentage will be calculated as 62.5% and not 50%. Therefore, exclusion
of disputed amount leads to overestimation of recovery performance.
RFIs often fail to write off bad loans due to various reasons. When
bad debts are not written off, the reported loan recovery performance may
be highly distorted. For example, assume that an RFIs lends Rs. 100 every
year and recovers 90 of that each year and Rs. 10 become bad.

The Following illustration shows how the recovery percentage is calculated

over a period of time.
Year 1 2 3 10
Recovery 90/100= 90/(10+100)= 90/(10x2+100)= 90/(10x9+100)=
Percentage 90 82 75 47
It is clear from the above example that though recovery percent on
the current year basis is 90% throughout, on a cumulative basis it becomes
47% in tenth year. It is therefore, not easy to accurately measure the
recovery performance of RFIs if there is no provision for writing off bad
2.1.2 Non-Performing Asset (NPA)
An amount under any of the credit facilities viz., term loan,
overdrafts, cash credit account, etc. is to be treated as 'past due' when it
remains unpaid for 30 days beyond the due date. A non-performing asset
(NPA) is defined as a credit facility in respect of which interest or
instalment of principal is past due for 'two quarters'. In respect of advances
for agricultural plirposes, if interest has not been paid during the last 2
seasons of harvest (covering two half years), after it has become 'past due'
then such advance should be treated as NPA. Further, if any one of the
credit facilities enjoyed by a client becomes NPA, all of the other credit
facilities enjoyed by the client also deemed to have become NPA and are
treated accordingly. In case of RFIs, the lumping poses a problem. There
are instances where the borrower had serviced one account but not the
other. Further, when there is limited repayment to be made borrowers
normally do not have option as to where the repayment need to be applied.
2.1.3 Repayment
The assumption in delivery of credit as a source of finance is that the
use of credit would generate enough income to repay the loan with interest.
However, generation of adequate additional income has to be accompanied
by willingness of

borrower to repay the loan with interest. Failure of investment may result in
non-generation of income, failure of expected income may lead to
inadequate income, perception or pressure of more important and urgent use
of income may incapacitate the repayment and finally the borrower's
willingness and desire has to be there to fulfil repayment obligation. If loans
are not repaid, the RFI loses both its interest income as well as its capital.
Good management of recovery of dues is, therefore, a complex issue
encompassing economic and non-economic factors and has implications for
profitability of the RFIs.
Repayment of loan together with interest by borrowers is crucial for
recycling of funds deployed in rural credit. The fuelling of development
process by dispensing credit is meaningful only when timely repayment is
forthcoming. Othenwise expansion of credit delivery is seriously vitiated
and the delivery system gets chocked limiting the continued supply of credit
by financial institutions in rural areas. Good recovery is an important
ingredient for profitability of RFIs as it leads to increased financial capacity
to deliver credit.
2.2 Prudential Norms
The introduction of banking sector reforms in 1992 is a watershed in
the Indian banking system. The reforms have not only brought about
structural changes in the Indian banking system but have also greatly
influenced all types of banking entities in various aspects of operations,
governance, transparency and accountability. Though the reforms were
initially directed towards the commercial banks, they were subsequently
extended to cover the rural banking sector of the country corriprising also of
regional rural banks and co-operative banks.
Out of the various reform measures, the introduction of prudential
norms has been the cornerstone of banking sector reform process. The
prudential norms mainly cover the following four major aspects: Capital
Adequacy; Income Recognitiop; Asset Classification; and Provisioning.
Herg it will be pertinent to mention the views of the Committee on the
Financial Systerri, .j^991 popularly known as Narasimh^m Committee I.

"The committee believes that a proper system of income recognition

and provisioning is fundamental to the preservation of the strength and
stability of the banking system. A proper asset classification will however,
have to precede this exercise." (Committee on the Financial System, 1991)
The prudential norms for income recognition have to be objective and
based on "the record of recovery" rather than on any subjective or security
consideration. Likewise, the classification of assets has to be done on the
basis of objective criteria which would ensure a uniform and consistent
application of norms. Under income recognition, banks were advised not to
charge and take to income account interest on all non-performing assets.
They were also required to classify all their loans and advances into four
broad group (i) standard assets (ii) sub-standard assets (iii) doubtful assets
and (iv) loss assets by compressing the existing eight health codes on the
basis of pre-defined parameters. While no provision is required to be made
in case of standard assets, provision is required to be made in case of
substandard, doubtful and loss assets in varying degrees.
In respect of non-performing assets, interest is not recognised on
accrual basis but is booked as income only when actually received.
2.3 Applicability of Prudential Norms
The timeframe and manner of application of prudential norms to
commercial banks (CBs), regional rural banks (RRBs) and co-operative
banks have been as foiiows:
2.3.1 Commercial Banks and Regional Rural Banks
The prudential norms were introduced to CBs vide Reserve Bank of
India (RBI) circular no. DBOD.BP.BC. 129/21.04.043-92 dated 27 April
1992 in a phased manner over a three-year period commencing with the
accounting year beginning 1 April 1992. In case of RRBs, the prudential
norms relating to income
recognition, assets classification were made applicable with effect from the
accounting year 1995-96 and provisioning from the financial year 1996-97
vide RBI circular no.03.05.34/95-96 dated 22 March 1996.
2.3.2 Co-operatives Banks
Co-operative banks in India occupy a unique position and are
organised on co-operative principles. Co-operatives are governed by the co-
operative societies act of the concerned state, while Banking Regulation Act
is applicable to them only in a limited form. Thus, co-operatives in India
enjoy a quasi-banking position. Under three tier system, the village or taluka
level co-operatives are independent units that are federated into District
Central Co-operative Banks which are in turn along with other state level
societies federated into State Co-operative Banks (SCBs). Some states have
no middle tier, but have only two tier systems. In a few states, there is only
unitary system without affiliated federal membership.
Co-operative banks in the country are given preferential treatment
and support by RBI and NABARD as regards maintenance of Statutory
Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) because of their
unique and quasi-banking position. The discipline of prudential regulation
was extended to co-operative banks at a laterstagei.e 1996-97,
The prudential norms were introduced to SCBs and DCCBs vide RBI
circular No. RPCD. BC. 155/07.37.02/95-96 dated 22 June 1996 from the
accounting year 1996-97 in the same form as applicable to CBs and RRBs.
Though there was no phasing in the assets classification norms as allowed in
case of CBs and RRBs in the initial years, considerable relaxation as regards
provisioning in the first year was provided to SCBs and DCCBs. The
phasing in provisioning requirement was as follows:
(i) First year of introduction of prudential norms (1996-97): 100% in
spect of loss assets and not less than 30% of the provisioning
needed in respect of sub-standard and doubtful assets.
(ii) Second year (1997-98): The balance provisioning needed in

of the above categories of assets together with current provision

needed in respect of assets classified in the second year (1997-98). In
other words, all the doubtful and sub-standard assets have to be
provided fully as in case of CBs from second year onwards in
addition to 100% for loss assets.
However, as some cooperative banks reported difficulties in
introducing prudential norms due to lack of relevant data / information,
experience and expertise in making provisions, Reserve Bank of India gave
further relaxation of one year to them so that the norms may be fully
For State Go-operative Agriculture and Rural Development Banks
(SCARDBs), the long term credit structure of co-operative banks, the
prudential norms have been made applicable since 1997-98.
Income recognition on realisation basis and provisioning in respect of
bad advances were not totally new concepts to the co-operative banks before
prudential regulation. It is not that co-operative banks were unaware of the
prudential norms and provisioning aspect. In fact, there exists a system of
recognizing income on actual realization basis and not on accrual basis.
They also, in most states, make provisions on a very conservative basis
which is more stringent than the present provisioning norms in some
respects. The profit appropriation stipulates norms for bad debt reserves,
statutory reserves, stabilisation fund, etc. As such, it was observed that most
of the SCBs and DCCBs, mainly profit making, had higher loan loss
provisions than what was required by the prudential norms. Nevertheless,
the prudential norms have not only standardised the whole exercise of
income recognition, classification of loan assets and provisioning but also
brought about uniformity in maintenance and disclosure of financial
information which has facilitated an objective inter-bank comparison

The time frame of applicability of prudential norms to the three types

of RFIs mentioned above are summarised in Table 1.1

Table 1:1 : Timeframe of Applicability of Prudential Norms in CBs, RRBs

and Co-operative Banks

Prudential Norms


Co-operative Banks

Income Recognition Assets classification








(with three years (with three years (No phasing for NPAs) phasing of NPAs)
phasing of NPAs)



(with relaxation in
the first year)

2.4 Stringency in Prudential Norms and Capital Adequacy

Initially, as mentioned above, the prudential norms were introduced to
different types of RFIs in a phased manner and that, too, in a diluted form so
that RFIs may suitably adjust to new discipline and stabilise in due course of
time. It was also expected that only a robust and vibrant RFI can cope up
with stringent prudential norms at par with international standards. The
Committee on Banking Sector Reforms (Narasimham Committee II, 1998)
also emphasised this aspect and recommended gradual tightening of the
prudential norms. RBI after examining the same and taking into account the
perfomriance of the banks, have further strengthened the prudential norms
for CBs only, with a gradual time frame as follows:
• Provision for loans guaranteed by government and public financial
institutions from 31.3.99.
• Income recognition and provisioning on government guaranteed
advances on par with those on other advances with effect from 2000-
• Provision for standard assets @ 0.25% with effect from 31.3.2000.
• Reduction of time frame from 24 month to 18 months for categorising

as doubtful from 31.3.2001.

The above stringent prudential norms have also been made applicable
to RRBs and Co-operative banks in a phased manner. Further, for CBs, the
norms shall be made more stringent as an on-going process to cope up with
the new and complex banking risks and also to keep them at par with
international standards.
Alongwith the prudential norms, the capital adequacy norms were
also introduced to commercial banks with a liberal timeframe. The CBs
were required to attain a capital adequacy of minimum 8% by 31 March
1996. These norms have been further raised to 9% with enhancement and
extension of risk weights on investments, government guaranteed advances
and other assets with effect from 31.3.2000. RRBs and co-operative banks
are at present, excluded from capital adequacy norms in viewof their weak
financial position, however it is expected that these norms shall be made
applicable to them also once their financial position improves and stabilises.



The non-performance of loans affects RFIs in several ways and
slowly incapacitates the institution over time. A few notable areas are
discussed below:
3.1 Solvency
The solvency of the RFI as exhibited by capital adequacy ratio is
directly related to quality of its loan portfolio. Like any company, RFIs can
make losses and so need capital which acts as a cover for such difTiculties.
Since the loan portfolio is a major part of net assets of any RFI, loan
defaults are a prime source of potential losses. Thus, new equity is required
whenever such loan losses occur. As loan loss provisions are a charge to
profit, the RFI's owned funds are significantly reduced. If tax provisions are
ignored, an increase in loan loss provision or writing off an asset requires an
equal amount of increase in the mandated capital (Beattie et al, 1995). A
substantial portion of non performing assets in loan portfolio, thus,
jeopardises solvency of the RFI as accretion to owned fund is reduced due
to higher provision and consequently less profit. Besides, minimum capital
is to be maintained even for hard core non performing assets falling under
doubtful or loss category which are, in effect, dead assets and are carried
over in the balance sheet over the years in the absence of write off. Thus,
every time NPAs increase, RFI has to look for additional avenues to raise
minimum capital to cover them.
3.2 Profitability
After the introduction of prudential norms, the NPAs have adversely
affected the profitability of RFIs in two ways. First, there is a loss of interest
income to the extent of interest accrued on NPAs since income recognition
is limited to only standard assets. Thus, RFI's income is affected to the
extent of proportion of NPAs in loan portfolio. Secondly, the RFI has to
divert a part of profit for loan loss provisions to cover the incremental
portion of NPAs. This affects the net-profit and thereby


erodes the solvency.

3.3 Liquidity
Banking business is a highly leveraged one. The intermediation
involves mobilizing short term deposit resources and lending for longer term
on the strength of future flow of deposits and the repayment of loans.
Increasing NPAs not only critically affect the liquidity of RFIs but also force
the RFIs to maintain more liquid assets thereby increasing the cost. Since the
NPAs remain in the balance sheet of the RFIs till they are written off or
adjusted against loan loss provision which is a long-winded process, they
have to be funded either through deposits or capital so far as they continue to
remain in the balance sheet. Capital enhancement is not always possible and
can not be resorted to every year. Hence, every time NPAs increase, deposits
are mobilised to fund the incremental NPAs, thereby, increasing interest
expenditure. Further, because of the mandated obligations, like SLR and
CRR, RFIs not only have to fund the non-performing assets but for every Rs
100 of such assets, RFIs have to look for more than Rs 100 of resources.
This can be expressed as follows:
NPAs Deposits
Required =

1- (SLR + CRR)
Where SLR = Statutory Liquidity Ratio
CRR= Cash Reserve Ratio
Thus, as the level of NPAs to total loans and advances increases, the
liquidity risk of RFI also increases.
3.4 Loan Assets Turnover
RFIs with high NPAs have a regressive loan portfolio. As large
amount is blocked in NPAs and is not available for recycling, the loan
availability starts shrinking over the period. This invariably reduces the real
rate of expansion of loan portfolio.

RFIs as financial intermediaries provide multiplier effect to the economy by

the process of credit creation and are required to maintain a fast moving
effective turnover of loans assets. With increase in NPAs, the turnover of
loan assets becomes gradually slow and the very essence of banking i.e.,
credit creation is greatly hampered.
3.5 Interest Rate
Another fallout of lower profitability and shrinkage of performing
loan portfolio due to high NPAs is that the RFIs are not able to reduce the
lending rate in relation to bank rate which adversely affects their
competitiveness and leads to poor credit expansion. Moreover, as a result of
higher provisioning due to incremental NPAs and the cost of servicing the
resources, the RFIs have to perforce charge higher interest on the
performing borrowers.
As the interest rate becomes higher than the market rate, the RFIs are
left with the option of adverse selection i.e., availability of only low rated
borrowers for their credit expansion which again increases the risk of
creating new NPAs. Thus, starts a vicious cycle as given below:
Low rated borrowers

Incremental NPAs High interest rate

(r> PLR)
Higher Provisioning ^ Lower Profitability
The following excerpt effectively summarises the catch-22 position of
the RFIs in this regard (Jilani, 1999).
"Besides affecting their ability to lower their interest rates, such
overhang also compels banks to maintain higher spreads to protect their
profit position. In the recent period when the inflation levels have been at
all-time low, it has been

suggested that lending rates should also come down. Although theoretically
such reduction is relevant, yet in the context of the huge burden of NPAs
and need to maintain higher spreads to protect their profit position, banks
have not been in a position to do so."
3.6 Risk Taking Ability
Lastly, high level of NPAs reduces risk taking ability of the RFIs. It
also affects the credit rating of the RFIs thereby restricting their ability to
approach the public for capital subscription (Tier I Capital). Alternatively, a
low rating substantially increases the cost of raising funds even for Tier II
3.7 Sum Up
Thus, it can be concluded that NPAs greatly affect the financial health
of the RFIs. Nothing can highlight the importance of NPAs and their impact
more than the Narasimham Committees (I and II) whose reports have
become the precursor of the financial reforms in general and banking
reforms in particular. The Committee on Banking Sector Reforms
(Narasimham Committee II, 1998) is quoted in this regard as follows:
" NPAs constitute a real economic cost to the nation in that they
reflect the application of scarce capital and credit funds to unproductive
uses. The moneys locked up in NPAs are not available for productive use
and to the extent that banks seek to make provisions for NPAs or write them
off, it is a charge on their profits. To be able to do so, banks have to charge
their productive and diligent customers a higher rate of interest. It thus
becomes a tax on efficiency. It is the customer who uses credit efficiently
that subsidises the inefficiency represented by NPAs. This also raises the
transaction costs in the system thus denying the diligent credit customers
the benefit of lower rates, which would help them to be more efficient and
competitive. NPAs, in short, are not just a problem for banks. They are bad
for the economy".


The introduction of prudential norms has been a turning point in the

reform process of the RFIs. NPAs are the key to the whole range of
prudential norms as mentioned earlier. It will, therefore, be pertinent to have
an analysis of the Non-Performing Assets from various dimensions for three
important RFIs viz., CBs, RRBs and Co-operative banks for which data are
available. The discussion on the levels of NPAs and recovery performance
is done together wherever data are available. This is done as NPA levels and
recovery performance are highly negatively correlated. That is better
recovery performance corresponds to lower NPAs.
4.1 NPAs in Commercial Banks
RBI conducted a study of NPAs in 27 public sector commercial
banks. The study reveals that the gross Non Performing Advances of these
banks were marginally reduced to 17.84% as on 31 March 1997 after
introduction of objective norms. Under the earlier concept of sticky
advances, the position as on 13 March 1989 was at 17.91%. However, a
paper brought out by FITCHIBCA, an international credit rating agency,
observes "there is significant improvement since 1991 when gross Non-
Performing Loans (NPL) to total loans were estimated to be around 23%, or
even in 1995-96, when this ratio was 17.5%. The bulk of the NPLs in the
banking sector are due to historical reasons and incremental NPLs, until
now, were not a serious problem".
Rajaraman, et al (1999) report bank specific percentage of net NPAs
to net advances in commercial banks for the year 1996-97. These range
from 2 per cent in case of 9 new private sector banks to 9 per cent in case of
27 public sector banks.


There is a general perception that the prescription of 40% of the net

bank credit to priority sector has led to higher level of NPAs in CBs.
However, an analysis of the data collected from the 27 Public Sector Banks
revealed that the proportion of NPAs in priority sectors to total NPAs was
48.27% as on 31 March 1996 which has gradually declined to 46.40% as on
31 March 1998.
The statistical information as at the end of financial years 1995-
96,1996-97 and 1997-98 relating to the proportion of the NPAs to the
advances under priority sectors and the comparative position of NPAs in
non-priority sectors vis-a-vis the advances to that sector by Public Sector
banks is given in Table 4.1.

Table 4.1: NPAs in 27 Commercial Banks (1996-98)

(Rs. Crore)
Variables 1996 1997 1998
Total Advances 229231 244214 284971
Total Gross NPAs 39583 * 43577 45652
% of Gross NPAs to Total 17.27* 17.84 16.02
Priority Sector Advances (PSA) 69609 79131 91318
% of PSA to Total Advances 30.37 32.40 32.04
Gross NPAs in PSA 19106 20774 21183
% of Gross NPAs in PSA 27.45 26.25 23.20
Share of Gross NPAs in PSA to 48.27 47.67 46.4
Total Gross NPAs
Non-priority Sector Advances 159622 165083 193653
Gross NPAs in Non-priority 20477 22802 24469
% NPAs in Non-priority 12.82 13.81 12.63

* The figures of Gross NPAs and the percentage of Gross NPAs to Total
Advances as
subsequently revised to Rs 41661 crore and 18 per cent respectively, but the
figures for priority sector and non-priority sector were not
Source: RBI, Website

on 31.3.1996 were •up of the relative

It is Observed that the share of priority sector NPAs in Gross NPAs of
public sector banks, though reduced from 48.27% in end-March 1996 to
46.4% in

end-March 1998, was significantly higher than the proportion of priority

sector advances to total advances, which ranged between 30% and 32%
during the above period. The percentage of gross NPAs in priority sector
advances, though came down from 27.45 per cent in end-March 1996 to
23.2 per cent in end-March 1998, was almost twice the NPAs in Non-
priority sector advances in per cent terms, which ranged from 12.8% to
13.8% during the above period. It could be inferred that the higher NPAs in
priority sector advances have pushed up the overall proportion of NPAs of
these banks by about 3% to 4 %. However, the gradual increase in the
proportion of NPAs in non-priority sectors could indicate that NPAs are
increasingly occurring on credit accounts of industrial sector during the
recent years.
4.2 NPAs in Regional Rural Banks
For a majority of RRBs, the high level of NPAs has been a major
stumbling block to attain profitability and solvency. However, at all India
level, percentage of NPAs to loans declined from 43.07% in 1995-96 to
27.89% in 1998-99. The median NPAs in per cent, too, has come down
from 45.2% in 1995-96 to 26.2% in 1998-99.
Undoubtedly, RRBs in general suffer from a high proportion of
NPAs and therefore, command a low esteem in Indian banking industry.
This is due to past policies of directed credit, faulty appraisal, poor
monitoring and recovery efforts in RRBs, etc. To have a proper perspective
of NPAs in RRBs, it is necessary to analyse the incidence of NPAs in
further detail.
4.2.1 Distribution of RRBs According to NPA Level
Table 4.2 shows that over the last four years, there has been
significant improvement in terms of reduction of NPAs in RRBs. In the
above 70% NPAs category, there is only 1 RRB in 98-99 as against 22 in
95-96 and that too the lone RRB is Tripura Gramin Bank having peculiar
socio-political problems of North Eastern (NE) region.

Table 4.2: Distribution of RRBs according to Percent NPA to Total
% of NPA to Loans
Years Above 41 10 Below Total Median
% %
to to
70% 70% 40 10% NPA
% ratio
95-96 22 91 79 4 196 45.2
96-97 10 88 88 10 196 40.0
97-98 4 71 109 20 196 32.3
98-99 1 56 119 20 196 26.2

Source: Key Statistics on Regional Rural Banks 1996, 97,98, and 99,
NABARD, Mumbai,
Initially, there has been major shift of RRBs from higher level NPA
categories (viz., above 70% and between 41 % to70%) to lower level
categories but the improvement has not further progressed downward from
the 3"* category of 10% to 40% to 4* category of below 10%. The
concentration of majority of RRBs in the 3'" size category indicates that
after major reduction in NPAs, it becomes increasingly difficult to effect
marginal reduction in NPAs position & stupendous efforts are required to
further reduce the NPAs of the RRB.
4.2.2 State Wise Analysis
NPAs and recovery perfonnance of RRBs of major states of India are
given in Table 4.3
Table 4.3 : NPAs and Recovery Performance of RRBs: Major
State 1996-97 1997-98 1998-99 % NPAs Recovery %
NPAs Recovery %NPAs to loans %* to loans %*
to loans
A. States with NPAs% below National Average (98-99)

1. Kerala 6.44 85.59 6.11 88.16 5.25

2. Tamil 11.06 79.24 -10.29 79.37 10.04
3. H.P. 22.33 58.97 19.33 68.95 15.58


4.Karnataka 19.89 72.28 18.93 70.20 17,49

5. Gujarat 25.36 67.88 21.81 72.33 17.69
6.A.P. 24.04 57.62 21.71 61.47 19,82
7. Rajasthan 30.67 52.37 24.62 65.19 20.90
8. Haryana 33.37 75.29 27.72 72.26 23.91
9. Punjab 36.78 70.92 31.88 72.11 25.48
B. States with NPAs% above National
Average (98-99)
1. Madhya 42.63 51.94 34.13 55.33 28.71
2. Maharastra 40.04 52.23 36.41 52.20 29.94
3. Orissa 44.20 60.07 35.10 60.05 30.11
4. U.P. 44.78 52.70 41.60 53.18 35.67
5. Assam 56.64 24.61 43.55 24.75 42.19
6. W.B. 49.35 38.92 46.11 38.92 42.76
7. Bihar 62.23 33.08 52.45 37.17 46.44

•Recovery per cent as on 30 June,

Source: Key Statistics on Regional Rural Banks 1997, 98 and 99
NABARD, Mumbai
The following points emerge from Table 4.3
• The states of Kerala and Tamilnadu have the lowest NPAs which are
consis tently declining.
• The problems of high NPAs and low recovery are highly manifest
in the states of Bihar, West Bengal and Assam.
• There has being significant reduction in NPA per cent and
improvement in recovery in Maharastra state during the period.
• Higher the recovery lowerthe NPAs. Thus recovery and level of NPAs
are inversely related.
It is noted that the states which are characterised by high loaning
operations i.e., southern states have the lower NPAs, thereby, defying the
myth that quantum of NPAs is linked with the quantum of loaning
operations. In fact, the states where RRBs have predominantly investment
approach to business are also characterised by higher NPAs per cent and low
recoveries. Conversely, lower the NPA level higher would be the ability and
incentive to expand credit.


4.2.3 Loan Assets Analysis

It is evident from Table 4.4 that there has been reduction in doubtful
assets and in overall quantum of NPAs in RRBs at all India level.
Table 4.4: Loan Assets Classification of RRBs (1995-96 to 1998-99)
(Rs. Crore)
Assets 1995-96 1996-97 1997-98 1998-99
Classification Amount Percent Amount Percent Amount Percent Amount Per
Standard 4272.71 56.93 5506.62 63.21 6622.83 67.16 8191.10 7
Sub-standard 693.42 9.24 713.47 8.19 835.94 8.48 932.16
Doubtful 2104.95 28.05 2088.73 23.98 2015.43 20.44 1907.70 1
Loss 433.94 5.78 402.99 4.63 386.62 3.92 327.98
Gross Loans
and advances 7505.03 100.00 8711.82 100.00 9860.61 100.00 11358.9 1
Total NPAs 3232.31 3205.20 3237.99 3167.84
Total NPAs to
Total Loans 43.07 36.79 32.84 27.89

Source: Key Statistics on Regional Rural Banks 1996, 97,98 and 99,
NABARD, Mumbai
The share of standard assets in the total loan portfolio of RRBs has
also increased significantly from 56.93% in 1995-96 to 72.11 % in 1998-99.
Despite these encouraging trends, the overall quantum of NPAs in loan
portfolio at 28% and that too of doubtful assets at 17% is still high as
mentioned earlier. Further, it may be observed that while in the last two
NPA categories there is decrease in both absolute and relative terms, in case
of sub-standard assets, they are, in fact, increasing in absolute terms. This
trend can be attributed either to shift of doubtful assets to substandard level
or occurrence of new sub-standard assets out of fresh loans with no
upgradation of already existing sub-standard assets into standard assets. This
is a disturbing feature and if not arrested early, may nullify the efforts of
RRBs to contain NPAs.

4.3 NPAs in Co-operative Banks

Though the prudential norms of income recognition, assets
classification and provisioning were made applicable to co-operative banks,
as mentioned earlier, with effect from 1996-97, many of the co-operative
banks had initial problems in adjusting to new system and therefore norms
could stablise only in 1997-98. Further, as mentioned earlier, the
provisioning norms were allowed in a phased manner with considerable
relaxation in the first two years viz. 1996-97 and 1997-98. It is important to
note that it is not possible to draw long term inferences from the two-year
data of asset classification and NPAs of SCBs and DCCBs that are
available. However, it shall be useful to analyse the available data for 1996-
97 and 1997-98 to have an insight into the volume and nature of non-
performing assets in SCBs and DCCBs.
4.3.1 Loan Assets Analysis
Table 4.5 provides category-wise amount and per cent of non-
performing assets of SCBs and DCCBs for the two years i.e., 1996-97 and
Table 4.5: Loan Assets Classification of Co-operative
Banks (1996-97 to 1997-98)
(Rs. Crores)
Asset SCBs DCCBs
Classification 1996-97 1997-98 1996-97 1997-98
Amount Percent Amount Percent Amount Percent Percent
Standard 15666.80 90.59 17687.98 87.97 21289.1 80.30 81.77
6 24456.1
Sub-Standard 796.41 4.61 1237.45 6.15 2789.81 10.52 9.29
Doubtful 777.99 4.50 913.56 4.54 1806.67 6.81 6,29
Loss 52.07 0.30 268.74 1.34 627.37 2.37 2.65
Total Assets 17293.27 100.0 20107.73 100.0 26513.0 100.00 100.0
0 0 1 29907.2 0
Total NPAs 1626.47 9.41 2419.75 12.03 5223.85 19.70 18.23

Source: Dossier on Co-operatlves-State-wise status of the Co-operative

Credit Structure, March 1998, NABARD, Mumbai.


It may be observed that non-performing assets of SCBs in each

category have increased both in absolute and relative terms during the
period. It may be due to more accurate classification of non-performing
assets in the subsequent year since co-operative banks took some time to
stabilise to the new system. Besides, there might be slippage of high grade
assets to the next low grades. Though, the former factor explains the
substantial increase in non-performing assets to a great extent, there is no
empirical evidence or in- depth analysis to isolate the causal factors.
However, it is expected that in later years the proportion of NPAs for SCBs
will come down with increase in loan portfolio and no fresh or marginal
accretion to existing NPAs.
Percent-wise, NPAs in both SCBs and DCCBs as a whole are pegged
around 12% and 18% respectively as compared to 28% in case of RRBs. To
certain extent, the progressively low levels of NPA at higher tiers of the co-
operative credit system is the result of absorption of the burden of NPAs by
lower tiers, consisting of PACS, marketing societies etc. Further, the higher
recovery rate among co-operatives as compared to RRBs, which again is a
reflection of more efficient legal recourse available to co-operatives for
recovery of overdue loans, has also helped the co-operatives to have lower
incidence of NPA. The share of NPAs in case of DCCBs has marginally
come down from 19.70% to 18.23%. It seems that DCCBs have been able to
contain the level of existing NPAs i.e., there is no fresh accretion, however
they have not been able to effectively noanage and reduce the NPAs in
absolute terms. There is no significant improvement in the first two NPAs
categories over the period though, per cent-wise, both have come down due
to increase in the size of loan portfolio.
4.3.2 Size Wise Analysis
The frequency distribution of SCBs in terms of percentage of NPAs
to total loans for the two years has been given in Table 4.6.

Table 4.6: Frequency Distribution of SCBs as per percentage of

NPAs to Total Loans (1996-97 to 1997- 98)
% of NPAs to Loans 1996-9r 1997-98"
Below 5% 6 7
5% to 10% 5 3
11% to 20% 4 4
21% to 50% 9 8
Above 50% 2 3
Total 26 25
* The data relate to 26 SCBs. Data for Arunachal Pradesh are not available.
** Data for Delhi SCB and Arunachal Pradesh are not available.
Source: Dossier on Co-operatives-State-wise status of the Co-operative
Credit Structure, March 1998,
NABARD, Mumbai.
In addition to Himachal Pradesh, Jammu & Kashmir, and Bihar,
SCBs of north-eastern states and union territories with peculiar socio-
political problems and poor co-operative base have NPAs above 20% in
1997-98. Thus, majority of SCBs, specially of large states having strong co-
operative base fall in the categories of below 20%) NPAs. This is a very
heartening feature. With concerted efforts, the position can further be
improved by bringing down NPAs in SCBs of North Eastern (NE) states.
The frequency distribution of NPAs percentage for DCCBs could not be
presented due to non-availability of bank-wise data for all the states.
4.3.3 State Wise Analysis
The state-wise analysis of NPAs and recovery performance for the
two years has been attempted for both SCBs and DCCBs and is presented in
Tables 4.7 and 4.8, respectively.


Table 4.7: NPAs level and Recovery Performance of SCBs: Major States
States 1996- 1997-98
% NPAs to loans Recover %NPAs to
y% loans Recovery
A. States with NPAs % below (1997-
National Average 98)
1. Tamil 0.18 99.9 0.19 99.1
2. Gujarat 3.27 98 1.00 94
3. 1.37 99 1.45 99
4. Kerala 5.92 87 2.56 81
5. 3.59 89 2.62 90
6. Goa 4.05 71 3.54 68
7.M.P. 3.13 99 4.32 99
8. Orissa 7.16 79 5.24 88
9. 9.17 82 5.77 80
10. U.P. 5.43 85 6.88 89
11.W.B. 17.33 70 11.5 78
B. States with NPAs% above National
Average (1997-98)
1.A.P 10.31 63 18.6 62
2. ra 13.20 79 18.6 68
Maharast 7
3: J&K 22.37 64 28.2 45
4. H.P 26.9 35 34.5 39
5. Assam 46.55 24 49.6 19
6. Bihar 57.00 18 66.1 13

Source: Dossier on Co-operatives-State-wise status of the Co-operative

Credit Structure, March 1998, NABARD, Mumbai.
Tables 4.7 and 4.8 highlight the fact that level of NPAs and recovery
perfonnance are negatively correlated. SCBs in most of the states have
significantly lower NPAs in comparison to national average and only SCBs
of 4 states viz. Jammu & Kashmir, Himachal Pradesh, Assam and Bihar
have NPAs above 20%. The comparative picture in case of DCCBs as given
by Table 4.8 is not so encouraging. In case of DCCBs, half the states are
below national average and half are above. It is observed that the NPA level
shows increasing proportion in lower level co-operative institutions. This
may indicate some inherent structure of the business transactions. Even the
states like Maharasthra and Gujarat with strong co-operative base have

weak co-operative intermediaries as indicated by high NPAs percent at

DCCBs level while it is not so in case of SCBs of these states.
Table 4.8: NPAs level and Recovery Performance of tlGCBsiMajof
States 1996-97 1997-98
% NPAs to loans Recovery %NPAs to loans
% Recovetv %
A. States with NPAs % below National Average (1997-98)

1. Haryana
2. Rajasthan
3. Tamil Nadu
4. Karnataka
5. H.P.
6. W.B. 7.A.P.
8. Kerala

79 5.98 78
83 8.84 85
60.2 12.51 76.4
75 13.35 69
63 14.97 56
72 15.11 74
75 15.52 71
80 18.12 79

B. State with NPAs % above National Average (1997-98)

LMadhya 21.36 Pradesh

2. Maharasthra 21.43
3. Orrisa 22.13
4. U.P. 28.01
5. Gujarat 20.03
6. J & K 40.60
7. Bihar 73.34
8. Assam 88.83



64 19.60 66
58 20.33 57
56 23.18 36
70 24.85 70
17 48.18 17
18 72.56 11
7 88.54 4

Source: Dossier on Co-operatives-State-wise status of the

Co-operative Credit structure, March 1998, NABARD,
4.4 A Comparative Position of NPAs in CBs, RRBs and Co-operative
To sum up. Table 4.9 gives a comparative position of growth of NPAs
in CBs, RRBs, SCBs and DCCBs for the last 3 years.

Table 4.9: Growth of NPAs in CBs, RRBs, SCBs and DCCBs (1996-97 to
Category NPAas%oftotal Volume of NPAs (Rs. Share the total
of Banks Advances Crores) in NPAs
1996-97 1997- 1998- 1996- 1997- 1998- 1996-97 1997- 1998-
98 99 97 98 99 98 99
i)CBs 18.00 17.8 16.0 41661 43577 45652 81 80 79
4 2
ii) RRBs 36.79 32.8 27.8 3205.2 3237.9 3167.84 6 6 5
4 9 0 9
iij) SCBs 9.41 11.7 12.5 1626.4 2304.1 2747.93 3 4 5
6 5 7 7
iv) DCCBs 19.7 18.0 17.8 5223.8 5687.3 6572.7 10 10 11
6 1 5 7 3
Total 18.35 17.9 16.4 51716. 54806. 58140.7 100 10 100
8 7 5 5 0

Source: Dossier on Co-operatives-State-wise status of the Co-operative

Credit Structure.March 1998 and 1999, NABARD, Mumbai and RBI,
Table 4.9 shows that NPAs in absolute terms are increasing in CBs,
SCBs and DCCBs. However, in per cent terms, NPAs are marginally
declining in CBs and RRBs. In per cent terms, for 1998-99, the latest year
for which data are available for all the four categories of institutions
considered here, RRBs have the highest level of NPAs i.e., 28% followed by
DCCBs (18%), CBs (16%) and SCBs (13%). Even the lowest here (13%) is
higher relative to the internationally acceptable standard of 5% NPAs. It
shows the urgency and magnitude of the problem of NPAs afflicting Indian
Banks in general and RFIs in particular. Therefore, management of NPAs
becomes of immediate importance for RFIs in India.


The efficiency of a RFI as a financial intermediary depends to a great
extent on timely recovery of loans. Abnormal delay in recovery of loans
builds up NPAs which affect RFIs adversely with respect to liquidity and
impair their ability to service the maturing liabilities as mentioned earlier.
The blocked funds in NPAs increase the cost of financial intermediation as
RFIs resort to raising deposits and borrowings at a higher cost as a measure
to minimize the imbalance between cash outflow and cash inflow arising out
of the NPAs. This has an adverse impact on the profitability of the banks
both in the short-run and long run as mentioned earlier.
5.1 Recovery Performance of RRBs
The Agricultural Credit Review Committee (1989) observed that the
recovery level of 49% of demand in the RRB system was a matter of
concern. This situation, however, has improved in recent years.
The percentage of recovery to demand in RRBs across states during
the period 1991 to 1998 is presented in Table 5.1. The recovery rate in
RRBs touched a very low point of 40.89% during 1992 in a seriously
contaminated recovery climate in the country after the announcement of
Agricultural and Rural Debt Relief (ARDR) scheme 1989 by the
Government of India. As per the ARDR scheme of 1989, loans outstanding
of less than Rs 10,000 were waived.
For ease in interpretation, Table 5.2 is prepared where region-wise
recovery percentage are given. During 1992, with the exception of Southern
Region (Andhra Pradesh, Karnataka, Kerala and Tamil Nadu) and Central
Region (Madhya Pradesh and Uttar Pradesh), the recovery rate was
substantially low in all other regions of the country. In fact the southern
region had a marginally higher recovery percentage during the year.


Table 5.1 : State wise Recovery Percentage of RRBs during the period 1991-


Name of States








Himachal Pradesh Jammu & Kashmir Punjab Rajasthan

38.92 51.63 43.65 56.61 62.43

37.86 49.38 34.52 49.80 29.72

34.91 55.60 17.05 55.65 30.90

45.71 55.67 25.63 52.25 35.04

59.79 65.50 26.99 60.55 44.00

64.00 66.74 35.95 64.42 50.45

75.29 68.32 35.17 70.92 52.37

72.26 68,95 24.23 72,11 65.19

Northern Region









Arunachal Pradesh

56.27 38.57 29.29 30.12 63.42 52.65 8.35

29.31 19,37 29.29 27.55 32.52 5.49 5.77

45.81 11.36 14.25 22.08 51.37 10.84 2.13

46.72 11.16 15.16 26.23 53.43 3.07 5.77

52.31 18.38 17.49 30.77 48.21 9.24 7.41

49.86 17,36 23.08 22.88 52.22 8,79 7.10

49.70 24.61 24.03 32.05 63.31 54.25 10.71

NA 29,26 29.53 41.19 58.70
NA 11.61
North 33.9 14.08 9.11 10.27 14.6 14.4 21.3 24.64
Eastern 0 7 7 1
13 Bihar 25,64 16.55 10.59 16,2 20,8 28.98 33.08 34.1
. 7 4 3
14 Orissa 48.08 45.61 47.72 48.8 53.3 57.57 60,07 61.6
. 0 9 2
15 West 53.76 28.22 27.26 30,2 32.2 34.35 38.92 37.9
, Bengal 6 0 9
Eastern 38.4 27.33 24.7 27.51 31.6 37.4 42.3 42.66
Region 5 1 6 8 4
16 Madhya 27.15 24.55 28.36 34.5 41.5 48.16 51.94 55,3
, Pradesh 4 4 3
17 Uttar 39.31 40.76 43.18 43.6 48.9 50.83 52.70 55.2
, Pradesh 9 9 3
Central 36.0 36.25 39.1 41.45 47.2 50.1 52.4 55.26
Region 5 6 3 2 8
18 Gujarat 59.66 49,55 56.95 59.1 65.1 68.04 67.88 72.3
, 8 4 3
19 Maharashtra 30.30 25.90 27.12 40.2 50.9 66.59 52,23 6222
, 2 2
Western 40.0 33.92 38.6 46.89 58.0 67.3 59.1 66.36
Region 2 8 6 5 5

20 Andra 46.2 44.9 46.8 57.1 57.8 58.1 57.6 61.4

. Pradesh 0 2 0 2 7 2 2 7
21 Kartnatal< 51.7 50.3 49.7 59.5 63.1 67.9 72.1 70.2
, a 5 4 2 4 4 2 7 0
22 Kerala 68.6 75,1 77.5 81.5 83,6 84.4 88.9 88
, 5 7 7 5 5 8 0 16
23 Tamilnadu 72,8 73.3 62.3 68.3 75.8 78.5 78.8 79.3
. 1 1 3 3 3 7 4 7

Southern Region

















The subsequent years witnessed a gradual but slow improvement in

recovery performance of the RRBs in all regions, reaching 60.54% in 1998
at All-India level, an improvement of 19.65 percentage points over a period
of 6 years. The southern Region ranks first with 72.74% recovery, followed
by Western Region (66.36%) and Northern Region (65.83%). The recovery
level in otherthree regions was below the national average.

Table 5.2: Region-wise Recovery Performance in RRBs


% Recovery to Demand as on 30 June

1991 1992 1993 1994 1995 1996 1997 1998

Change In Recovery %(92-98)

Northern Region
(Haryana,HP,Punjab,J&K, 53.06 36.44 37.87 41.28 52.35 57.86 56.29 65.83
North Eastern Region 33.90 14.08 9.11 10.27 14.67 14.47 21.31 24.64 10.56
Eastern Region
(Bihar.Orissa, West Bengal) 38.45 27.33 24.71 27.51 31.66 37.48 42.34
42.66 15.33
Central Region
(IWP&UP) 36.05 36.25 39.16 41.45 47.23 50.12 52.48 55.26 19.01
Western Region
(Gujarat & Maharshtra) 40.02 33.92 38.68 46.89 58.06 67.35 59.15 66.36
Southern Region
(AP, Karnataka, Kerala, 54.68 56.73 56.63 64.66 66.29 68 93 71.62 72.74


45.21 40.89 41.20 46.23 50.98 55.10 56.96 60.54


Source: Review of Working Regional Rural Banks as on 31 March 1998,

NABARD, Mumbai
The North Eastern Region continues to have dismal performance
owing to the peculiar socio-political conditions prevailing in the region. The
RRBs in Eastern Region still continue to have low recovery level of 42.66
percent, 17.88 points below the national average. The Central Region's score
is 5.28 points below the all-India level figure. The maximum improvement
of 32.44 percentage points has taken place in Western Region followed by
Northern Region with an increase of 29.39 percentage points.
The positive developments in recovery of loans in RRBs since 1993
as evident from the above analysis may be termed as 'U-turn on Recovery
Highway' although there are several miles to go. The following external and
internal factors have largely contributed to these developments.
The policy of restructuring of RRBs initiated during 1994-95 by the
GOI/ RBI/NABARD helped the RRBs to reflect on their position and draw
up Development Action Plans (DAPs) for improving their viability.
Renewed focus and thrust on


recovery was an integral part of such DAPs. All the Sponsor Banks/ RRBs
signed a Memorandum of Understanding (MoU) with NABARD to achieve
certain business parameters including recovery targets over a period of five
to seven years which brought about commitment of the management of the
individual RRB.
The increasing competition in the banking world under the ongoing
financial reforms process also propelled RRBs to make vigorous recovery
efforts to ensure their survival and growth. The introduction of prudential
norms in 1995-96 and further tightening of the norms in the subsequent
years led to greater accountability on the part of the management and staff
of RRBs. These norms clearly established a direct linkage between recovery
of advances and the profitability of the branches which was not conspicuous
in the previous system of health code classification of assets based on
overdues criterion. The RRBs were left with no option but to effect recovery
of derecognised income and prevent fresh incidence of non-performing loan
assets. This resulted in fairly widespread improvement in internal systems
and control and strengthening of recovery mechanism in RRBs.
The Organisation Development Initiative (ODI) taken up by
NABARD/Bankers Institute of Rural Development (BIRD) in selected
RRBs helped in arousing the motivational levels among the staff and
transforming them into challenge seekers as the process involved a wider
cross section of staff in business and profit planning through DAPs. This
brought commitment of the RRB staff without which it would have been
difficult to negotiate the U-turn on recovery highway.
5.2 Recovery Position in Co-operatives
Recovery position in relation to short term and long term co-
operative credit across states for the last three to four years is shown in
Tables 5.3 and 5.4 respectively. As regards short term credit, recovery
percentage is generally higher in case of SCBs across states followed by
DCCBs and PACS respectively. Recovery rates are lower in North-Eastern
Region and Bihar and are higher in Haryana, Punjab, Madhya Pradesh,
Gujarat and Tamil Nadu.


Table 5.3 : Recovery Percentage of Short Term Cooperative Credit (%

of Collection to Demand)
states SCBs OCCBs PACs
95- 96- 97- 98- 95- 96- 97- 98- 95- 96- 97-
96 97 98 99 96 97 98 99 96 97 98
1. Haryana 99 99 99 99 83 79 77 79 75 76 74
2. HImachal 34 35 39 56 31 63 56 55 55 58 55
3. Jammu & 74 64 45 34 23 17 17 26 NA NA NA
4. Punjab 99 99 100 96 89 87 87 88 83 83 85
5. Rajasthan 85 85 81 89 80 83 85 83 71 68 70
6. 48 49 34 22 NA NA NA NA NA NA NA
7. Delhi 53 48 51 39 NA NA NA NA NA NA NA
1. Arunnachal 25 22 37 NA NA NA NA NA NA NA
2. Assam 24 24 20 27 6 7 4 5 NA NA NA
3. Manipur 9 8 4 4 NA NA NA NA NA NA NA
4. Meghalaya 39 41 40 44 NA NA NA NA NA NA NA
5. Mizoram 11 31 43 42 NA NA NA NA NA NA NA
6. Nagaland 39 28 23 13 NA NA NA NA NA NA NA
7. Tripura 25 28 19 34 NA NA NA NA NA NA NA
1. Bihar 20 18 13 7 18 18 11 12 NA NA NA
2, Orissa 78 79 88 91 61 58 57 48 63 40 49
3. West 62 70 78 78 76 72 74 75 67 72 NA
4. Andaman 44 55 61 64 NA NA NA NA 52 55 60
1. Madya 97 99 99 94 59 52 58 60 50 52 64
2. Uttar 85 85 89 80 58 56 54 53 67 43 41
1. Goa 74 72 68 66 NA NA NA NA 47 51 47
2. Gujarat 99 98 94 90 67 70 70 66 71 69 69
3. 86 84 78 84 66 64 68 66 57 57 55
1. Andhra 68 63 62 72 69 75 71 72 55 NA NA
2. Karnatal<a 92 89 90 91 73 68 69 71 67 65 79
3. Kerala 96 87 81 88 77 80 79 84 79 NA 83
4. Tamil 99. 99. 97. 94. 77. 80. 76. 77. 70 62 62
Nadu 8 9 3 6 7 2 4 4
5. 61 59 63 NA NA NA NA NA 53 48 44

Source: Dossier on Cooperatives, NABARD, Manual 1998 & 1999. NA=

Not Available/ Applicable.

Recovery percentage in relation to long term co-operative credit is
lower compared to short term co-operative credit generally. However,
recovery patterns are similar across states in case of short term and long term
co-operative credit.
Table 5.4 : Recovery Percentage of Long Term Cooperative
Credit (% of Collection to Demand)
95- 96- 97- 98- 95- 96- 97- 98-
96 97 98 99 96 97 98 99
1. Haryana 95 96 93 94 66 70 65 69
2. Himachal 65 70 67 69 69 80 80 81
3. Jammu & 39 32 33 37 NA NA NA NA
4. Punjab 100 100 100 10 89 82 83 83
5. Rajasthan 80 84 85 82 69 72 67 65
6. 48 49 34 22 NA NA NA NA
B. Northern 1
-Easterr Regio
2. Assam 2 24 16 1 NA NA NA NA
3. Manipur 11.91 11.1 4.99 NA NA NA NA NA
5. Mizoram NA NA NA NA NA NA NA NA
6. Nagaland NA NA NA NA NA NA NA NA
7. Tripura 66 51 44 57 NA NA NA NA
C. Eastern
1. Bihar 33 38 38 36 NA NA NA NA
2. Orissa 18 11 6 7 39 31 24 23
3. West 60 61 62 64 60 63 62 59
4. Andaman NA NA NA NA NA NA NA NA
& Nicobar
D. Central
1. iVIadhya 39 42 37 42 52 55 48 60
2. Uttar 79 80 81 82 NA NA NA NA
E. Western
1. Goa
2. Gujarat 66 65 66 64 NA NA NA NA
3. 52 50 44 45 NA NA NA NA
2. 38 41 31 33 36 38 32 34
3. Kerala 92 93 93 95 75 76 73 73
4 Tamil 50 55 51 52 42 47 43 47
5. 49 53 36 41 NA NA NA NA

Source: Dossier on Cooperatives, NABARD

Manual 1998 & 1999. NA = Not Available/
The amount of overdues in co-operative RFIs is shown in Table 5.5.
Overall picture that emerges is that of increasing overdues in short term and
long term co-operative credit in India.
Table 5.5 : Chronic Overdues in Cooperative RFIs (July-June)
1996-97 1997-98 1998-99
Total 2192 6350 753 2616 7457 1196 983 2650 8565
Overdues 1012 1353
Overdues> 602 1348 148 294 837 1662 170 382 1095 1914
3 years 449
Overdues to 12 22 14 15 13 24 14 17 12 23 13
Loans Outstanding
Overdues 28 21 15 39 32 22 14 39 41 22 33
> 3 years

Source : Compiled from Dossier on Cooperatives, 1999, NABARD

5.3 Recovery Position in Commercial Banks
Recovery position of commercial banks with respect to agricultural
advances has improved overtime. It has improved from 57% in 1994-95 to
67% in 1998-99 (Economic Survey 2000-01). The position with reference to
only rural branches of commercial banks is not readily available for the
comparison. Nonetheless, the performance with regard to recovery of
agricultural loans across financial institutions is provided in Table 5.6.
SI.No AgencyRecovery Percentage 30
as on June
1995 1996 199 199 1999
7 8
1 Commercial 57 62 63 66 6
Banks 7
II RRBs 51 55 57 61 6
III Cooperative
SCBs 90 90 86 84 81
DCCBs 73 69 70 70 70
PACs NA NA 63 68 NA
SCARDBs 62 61 62 61 62
PCARDBs 67 61 59 55 60

Source : 1. Dossier on Cooperatives, March, 1999, NABARD

2. Report on Trend and Progress of Banking in India 1998-99, RBI
3. Publications of NABARD on Regional Rural Banks


Table 5.6 shows that recovery percentage is improving in case of CBs

and RRBs whereas it is worsening in case of co-operatives. However, in
absolute sense, recovery percentage is higher in case of co-operatives (SCBs
and DCCBs) generally compared to that of CBs and RRBs.
5.4 Feasibility of Demand Collection Balance (DOB) Reporting
Demand collection balance (DCB) data relating to recovery are
presented July to June every year whereas other banking statistics are
presented April to March every year. It seems reasonable to think that if
DCB is also reported April to March every year, it would make it consistent
with other banking statistics. However, rural credit being largely agricultural
credit, its recovery season coincides with agricultural season. Recoveries
start coming after the Rabi crop in March and April. If DCB is reported in
March, it would provide an underestimate of actual amount recovered which
in fact belongs to that year.
Nonetheless, it is an interesting point to investigate the difference
between DCB ending March and DCB ending June. If the difference is
significant, it is worthwhile to see the figures for few years. If the difference
is not significant, it could very well be changed to ending March every year
to make it consistent with other banking statistics. As a matter of fact, both
DCB figures can be compared and it should not be difficult to do so with
available information technology with RFIs, at least at corporate level.
As regards the shift from June to March, it would make a difference
only in the first year when DCB will be reported for nine months. From the
next year onward, it would be for the whole year. Therefore, the transition
from June ending to March ending should not be difficult if the shift is
considered appropriate for comparison with other banking statistics which
are reported according to the financial year ending March every year.


5.5 Factors Affecting Recovery of Loans in RFIs

The discussion above points to the fact that recovery performance of
commercial banks (CBs) and RRBs has improved in the recent past whereas
it has stagnated or worsened in case of co-operatives. However, there are
inter-institutional and intra-institutional differences in recovery
performance. This, however, should not be taken as a matter for
complacency because recovery percentage should be close to hundred per
cent if the build-up of NPAs has to be arrested. Therefore, it is important to
consider the factors which are responsible for low recovery of loans in RFIs.
The factors affecting the recovery of loans by RFIs may be broadly
grouped into two, the external and the internal. Among the internal factors,
some are related to the borrowers and some are related to the RFIs. A few
important factors responsible for poor recovery of loans and therefore build
up of NPAs in RFIs are illustrated in Box. 1.



A. External

Natural calamities Political Interference Loan waiver, write off, etc.

Geographical factors Changes in Policy environment Changes in
Technology Changes in Economic Conditions Target approach under
Government sponsored programmes Legal process

B. Internal

I. RFI Related:

Credit Decisions

Improper identification of borrower—|

Lack of appraisal skills
Delay in loan sanctioning
Under or over financing
Insufficient gestation or repayment
Lack of post-disbursement follow-up
Lack of borrower contact and poor
understanding of rural clientele
No thrust on recovery
Laxity in internal control systems
Poor Management Information System
Failure to ensure adequate rapport with
government agencies
Low motivation and involvement of staff
Perception of bank as a charity institution
Poor Industrial Relations climate
II. Borrower Related:
Misutilisation of Loan
Diversion of Funds
Lack of Technical and Managerial Skills
Poor maintenance of Assets
Wilful Default
Personal accident, death, etc.
Shifting of place of residence or business

The external factors such as natural calamities, political interference,

policy changes and legal process are outside the control of RFIs but are
critical for creating conducive recovery climate. The internal factors - be
related to the borrower or the RFI, are within the zone of influence of RFIs.
Proper methods of borrower appraisal and credit management may yield
good results if RFIs conduct the job of recovery management well under the
changed economic environment of financial reforms. Various methods to
improve recovery performance and NPA management are discussed in the
following section.


RFIs were never so serious in their efforts to ensure timely recovery
and consequent reduction of NPAs as they are today. It is important to
remember that recovery management, be of fresh loans or old loans, is
central to NPA management. This management process needs to start at the
loan initiating stage itself. Effective management of recovery and NPA
comprise two pronged strategy. First relates to arresting of the defaults and
creation of NPA thereof and the second is to handling of loan delinquencies.
The tenets of financial sector reforms were revolutionary which created a
sense of urgency in the minds of staff of RFIs and gave them a message that
either they perform or perish. The prudential norms has forced the RFIs to
look into the asset quality. The recovery and NPA management strategies
adopted by the RFIs may be classified into two broad categories viz. 1.
Preventive and 2. Corrective strategies. While preventive methods are aimed
at preventing the event of a default within the prescribed procedures, the
corrective methods are^ aimed at ensuring recoveries once credit is due for
6.1 Preventive Methods
The preventive methods include-
• More careful and responsible scrutiny and appraisal. This includes
timely sanction, realism in fixing repayment schedule and adequacy
of credit with efficient delivery.
• Evolving a broad loan recovery policy and implementing through the
cadres with adequate accountability and empowerment.
• Regular and effective follow up with borrowers and timely action on
sensing the likely default.
• Title, value, etc. and additional security are to be investigated before
the disbursement of loan.
• More detailed information about the borrowers is to be obtained in
terms of


his/her family background such as i) size of the family ii) number of

depen dents in the family iii) earning members in the family iv)
standard of living v) length of residency in the area, etc.
• Reviewing the advances in time and taking appropriate immediate
• Sending demand notices in time.
• Contacting the borrower before the harvest or cash inflow.
• Proper supervision of the borrowal account through personal visits and
calling for periodical returns to get incipient signals of default.
• Efficient MIS system on the borrowers and on the branches.
• Credit rating of clientele.
• Developing an early warning system for identifying potential
weakness in the accounts.
• Strict observance of time schedules.
• Timely extension of period of limitation through debt
acknowledgement, partial payment, renewal of documents etc.
• Timely rephasement or rescheduling of loan in the event of natural
RFIs particularly the Regional Rural Banks in recent years have
resorted to the preventive methods to ensure prompt recovery. These
methods are seldom resorted to by the co-operative system because under
the co-operative laws stringent legal actions could be ensured to force a
recovery. In case of Commercial Banks performing in rural areas, the
preventive methods are not so much visible. This may be because they have
a wider option to relocate or consolidate their rural branches or may be as a
percentage the rural lending is small against their total loans and advances.
6.2 Corrective Methods
The corrective methods conventionally start with initiating legal
action for recovery and followed by lodging insurance claims with DICGCI
wherever possible and initiating coercive action against the borrower and the
surety. However, corrective methods, in recent years, have become more
innovative and participatory.

The distinction between preventive and corrective methods has become

blurred. Some corrective methods, as practiced mainly by RRBs, are
discussed here.
(i) Sharing the Threat Perception
The top management conducts seminars and meetings with the staff
and conveys the crisis in which the RRB is in. It indicates that unless
recoveries start coming the RRB would be closed. Periodical seminars
involving small group of Branch Managers and other staff including the
sub-staff are conducted to educate them about the impact of NPA accounts
on the overall profitability of the branch and RRB and how it affects the
very existence of the RRB.
(ii) Staff Motivation
Some Regional Rural Banks have dismantled the demotivated
mindset of their staff by releasing staff benefits like conveyance allowance,
housing loan, etc. and some have effected promotions. These measures have
motivated the staff to perform better in every area and particularly the areas
which hurt the bank the most viz. recovery of loans and management of
NPAs. In some banks the organisational development intervention (ODI)
has motivated the staff to step up recovery efforts (e.g., Howrah Gramin
Shields, trophies and appreciation certificates are awarded to the staff
and branches showing good recovery performances, in some cases transfer
to centres of choice are linked to recovery performance of the concerned
staff. In some banks, in each branch the NPA accounts are allotted to each
staff right from the officer to the messenger for personal follow-up and
(iii) Constitution of Special Recovery Cells and Related Measures
The special recovery cell in some RRBs maintains rapport with
Nodal Officers and branches for effecting recoveries. For example in the
case of RRBs sponsored by Syndicate Bank, the Head Office of RRB
identifies branches which constitute


50% of the total NPA of the bank so that Head Office can have control over
the recovery efforts initiated at the selected high NPA branches through
intensive monitoring. In some cases, top 100 NPA accounts of the bank
pertaining to various branches are identified and monitored directly from
the Head Office in co-ordination with branches. Following steps are taken.
• Executives of RRBs visit selected 100 NPA parties and establish direct
personal contact for ensuring recovery. The RRBs arrange for
customers' meet especially of NPA clients at various important
centres to discuss and address their problems.
The RRBs arrange periodical lawyers' meet to review the status of
suit filed cases.
Pragmatic approach is followed for out of court settlement of loan
accounts and bringing compromise proposals to logical end at the
earliest. Identification of potential NPAs Is done by the end of the
first quarter of the financial year so that preventive measures could be
initiated at the beginning. Staff mobility is ensured and the recovery
staff is allowed to hire transport to suit their needs and no questions
are asked.
Staff are deputed to Sub Divisional Officer (SDO) orTehsil courts to
assist the court staff for issuing notices to borrowers In case of
overdue loans. Periodical recovery camps are held In villages In co-
ordination with Government officials.
The borrowers are constantly reminded about their overdues and
notice to clear them are regularly sent.
List of defaulters is displayed in the notice board of the branch
without disclosing the account number, amount of loan, overdue, etc.
The Idea is simply to draw attention of the defaulters to contact the
Branch Manager. A copy of the list Is also given to the counter clerk
so that he/she can ask the defaulters whenever they come to the
branch to transact to meet the Branch Manager.


(iv) Involvement of Government Agencies

There are instances where RRBs are able to recover overdue loans by
involving District Administration. Some of the methods adopted to involve
government machinery are listed below:-
• Revenue recovery notices are issued by the District Magistrate or Sub-
Divisional Officer once a year advising Ixjrrowers to deposit the
overdue amount in the RRB to avoid legal actions permitted under the
• The list of defaulters is given to the Revenue Authorities or Tehsildars
in case of agriculture loans, in case of industrial loans the list is given
to District Industries Centres for follow-up.
• Joint recovery teams are formed in which Tehsildars, Revenue
Inspector, Patwari and RRB Staff jointly participate to expedite the
execution of decrees.
• Help of Block Development Officer (BDO) is solicited in case of
Government sponsored schemes. Joint inspections are carried out
with BDO and incase of accounts where misutilisation of loans and
subsidy amount is noticed, joint First information reports (FIRs) are
(v) Extraordinary Methods
Apart from what has been stated above some RRBs have adopted
certain extra-ordinary methods to ensure recovery and a few of such
methods adopted by the RRBs are narrated here.
• Announcing the names of the defaulters in market places through drum
• Approaching influential bon-owers who are defaulters, while important
functions such as thread ceremony, marriage, etc. are going on in their
houses. Cases have been reported where the branch staff have directly
asked for repayment during such functions and loans have been repaid
because the borrowers (defaulters) tried to protect their self prestige in
the presence of invited guests and relatives. But there are also
instances where the branch staff have simply

attended the marriage ceremony with gifts and repayments have

followed. In some cases, the branch staff have paid money for the
performance of last rites in the event of the death in the family of the
borrower (defaulter) and repayments have followed.
• List of defaulters prepared and pasted at public places and the recovery
van, a hired jeep, was flag marched with banner Vasuli Dal (recovery
squad) by order of district administration. Bank records related to
recovery were kept wrapped in red cloth to impress the public that
Government officials are also involved in the recovery of bank dues.
• In some places the visit of a police constable to a particular person's
house is considered inauspicious and banks' taking advantage of this
aspect have served recovery notices through police constables and
have put pressure to get the loans recovered.
The methods mentioned above have either tried to tarnish the social
image or appeal to the morale of the borrower to repay the banks' dues.
While these methods have yielded fruitful results in some places it may be
dangerous and risky to adopt such methods everywhere.
To sum up, it may be seen that whether it is preventive or corrective
method, proper motivation and commitment of the bank staff, strict
adherence to proper loan supervision and monitoring and a congenial
relationship with Government machinery contribute to good recovery. But
there may be cases where all or any of these methods fail and consequently
the loans have to be finally written off. Moreover, the legal procedure in
regard to recovery of bank dues is cumbersome, lengthy and time consuming
and it is time to critically examine these laws for their efficacy.

(vi) Corrective Management for NPA Management

The following diagram shows the corrective management of NPAs.

Study the problems of NPAs - branch-wise, amount-wise and age-wise

Prepare a loan recovery policy and strategies exclusively for NPAs
Create Special Recovery Cell at various levels

Identify critical branches for intensive recovery
Fix targets of recovery and draw timebound action programme


Select proper strategy for solving the problem of each NPA account
Monitor implementation of time bound action plan

Under corrective management, each NPA has to be examined in

totality and on the basis of various factors like past efforts, period of
overdue, client profile, natural calamities etc. and suitable strategy is
decided. Since the reasons or factors responsible for sliding a good loan into
bad one vary for each loan account, it is necessary to adopt different
strategies for different NPA accounts. Some corrective management
strategies for reducing NPAs are:
• Recovery Strategies effect
compromises to improve recovery status of
account partial write off
adjustment of collateral securities
pressure on guarantors

special recovery drive

help from revenue authorities Rephasement of loans or
Rescheduling of demands Rehabilitation of potentially viable
units Compromise with borrowers for final settlements Calling
up the advances and filing of civil suits Approaching debt
recovery tribunals
Settlement of claims with Deposit Insurance and Credit Guarantee
Corporation of India (DICGCI) and Export Credit Guarantee Corporation of
India (ECGCI). Write off the outstandings

6.3 Recovery Through Legal Process

Experience has shown that legal support is critical to recovery
management. The recovery of loans through crystallised collateral and other
back-stoppings is subject to a prolix process as the present legal system
normally does not provide a fast and effective exit route. Discussion on
recovery process through legal means amenable to RFIs is presented in the
following section.
6.3.1 Legal System Administration
The security obtained for a loan account has only one major objective,
that, in the event of default, the RFI should be able to recover the money
through the security. It could be by sale of the security or through the
compromise process as the borrower would not like to lose the security.

The process of recovery through legal process involves proper

documentation of credit, issue of notices, filing and sustaining of suit in the
court of law, obtaining the decree, issue advertisement in the newspapers on
the intention of execution of decree, arrange for execution, make the sale,
realize the proceeds and adjust the loan. In almost all the activities, the RFI
needs the services of professionals such as lawyers, court receivers, etc. The
bank has to meet all these expenses and adjust or seek

reimbursement once the decree is executed from out of sale proceeds as per
decree. However, in most cases the cost aJlowed is far less than the actual,
inflicting high expenditure to the banks. It is seen that in case of RFIs, the
legal process is not only long drawn buK also expensive.ln the meantime, as
per prudent accounting procedure, the money will remain in the books of
accounts without earning anyinterest. Also, making it imperative to make
provisions as per directives. The following points are worth mentioning.
i The law does not allow sale as an automatic right of the creditor -
through a court process even in the case of mortgage, i The procedure
for seizure and foreclosure is involved and costly, ii In many cases, such
as tribals, property alienation is not permitted, iv In case of small loans
to poor, there is no asset available for attachments.
Therefore, proper and effective legal process is very crucial in
creating a repayment atmosphere. If it is proved that the legal process is
time consuming and long, it would make the security ineffective. Once this
is well known, borrowers would not hesitate to offer security as they can
default with impunity and get compromises. Maharastra Land Development
Bank (LDB) has, in fact put the entire compromise process in the form of
Bye-Laws which encourage a borrower to default to and then settle the dues
after getting substantial interest waiver. Nowadays, compromise proposals
are on the increase. For the compromise process to start the RFI will have to
complete the legal process and obtain the decree. Once the borrower is
apprehensive of losing the security he comes to the compromise table. In
case of loan accounts where there are no assets to proceed against, the
compromise is a non-starter.
6.3.2 Use of Collaterals and Collateral Substitute
It is seen that the recovery process through legal system with or
without collateral is equally costly and lengthy. The court fee is payable on
the amount of default or on the amount to be recovered and not on the value
of the security. Judiciary and Revenue machinery have been generally
unable to help the RFIs in recovery. The sheer volume of cases weighs them
down even if the system has the intention. Except for the demonstrative
effect, filing of summary or money suit for unsecured loans does not

provide any tangible benefit for the RFIs. RFIs observe that pursuing such
suits to a logical end is not prudent as it involves higher administrative and
risk costs for them.
The expenses made on the court lie in the books of accounts until their
recovery is made by effecting the sale. This is a drain on the RFI's resources
is often without any return for the RFI during the period. The RFIs feel that
the cost of executing the collateral is quite high for the RFIs.
6.3.3 Efficacy of Cooperative Law
Under State enactments, the Cooperative Banks and Credit Societies
enjoy certain privileges like 'change' and priority over other creditors for
recovery of dues from members. They also enjoy exemption from payment
of stamp duty and registration charges for mortgaged land while availing
agricultural loans (upto some financial ceiling) and the creation of mortgage
by the borrower by simple declaration.
In addition, the Cooperative Banks enjoy special facilities to expedite
the process of recovery of their dues without recourse to civil courts. State
Laws authorise some officials of the Government (Registrars of Cooperative
Societies) to exercise the powers of a civil court to order attachment and
sale of property of debtor to fulfill the repayment obligation to a cooperative
The essence of these special facilities, usually referred to as summary
procedure, is that the authorised officials are empowered to issue an order
having the force of a decree of a civil court for payment of any sum due to
the banks by sale of the property changed or mortgaged in favour of the
bank. These powers have been granted to facilitate recovery of dues of
cooperatives without having to resort to time consuming litigation in civil
courts. The Recovery performance of the cooperatives is not improving
despite the above special facilities showing the inept handling by
government machinery. The cost, despite the easy procedure, is high as the
high cost of the departmental officials for the semi judiciary process is met
by these banks in addition to recovery officers of the bank. Further, the
execution of awards


through sale gets, most often, vitiated by external forces, as being the
government agency, cutting the root of the efficacy of the special facilities
supposedly given to co-operatives.
6.3.4 Revenue Recovery Acts
An Expert Group headed by Shri R.K. Talwar in 1970 had
recommended extension of similar facilities to commercial banks by
appropriate State legislation (TalwarCommittee, 1970). On the basis of the
recommendations of the Talwar Committee, the State Governments (barring
nine) have passed the Agricultural Credit Operations and Miscellaneous
Provisions (Banks) Act, The act empowers designated officials of Revenue
Department to issue an order having a force of decree of a civil court for
payments of any sum due to a bank by sale of the property charged or
mortgaged in favour of the bank. This facilitates foreclosure of mortgage on
land in bank's favour and brings the property for sale. Under the act a
nominal fee and not the entire salary of the government official, is charged
to the bank.
The recovery officers under the Act have helped in recovering small
loans of the banks. The banks, in States like Uttar Pradesh, Karnataka, have
taken proactive steps to fund the cost (salary of recovery officers and other
incidental expenses) by making a collective contribution for their
establishment and/or allowing a recovery fee of 5% to 10% of the recovered
amount towards their maintenance. But the above system has not worked
uniformly well in all the states. The state governments had found it difficult
to spare officials possessing zeal for this type of work which is a
prerequisite for a supporting machinery to work efficiently. Use of
government official machinery helps in infusion of the threat perception
amongst people, but the political interference becomes a part of it.
Therefore, the lack of political will beconrles a hindering factor in the
process. It would perhaps be necessary to study the relative efficiency of the
system across the country, so that improvements wherever possible, could
be made.


6.3.5 Debt Recovery Tribunals

Special Debt Recovery Tribunals (SDRTs) have been set up under
the Recovery of Debts due to banks and Financial Institutions Act, 1993 for
expeditious adjudication and recovery of debts. These courts now adjudicate
banks' suits involving amount of Rs 10 lakh and above by transferring the
cases pending with the civil courts. These loans are nomnally secured with
collaterals. Only six such tribunals are operative now. The number of such
tribunals is inadequate resulting in large number of cases pending before
them. They are not yet equipped with proper infrastructure and flexibility to
function smoothly.
For recovery of small loans and to ensure quick justice on settlement
of dues, Lok Adalats (People's Courts) have been set up in some States.
These courts are headed by retired high court judges and two other
members. These small courts are found to be of success in selected pockets.
Efforts are continuing to popularise this arrangement. The judgement of
these courts are found to lack the teeth of a civil court judgement for their
enforceability. But these courts have provided good opportunity to narrow
or bridge the differences between the banker and the defaulter by creating a
favourable environment for a settlement and also in formalising such
6.3.6 Legal Changes Required
From the above and the immensity of cases pending in the courts it is
obvious that the recovery of RFI dues through the legal process has not been
encouraging. With the introduction of the NPA norms and as the secured
NPA loans are subject to lesser provisions than the unsecured NPA loans, it
is essential to look into the effectiveness of security and legal process
towards recovery. There is no doubt that the laws governing the collaterals
need to be improved and the legal process expedited. It is perhaps essential
to start many units of the Revenue Recovery (RR) procedures in each state.
Increasing the efficiency of the RR courts, SDRTs and making the sale of a
mortgaged or hypothecated asset possible without court intervention are
some of the steps that need to be taken in this direction. As more

and more RFIs feel the pressure of NPAs such improvements are crucial to
the success of rural financial intermediation.
One of the most important causes hampering the recoveries of NPAs,
among other things is a long-winded and ineffective legal recourse available
to RFIs in India. A legal framework that clearly defines the rights and
liabilities of parties to contracts and provides for a speedy resolution of
disputes is essential for efficient financial intermediation. It is true that
existing legal framework is archaic, slow and outright non-productive as
discussed above. It is also not in tune with the changing commercial
practices and banking refonns. Some of the legal acts which were enacted in
nineteenth century and therefore require immediate overhauling are Indian
Contract Act 1872, Transfer of Property Act 1882 and Indian Stamp Act
It is understood that RBI has already constituted committees for
looking into the necessary amendments to various banking related Acts.
Simultaneously, there is a committee which is looking into the amendments
necessary in the plethora of Acts that affect the collateral and collateral
Improvements in the legal process involving collaterals will have no
impact in the case of small loans where the borrowers have no collaterals to
offer. It is here that the propagation of various models of microfinance will
be welcome.
6.4 Macro Policy issues
6.4.1 Central Government and State Governments
The great contribution central and state governments can make in
improving recovery management of RFIs is by not announcing politically
motivated schemes like distribution of loans through loan melas, loan
waivers, interest waivers, etc.
State government have to ensure that no state law governing the
business of co-operative banking is curtailing the liabilities provided under
B.R. Act by RBI. That is, state governments need to liberate banking co-
operatives in line with B.R.Act. This includes freedom on interest rate
matters, terms of lending etc.


Regarding the law of mortgage, the response has been to enact the
separate enactments by many states to remove difficulties in recovery of
loans and to speed up the process of enforcement and foreclosure. Besides,
suggesting amendments in the various legal Acts, Narasimham Committee
II (1998) has recommended two approaches to recover NPAs and thus, to
cleanse the balance sheet of the banks. They are:
(i) Setting up of Special Tribunals for recovery of dues to banks and
financial institutions. (Originally suggested by the Tiwari Committee
(1984) and subsequently endorsed by both the Narasimham
Committees) (ii) Forming of special purpose vehicle like Asset
Reconstruction Company (ARC) for each bank or a group of banks.
The special tribunals known as debt recovery tribunals (DRT) have
been set up under the DRT Act as mentioned earlier. Recently, Government
of India has approved granting more teeth to DRT act by moving some
important amendments. These relate to empowerment of tribunals to attach
property on filing of complaint of default by the bank. Besides, it also
empowers the processing officers to execute the decree based on a
certificate issued by the DRT. These two steps together would ensure
speedy recovery of dues, iron out delays at the DRT end as well as prompt
action without waiting for the venture to go sick.
Some important areas where the support of the GOI/ RBI/ NABARD
is required for improved recovery management are outlined as follows.
i) RFIs should be governed by the state Act for empowering recovery
initiatives with specific provisions. A Rural Credit Recovery
Act could cover all loans issued in the state but not covered by
Debt Recovery Tribunals. Empowered Rural Credit courts
financed by all RFIs, as a percentage of rural credit portfolios
may be established. Or
ii) The state governments may speedily devise suitable mechanisms
under the existing legislation such as Revenue Recovery

Act, Public Debt Recovery Act etc., for providing recovery assistance
to RFIs. iii) The RFIs need to be allowed to offer social security
financial products, like rehabilitation loans, insurance, etc. directly or
indirectly in collaboration with other agencies offering such products.
This would broad base the functioning of RFIs at village level and
would improve the recovery climate.
6.4.2 Internal Policies of RFIs
In the changed circumstances of financial reforms, more and more
freedom to RFI in decision making is expected. RFIs will have to act
promptly to benefit from such freedom in decision making.
For speedy recovery management, decentralisation of decision making
regarding resheduling of loans and repayments due to local events of
drought, floods, etc. should be with regional, zonal or branch managers in
the area. Similarly, decisions regarding compromises and write offs should
also be decentralised to branch level. This decentralisation in terms of
decision making is not limited to just taking decisions at branch level but
making branch staff accountable to their decisions. There is also an urgent
need to train the bank staff on prudent decisions making.
Innovative methods of involving panchayats, good non government
organisations (NGOs), self help groups (SHGs), Vikas Volunteer Vahini
(VW) farmers' clubs, etc. for recovery of loans need to be evolved. This is
because these local level institutions - be formal legal entities like
panchayats and NGOs or informal entities like SHGs and \AA/ farmer clubs
have the advantage of understanding the local conditions better. The RFIs
could benefit from this advantage if these are involved in informing and
educating the borrowers the benefits of prompt recovery for continued
financial services in a sustainable manner.
RFIs have to involve themselves more in propagating rural
technology, rural

health etc. to exhibit their concern for rural development for mutual benefit
rather than just the credit alone. It is this feature of credit that has potential
to distinguish RFIs from others, increase their relevance in the rural setting
and improve the recovery climate in rural areas.
It is sincerely hoped that RFIs working in rural India shall be able to
manage recovery to reduce NPAs effectively by adopting suitable
preventive and corrective recovery methods specific to their area and
6.5 Sum Up
Legal support is critical to effective recovery management. However,
the experience with legal support has not been very encouraging as it has
been prolonged, ineffective and expensive for the RFIs. A legal system that
clearly defines the rights and liabilities of parties to contracts and provides
for timely resolution of disputes is essential for efficient recovery
management. Existence of legal framework is one thing and its enforcement
is quite another. Changes are required on both fronts. Outdated laws need to
be changed and laws enacted need to be properly enforced. It is heartening
to note that RBI has already taken initiatives in this direction.
The role of governments (Central and State) is crucial for creating
and maintaining proper recovery environment in society. India being a
democratic country, politically motivated but otherwise damaging public
announcements like loan waivers, interest waivers, etc. pollute the recovery
environment. Governments have to learn to respect the professionalism of
RFIs and should not interfere in their business affairs.
In the era of financial reforms involving liberalization and
decentralisation in decision making, it is important that it percolates down
to branches of RFIs. Decisions relating to rescheduling of loans and
repayments at branch level due to local conditions of drought, floods, etc. is
an example to illustrate the point. Similarly, decisions regarding
compromises and write offs also need to be decentralised to branch level.
This decentralisation in terms of decision making is not only limited to
making alone but is about making branch staff accountable to their
With renewed emphasis on participatory development process, it is
relevant that RFIs involve panchayats, NGOs, SHGs and VW farmer clubs
for recovery of loans. This is a mutually advantageous partnership. These
grassroot level institutions have the knowledge about local people and
conditions which RFIs do not have. In return, rural people get financial
services on a continuous basis if good recoveries are effected with
involvement of village level institutions.


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