Q4

Policies to tackle NPAs

Axis bank is India’s third biggest private lender. But Axis’ decision to have a large concentration
of its loan book in power, real estate, iron and steel has cost it dearly. From 1.34% in FY15, its
gross NPAs in FY17 rose to 5.04% of gross advances even as its net profit plummeted 55%. In
Q3FY17, net profit fell 73%, while gross NPAs stood at 5.22%. The gross NPAs, including the
divergences, jumped 67 percent to Rs 27,402 crore from Rs 16,379 crore and net NPAs nearly
doubled to Rs 14,052 crore from Rs 7761 crore a year ago. A large part of the new additions to
NPAs constitute corporate slippages of Rs 8,110 crore, predominantly from low-rated accounts.

The polices undertaken to reduce the NPAs are –

1. One time settlement scheme --

This scheme covers all sectors sub – standard assets, doubtful or loss assets as on 31st March
2000. All cases on which the banks have initiated action under the SRFAESI Act and also cases
pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the
Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance are not
covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should
be recovered should be 100% of the outstanding balance in the account.

2. Sustainable structuring of NPAs --

Under this policy, the liability of the struggling company’s debt will be bifurcates into
sustainable and unsustainable portion. The bank will convert the unsustainable portion into
equity and sell it to the new owner. Under this policy the axis bank is able to recover a large
portion of bad loans and there will be reduction in NPAs.

3. Corporate restructuring –

Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism
for restructuring of the corporate debts of viable entities facing problems, outside the purview of
BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the
framework will aim at preserving viable corporate that are affected by certain internal and
external factors and minimize the losses to the creditors and other stakeholders through an
orderly and coordinated restructuring program

4. Preventive measure –

The preventive measure is a policy which was enacted by Axis bank to prevent the asset from
becoming an Non-Performing Asset. This policy is enacted by various banks to identify and
ensure that Potential NPAs doesn’t become a non performing asset. The policy concentrate on
the following to minimize the NPAs

 Early warning signals

 Management related warning signals
 Financial warning

This signal helps the bank to identify the company or the customer and ensure that bank asset is
still performing.

5. Government measures –
 Lok Adalats -- Lok Adalat institutions help banks to settle disputes involving account in “doubtful”
and “loss” category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok
Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of
NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice
and recovery of small loans. The progress through this channel is expected to pick up in the coming
years
 Debt Recovery Tribunals (DRTs) --The Debt Recovery Tribunals have been established by the
Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and
recovery of debts due to banks and financial institutions. The Debt Recovery Tribunal is also the
appellate authority for appeals filed against the proceedings initiated by secured creditors under the
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. The
recovery of debts due to banks and financial institution passed in March 2000 has helped in
strengthening the function of DRTs. Provision for placement of more than one recovery officer,
power to attach defendant’s property/assets before judgment, penal provision for disobedience of
tribunal’s order or for breach of any terms of order and appointment of receiver with power of
realization, management, protection and preservation of property are expected to provide necessary
 teeth to the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been
set up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make much
impact on loan recovery due to variety of reasons like inadequate number, lack of infrastructure,
under staffing and frequent adjournment of cases. It is essential that DRT mechanism strengthened
and vested with a proper enforcement mechanism to enforce their orders. Non observation of any
order passed by the tribunal should amount to contempt of court, the DRT should have right to initiate
contempt proceedings. The DRT should empowered to sell asset of the debtor companies and forward
the proceed to the winding – up court for distribution among the lenders.

 Securitization and SARFAESI Act-- Securitization is a relatively new concept that is

taking roots in India of late. It is still in its infancy with only a few market players.
Securitization is considered an effective tool for improvement of capital adequacy. It is also
seen as a tool for transferring the reinvestment risk, apart from credit risk helping the banks
to maintain proper match between assets and liabilities. Securitization can also help in
reducing the risk arising out of credit exposure norms and the imbalances of credit exposure,
which can help in the maintenance of healthy assets. The SARFAESI Act intends to promote
Securitization, pool together NPAs of banks to realize them and make enforcement of
Security Interest Transfer. The SARFAESI Act-2002 is seen as a booster, initially, for banks
in tackling the menace of NPAs without having to approach the courts. With certain
loopholes still remaining in the act, the experiences of banks were that the Act in its present
form would not serve the envisaged objective of optimum recovery of NPAs, particularly
with the hard-core NPA borrowers dragging the banks into endless litigation to delay the
recovery process. The Supreme Court decision in regard to certain proviso of the SARFAESI
Act also vindicated this view. This section deals with the features of Securitization and its
resourcefulness in tackling NPAS and about the SARFAESI Act, its resourcefulness and
limitations in tackling the NPA borrowers and the implication of the recent Supreme Court
judgment. With the steady sophistication of the Indian Financial Services Sector, the
structured finance market is also growing significantly, of which Securitization occupies a
prominent place. With Basel II norms imminently being implemented by 2008, banks are
required to pool up huge capital to offset the credit risk and operational risk components.
Securitization, therefore, is seen to be an effective and vibrant tool for capital formation for
banks in future.
 Q5

Is recapitalization a solution for your bank?

As recapitalization of a private bank involves issuing of additional shares in order to finance

their NPAs and which will dilute the management hold on the company which the management
doesn’t want or the bank can go for additional loan form Reserve Bank of India or by raising
funds from foreign market. As recapitalization is not solution for Axis Bank as banks NPAs are
mostly in power, mining and steel. So if asset aren’t performing well the bank can recover by
selling off those asset and recover or can go for corporate restructuring to overcome internal and
external problem faced by the company and this is one of the policy of axis bank to help their
NPAs in performing.

As with 42000 crores of NPAs, Axis bank can control this amount and reduce it as the
government is investing and planning to invest huge amount of the money in power and
infrastructure where a lot of Axis banks NPAs are present. This might help to boost up these
sectors which might help them. But if Axis bank wants to go for short term recapitalization them
it might help them as credit availability with the bank will increase but in long run
recapitalization isn’t a solution.