The following piece by C V Madhukar appeared in the September,2011 issue of Governance Now magazine. The debate in Parliament in response to the recent Anna Hazare led agitation demanding a strong Lok Pal Bill was a fine hour for the institution of Parliament.  What was even more important about the debate is that it was watched by thousands of people across the country many of whom have lost faith in the ability of our MPs to coherently articulate their point of view on substantive issues. Of course, in many cases some of these impressions about our MPs are largely formed by what the media channels tend to project, and without a full appreciation of what actually happens in Parliament.  There is now a greater awareness about an important institutional mechanism called the standing committee, and other nuances about the law making process. The Lok Pal agitation brought out another important aspect of our democracy.  There are still many in India who believe that peaceful protest is a powerful way to communicate the expectations of people to the government. Our elected representatives are prepared to respond collectively when such protests are held.  There is a negotiated settlement possible between the agitating citizens and our political establishment within the broad construct of our Constitution.  All of this means that the safety valves in our democracy are still somewhat functional, despite its many shortcomings. But the way the whole Lok Pal episode has played out so far raises a number of important questions about the functioning of our political parties and our Parliamentary system.  A fundamental question is the extent to which our elected MPs are able to ‘represent’ the concerns of the people in Parliament.  It has been obvious for some time now, that corruption at various levels has been a concern for many.  For months before the showdown in August, there have been public expressions of the disenchantment of the people about this problem.  Even though several MPs would say privately that it is time for them to do something about it as elected representatives, they were unable to come together in a way to show the people that they were serious about the issue, or that they could collectively do something significant about the problem.  The government was trying in its own way to grapple with the problem, and was unable to seize the initiative, expect for a last minute effort to find a graceful way out of the immediate problem on hand. In our governance system as outlined in our Constitution, the primary and most important institution to hold the government accountable is the Parliament.  To perform this role, the Parliament has a number of institutional mechanisms that have evolved over the years.  The creation of the CAG as a Constitutional body that provides inputs to Parliament, the Public Accounts Committee in Parliament, the question hour in Parliament are some of the ways in which the government is held to account.  Clearly all of these mechanisms together are unable to adequately do the work of overseeing the government that our MPs have been tasked with.  But it is one thing for our MPs to be effective in their role holding the government to account, and a very different thing to come across collectively as being responsive to the concerns of the people. For our MPs to play their representation role more convincingly and meaningfully there are certain issues that need to be addressed.  A major concern is about how our political parties are structured, where MPs are bound by tight party discipline. In a system where the party leadership decides who gets the party ticket to contest the next election, there is a natural incentive for MPs to toe the party line, even within their party forums.  This is often at the cost of their personal conviction about certain issues, and may sometimes be against what the citizens could want their representatives to do. Add to this the party whip system, under which each MP has to vote along the party line or face the risk of losing his seat in Parliament.  And then of course, if some MP decides to take a stand on some issue, he needs to do all the research work on his own because our elected representatives have no staff with this capability.  This deadly cocktail of negative incentives, just makes it very easy for the MP to mostly just follow the party line.  If the representation function were to be taken somewhat seriously, these issues need to be addressed. The 2004 World Development Report of the World Bank was focussed on accountability.  An important idea in the report was that it was too costly and inefficient for people to vote a government in and wait till the next election to hold the government accountable by voting it out for the poor governance it provides.  That is the reason it is essential for governments and citizens to develop ways in which processes can be developed by which the government can be held accountable even during its tenure. The myriad efforts by government such as social audits, monitoring and evaluation efforts within government departments, efforts by Parliament to hold the government accountable, efforts of civil society groups, are all ways of holding the government to account.  But over and above accountability, in an age of growing aspirations and increasing transparency, our MPs must find new ways of asserting their views and those people that they seek to represent in our Parliament.  This is an age which expects our politicians to be responsive, but in a responsible way. Even as the Lok Pal Bill is being deliberated upon in the standing committee, civil society groups continue to watch how MPs will come out on this Bill.  There are plenty of other opportunities where MPs and Parliament can take the initiative, including electoral reforms, funding of elections, black money, etc.  It remains to be seen whether our MPs will lead on these issues from the front, or will choose to be led by others. This will determine whether in the perception of the public the collective stock of our MPs will rise or continue to deplete in the months ahead.

At noon today, the Finance Minister introduced a Bill in Parliament to address the issue of delayed debt recovery.  The Bill  amends four laws including the SARFAESI Act and the DRT Act, which are primarily used for recovery of outstanding loans.  In this context, we examine the rise in NPAs in India and ways in which this may be dealt with.

I. An overview of Non-Performing Assets in India 

Banks give loans and advances to borrowers which may be categorised as: (i) standard asset (any loan which has not defaulted in repayment) or (ii) non-performing asset (NPA), based on their performance.  NPAs are loans and advances given by banks, on which the borrower has ceased to pay interest and principal repayments. Graph for blog In recent years, the gross NPAs of banks have increased from 2.3% of total loans in 2008 to 4.3% in 2015 (see Figure 1 alongside*).  The increase in NPAs may be due to various reasons, including slow growth in domestic market and drop in prices of commodities in the global markets.  In addition, exports of products such as steel, textiles, leather and gems have slowed down.[i] The increase in NPAs affects the credit market in the country.  This is due to the impact that non-repayment of loans has on the cash flow of banks and the availability of funds with them.[ii]  Additionally, a rising trend in NPAs may also make banks unwilling to lend.  This could be because there are lesser chances of debt recovery due to prevailing market conditions.[iii]  For example, banks may be unwilling to lend to the steel sector if companies in this sector are making losses and defaulting on current loans. There are various legislative mechanisms available with banks for debt recovery.  These include: (i) Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act) and (ii) Securitisation and Reconstruction of Financial Assets and Security Interest Act, 2002 (SARFAESI Act).  The Debt Recovery Tribunals established under DRT Act allow banks to recover outstanding loans.  The SARFAESI Act allows a secured creditor to enforce his security interest without the intervention of courts or tribunals.  In addition to these, there are voluntary mechanisms such as Corporate Debt Restructuring and Strategic Debt Restructuring, which   These mechanisms allow banks to collectively restructure debt of borrowers (which includes changing repayment schedule of loans) and take over the management of a company.

II. Challenges and recommendations for reform

In recent years, several committees have given recommendations on NPAs. We discuss these below.

Action against defaulters: Wilful default refers to a situation where a borrower defaults on the repayment of a loan, despite having adequate resources. As of December 2015, the public sector banks had 7,686 wilful defaulters, which accounted for Rs 66,000 crore of outstanding loans.[iv]  The Standing Committee of Finance, in February 2016, observed that 21% of the total NPAs of banks were from wilful defaulters.  It recommended that the names of top 30 wilful defaulters of every bank be made public.  It noted that making such information publicly available would act as a deterrent for others.

Asset Reconstruction Companies (ARCs): ARCs purchase stressed assets from banks, and try to recover them. The ARCs buy NPAs from banks at a discount and try to recover the money.  The Standing Committee observed that the prolonged slowdown in the economy had made it difficult for ARCs to absorb NPAs. Therefore, it recommended that the RBI should allow banks to absorb their written-off assets in a staggered manner.  This would help them in gradually restoring their balance sheets to normal health.

Improved recovery: The process of recovering outstanding loans is time consuming. This includes time taken to resolve insolvency, which is a situation where a borrower is unable to repay his outstanding debt.  The inability to resolve insolvency is one of the factors that impacts NPAS, the credit market, and affects the flow of money in the country.[v]  As of 2015, it took over four years to resolve insolvency in India.  This was higher than other countries such as the UK (1 year) and USA (1.5 years).  The Insolvency and Bankruptcy Code seeks to address this situation.  The Code, which was passed by Lok Sabha on May 5, 2016, is currently pending in Rajya Sabha. It provides a 180-day period to resolve insolvency (which includes change in repayment schedule of loans to recover outstanding loans.)  If insolvency is not resolved within this time period, the company will go in for liquidation of its assets, and the creditors will be repaid from these sale proceeds.


  [i] ‘Non-Performing Assets of Financial Institutions’, 27th Report of the Department-related Standing Committee on Finance, http://164.100.47.134/lsscommittee/Finance/16_Finance_27.pdf. [ii] Bankruptcy Law Reforms Committee, November 2015, http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf. [iii] Volume 2, Economic Survey 2015-16, http://indiabudget.nic.in/es2015-16/echapter-vol2.pdf. [iv] Starred Question No. 17, Rajya Sabha, Answered on April 26, Ministry of Finance. [v] Report of the Bankruptcy Law Reforms Committee, Ministry of Finance, November 2015, http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf. *Source:  ‘Non-Performing Assets of Financial Institutions’, 27th Report of the Department-related Standing Committee on Finance, http://164.100.47.134/lsscommittee/Finance/16_Finance_27.pdf; PRS.