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, [ii] Bankruptcy Law Reforms Committee, November 2015, [iii] Volume 2, Economic Survey 2015-16, [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, *Source:  ‘Non-Performing Assets of Financial Institutions’, 27th Report of the Department-related Standing Committee on Finance,; PRS.  

In the last few years, several states have enacted laws to curb cheating in examinations, especially those for recruitment in public service commissions.   According to news reports, incidents of cheating and paper leaks have occurred on several occasions in Uttarakhand, including during the panchayat development officer exams in 2016, and the Uttarakhand Subordinate Services Selection Commission exams in 2021.  The Uttarakhand Public Service Commission papers were also leaked in January 2023.  The most recent cheating incidents led to protests and unrest in Uttarakhand.   Following this, on February 11, 2023, the state promulgated an Ordinance to bar and penalise the use of unfair means in public examinations.  The Uttarakhand Assembly passed the Bill replacing the Ordinance in March 2023.  There have been multiple reports of candidates being arrested and debarred for cheating in public examinations for posts such as forest guard and secretariat guard after the ordinance’s introduction.  Similar instances of cheating have also been noted in other states.   As per news reports, since 2015, Gujarat has not been able to hold a single recruitment exam without reported paper leaks.  In February 2023, the Gujarat Assembly also passed a law to penalise cheating in public examinations.  Other states such as Rajasthan (Act passed in 2022), Uttar Pradesh (Act passed in 1998) and Andhra Pradesh (Act passed in 1997) also have similar laws.  In this blog, we compare anti-cheating laws across some states (see Table 1), and discuss some issues to consider.

Typical provisions of anti-cheating laws

Anti-cheating laws across states generally contain provisions that penalise the use of unfair means by examinees and other groups in public examinations such as those conducted by state public sector commission examinations and higher secondary education boards.  Broadly, unfair means is defined to include the use of unauthorised help and the unauthorised use of written material by candidates.  These laws also prohibit individuals responsible for conducting examinations from disclosing any information they acquire in this role.  The more recent laws, such as the Gujarat, Uttarakhand, and Rajasthan ones, also include the impersonation of candidates and the leaking of exam papers within the definition of unfair means.  Uttarakhand, Gujarat, Rajasthan, Uttar Pradesh, Chhattisgarh, and Andhra Pradesh prohibit the use of electronic aids.  Maximum prison sentences for using such unfair means range from three months in Uttar Pradesh, to seven years in Andhra Pradesh. 

Issues to consider

The Gujarat and Uttarakhand anti-cheating Acts have relatively stringent provisions for cheating.  The Uttarakhand Act has a fixed 3-year prison sentence for examinees caught cheating or using unfair means (for the first offence).  Since the Act does not distinguish between the different types of unfair means used, an examinee could serve a sentence disproportionate to the offence committed.  In most other states, the maximum imprisonment term for such offences is three years.   Andhra Pradesh has a minimum imprisonment term of three years.  However, all these states allow for a range with respect to the penalty, that is, the judge can decide on the imprisonment term (within the specified limits) depending on the manner of cheating and the implications of such cheating.  Table 1 below compares the penalties for certain offences across eight states.

The Uttarakhand Act has a provision that debars the examinee from state competitive examinations for two to five years upon the filing of the chargesheet, rather than upon conviction.  Thus, an examinee could be deprived of giving the examination even if they were innocent but being prosecuted under the law.  This could compromise the presumption of innocence for accused candidates.  The Gujarat and Rajasthan laws also debar candidates from sitting in specified examinations for two years, but only upon conviction. 

These laws also vary in scope across states.  In Uttarakhand and Rajasthan, the laws only apply to competitive examinations for recruitment in a state department (such as a Public Commission).   In the other six states examined, these laws also apply to examinations held by educational institutions for granting educational qualifications such as diplomas and degrees.  For example, in Gujarat, exams conducted by the Gujarat Secondary and Higher Secondary Education Board are also covered under the Gujarat Public Examination (Prevention of Unfair Means) Act, 2023.   The question is whether it is appropriate to have similar punishments for exams in educational institutions and exams for recruitment in government jobs, given the difference in stakes between them.

Sources: The Rajasthan Public Examination (Measures for Prevention of Unfair Means in Recruitment) Act, 2022; the Uttar Pradesh Public Examinations (Prevention of Unfair Means) Act, 1998; the Chhattisgarh Public Examinations (Prevention of Unfair Means) Act, 2008; the Orissa Conduct of Examinations Act, 1988; the Andhra Pradesh Public Examinations (Prevention of Malpractices and Unfair means) Act, 1997; the Jharkhand Conduct of Examinations Act, 2001, the Uttarakhand Competitive Examination (Measures for Prevention and Prevention of Unfair Means in Recruitment) Act, 2023, the Gujarat Public Examination (Prevention of Unfair Methods) Act, 2023; PRS.