Sun Tzu in his ancient treatise “Art of War” advises ““The whole secret lies in confusing the enemy, so that he cannot fathom our real intent.” In today’s highly connected world, wars are fought not only on battlefields but also on information front.  The opponents of Indian government’s demonetization have fired the first major salvo of disinformation by projecting PSU Banks’ exercise to write off loans as a waiver given to the rich.

As a staff of a PSU Bank working in its recovery branch, it is my duty to debunk the myth created by certain sections of media which is instantly upheld by many politician. Let's look at RBI norms for treating a Non performing asset at Banks in India. This explanation is about commercial or personal loans and not crop loans because crop loans are treated more leniently and have different norms. 

An account becomes NPA or non-performing asset when even the interest is not paid for over 90 days. Branding any account as NPA is automatically done by the accounting software and it cannot be manually altered at the branch level. After the account is branded as NPA the hard recovery measures are started. PSU banks have set up specialized branches to deal with such accounts. So NPA accounts are migrated to these branches for perusing the hard recovery measures as they are called, which basically involves filing suit in DRT or civil courts or taking physical possession of the mortgaged properties and selling them through e-auctions. These branches also put pressure on the borrowers through various other measures like declaring them Wilful Defaulters or publishing their photographs in the papers. All these measures are undertaken after careful consideration them by the competent authorities or internal committees set up for these decisions. Each of these decisions are taken inside the framework of RBI guidelines.

The main hard recovery measures are SARFAESI action and filing suit in Debt Recovery Tribunals. SARFAESI Act, 2002 came into practice from 2005 which empowered the secured creditors, in this case a Bank or financial institution, to take possession of the secured asset in case of default and is allowed to sell the asset to recover it. Though when the act was brought it was hailed as powerful tool but soon it was rendered toothless as the Banker was made to apply to Chief Metropolitan Magistrate or District Magistrate to take possession of the property. SARFAESI Act does not apply to agriculture land. You will be surprised to know that taking physical possession through this route takes about 2-3 years minimum.

The other measure along with SARFAESI that bank exercises is filing suit in DRT or in civil court depending on the amount of dues. If the amount due is less than 10lcs, suit is filed in Civil Court. DRTs are specialized tribunals created to resolve NPA cases. Though these tribunals were supposed to act as a fast track courts, they have also fallen in the trap of endless loop of hearings. The normal case takes about 5-7 years to get resolved in DRT court. After resolution, the DRTs also take possession of the mortgaged properties and sell them in e-auction to realize the bank dues.

Now imagine all these years the bank is holding an asset, the advance or loan in its book which is not performing on one side and on the other it is showing an inflated profit. So Narsimhan committee of RBI structured these NPAs age-wise and told the banks to set aside certain amount of profit as Provision against these loans. The different stages in the life of an NPA are as under:-

On turning NPA, normal account is converted to Recalled Asset from Live Ledger. For the Recalled Asset account interest gets suspended. Interest is calculated separately and becomes due when some recovery comes in the account.

NPA - Interest not serviced for more than 90 days

Sub Standard – NPA from 0-1 year - Provision – 15%

Doubtful – 1 – NPA for 1-2 years – Provision - 25%

Doubtful – 2 – NPA for 2-4 years – Provision – 40%

Doubtful – 3 – NPA above 4 years – Provision – 100%

The provisioning or carving out profit is happening regularly over the life of an NPA and it reflects very badly on the management and all the possible measures are taken to avoid provisioning.

Let’s now look at all such accounts which have become D3 and have automatically been provided for. In the subsequent quarter all such balances are transferred to AUCA – Advance Under Collection Account, which only means bank appropriates the provision to reduce this from one basket and parks it under another type of account. AUCA accounts are off balance sheet items, but don’t forget that bank has sacrificed it profit to that extent.

Now understand what happens with this accounts after they are parked in AUCA. The bank never stops its recovery procedures irrespective of whether the account is in AUCA or otherwise, till the last rupee is recovered through SARFAESI/ DRT or some settlement is reached. All these accounts are periodically reviewed. Staff accountability is fixed and very strict action up to suspension is taken on careless bankers. More than 500 retired officers have been appointed by the bank to complete the Staff Accountability study.

Now the argument of people maligning the banks for this procedure are saying that public sector bank management is least bothered about the public money being wiped off. First off all this is not a new procedure as it is made out to be. The various newspaper reports seems to have played fast and loose with the truth about this and the possibility of political motivation cannot be ruled out. The payoff expected from this ‘write off’ campaign is quite obvious. However, this can have very detrimental effect on the morale of the people standing in the queues. They start mistrusting the bank employees which are actually helping the common man in the wake of the current crises.

Truth, they say is the best disinfectant. With advent of social media, access to information has reached unprecedented levels. Unfortunately, it has also made lot of rumor mongering more efficient from distribution view point. As someone working on ground zero on this war on defaults, I felt duty bound to clarify the facts.