11 Chapter 3

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PRIORITY SECTOR LENDING AND RECOVERY -AN

EYE OPENER

A c lear p ic tu re abou t the p r io r i ty sec to r l end ing and

recovery i s g iven in th i s chap te r .

“Though Ind ia has one of the o ldes t banking sec to rs

in the wor ld ye t the g rowth o f the sec to r has been very

lops ided .” 1

The main reason fo r such an imbalanced g rowth

was tha t the commerc ia l banks were in the hands o f the

p r iva te sec to r . As such , they p rov ided shor t - t e rm f inance to

t rade and indus t ry based on the secur i ty o f fe red by the

bor rowers . “Th is secur i ty -o r ien ted approach resu l ted in a

l a rge chunk o f bank c red i t be ing u t i l i sed on ly by b ig

indus t r ia l houses and t raders . Banks were unknown

ins t i tu t ions to smal l en t repreneurs , ag r icu l tu r i s t s , a r t i sans ,

t r anspor t opera to rs and a hos t o f peop le wi th smal l

means .”2

These v i ta l sec to rs , wh ich made the l a rges t

con t r ibu t ion to the Gross Nat iona l P roduc t [GNP] and

p rov ided the bu lk o f employment , were to ta l ly ignored by

the banking sec to r . Hence , a f te r independenc e , i t was fe l t

tha t in o rder to ach ieve ba lanced reg iona l g rowth in the

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coun t ry , i t i s es sen t ia l to deve lop these neg lec ted sec to rs ,

fo r which i t i s essen t i a l to channe l i se the necessary

f inanc ia l resources .

For a t t a in ing the goa l o f se l f - su f f ic iency and fo r

ensur ing sus ta ined economic g rowth , the Al l Ind ia Rura l

Cred i t Survey Commit tee in 1954 , recommended fo r the

deve lopment o f a S ta te sponsored commerc ia l bank ing

sys tem. “ I t was in th i s background tha t the S ta te Bank o f

Ind ia was fo rmed , which se t up m ore than 400 b ranches in

ru ra l a reas . Th is was fo l lowed by na t iona l iza t ion o f 14

banks in 1969 and soc ia l con t ro l over banks was

in t roduced .”3

The main ob jec t ive o f na t iona l iza t ion o f commerc ia l

banks was to p rov ide f inance to the h i ther to neg lec ted

sec to r s o f the economy l ike ag r icu l tu re , smal l - sca le

indus t r ies , smal l en t repreneurs , a r t i sans , e tc . As these

sec to rs r ece ived p r io r i ty in ava i l ing f inanc ia l as s i s tance ,

they were known as p r io r i ty sec to rs .

“The concep t o f p r io r i ty sec to r l end ing was evo lved

to ensure tha t ass i s tance f rom the bank ing sys tem f lowed in

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an increas ing measure to the v i ta l sec to rs o f the economy

and accord ing to na t iona l p r io r i t i es . The descr ip t ion o f the

p r io r i ty sec to rs was fo rmal ized in 1972 on the bas i s o f the

repor t submi t ted by the Info rmal S tudy Group on S ta t i s t i c s

re la t ing to advances to the p r io r i ty sec to r .”4 P r io r i ty

sec to rs inc lude agr icu l tu re [bo th d i rec t and ind i rec t ] , smal l

sca le indus t r ies , smal l road and wate r t ranspor t , smal l

bus iness , re ta i l t r ade , p ro fess iona l and s e l f -employed

persons , s ta te sponsored o rganisa t ions fo r schedu led

cas tes / schedu led t r ibes , educa t ion , hous ing [bo th d i rec t and

ind i rec t ] , consumpt ion loans , micro -c red i t , loans to so f t -

ware and food and agro -process ing sec to r .” 5

In i t i a l ly , the re were no ta rge t s f ixed on the p r io r i ty -

sec to r l end ing . I t was jus t emphas ized tha t commerc ia l

banks shou ld increase the i r invo lvement in the f inanc ing o f

p r io r i ty sec to rs . In November 1974 , pub l ic sec to r banks

were advised tha t the i r p r io r i ty sec to r l end ing shou ld reach

a l eve l o f no t l ess than one - th i rd o f the ou ts tand ing c red i t

by March 1979 . In November 1978 , the p r iva te sec to r banks

were a l so adv ised to l end a min imum of 33 1 /3 per cen t o f

the i r to ta l advances to the p r io r i ty sec to r by the end o f

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March 1980 . Subsequen t ly , the t a rge t was enhanced to 40

per cen t o f aggrega te advances . In ach iev ing th i s overa l l

t a rge t , sec t ions were a l so s t ipu la ted fo r the banks . At

p resen t , r espec t ive ly , o f the i r Net Bank Cred i t [NBC] to

the ag r icu l tu ra l sec to r and weaker sec t ions o f the soc ie ty ,

respec t ive ly . Fore ign banks opera t ing in Ind ia were a l so

adv ised to p rogress ive ly increase the i r advances to the

p r io r i ty sec to r to reach a l eve l o f 15 per cen t o f the i r ne t

bank c red i t by the end o f March 1992 . In Apr i l 1993 , th i s

ra t io was fu r ther ra i sed to 32 per cen t o f NBC to be

ach ieved by March 1994 . Wi th in the enhanced ta rge t o f 32

per cen t , two sub - ta rge t s o f 10 per cen t in respec t o f Smal l

Sca le indus t r ies and 12 per cen t fo r expor ts were f ixed . On

the bas i s o f the rev i sed gu ide l in es on lend ing to the

p r io r i ty sec to r , the p r io r i ty sec to r l end ing ta rge t / sub -

ta rge t s have now been l inked to ad jus ted ne t bank c red i t

[ANBC] o r c red i t equ iva len t amount o f o f f -ba lance shee t

exposures , whichever i s h igher , wi th e f fec t f rom Apr i l 30 ,

2007 .

Dur ing the in i t i a l pe r iod , on ly ag r icu l tu re , smal l -

sca le indus t r ies , sma l l and marg ina l fa rmers and a r t i sans

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and expor t s were inc luded in the pr io r i ty sec to r . La te r on ,

based on the recommendat ions o f the Naras imham

Commit tee Repor t , 1991 , hous ing , educa t ion , consumpt ion ,

p ro fess ion , I .T sec to r and food p rocess ing no t fa l l ing under

SSI were a l so inc luded under the ca tegory p r io r i ty sec to r .

In 1991 , the Naras imham Commit tee po in ted ou t many

p rob lems re la t ing to p r io r i ty sec to r l end ing , the mos t

impor tan t one be ing tha t a l a rge par t o f the non -per fo rming

asse t s come f rom pr io r i ty sec to r l end ing . Thus , the

commit tee recommended reduc t ion o f p r io r i ty sec to r t a rge t

to 10 per cen t and expans ion o f the coverage o f p r io r i ty

sec to r to inc lude more sec to rs . However , the t a rge t o f

p r io r i ty sec to r was no t reduced bu t the def in i t ion of

p r io r i ty was expanded to inc lude more sec to rs l ike

educa t ion , consumpt ion , p ro fess ion , I .T sec to r and food

p rocess ing no t fa l l ing under SSI . Also , a p rov is ion was

made such tha t , banks tha t cannot mee t the p r io r i ty sec to r

t a rge t s can depos i t funds in the f inanc ia l ins t i tu t ions l ike

Nat iona l Bank fo r Agr icu l tu re and Rura l Deve lopment

[NABARD] under Rura l In f ras t ruc tu re Deve lopment Fund

[RIDF] o r some banks can do so in the Smal l Indus t r ies

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Bank o f Ind ia [SIDBI] fo r l esse r in te res t ra tes , wh ich in

tu rn wi l l be l en t ou t to the p r io r i ty sec to rs .

The b road ca tegor ies o f p r io r i ty sec to r fo r a l l

schedu led commerc ia l banks a re as under :

[ i ] Agr icu l ture (Direct and Indirect F inance)

Direc t f inance to ag r icu l tu re inc ludes shor t med ium

and long te rm loans g iven fo r ag r icu l tu re and a l l i ed

ac t iv i t i e s d i rec t ly to ind iv idua l fa rmer s , se l f -he lp g roups

(SHGs) o r jo in t l i ab i l i ty g roups ( JLGs) o f ind iv idua l

fa rmers wi thou t l imi t and to o thers ( such as co rpor a te

par tnersh ip f i rms and ins t i tu t ions) up to Rs . 20 lakh fo r

t ak ing up agr icu l tu re a l l i ed ac t iv i t i es . Ind i rec t f inance to

ag r icu l tu re inc ludes loans g iven fo r ag r icu l tu re and a l l i ed

ac t iv i t i e s .

[ i i ] Smal l - sca le industr ies (Direct and Indirect F inance)

Direc t f inance to smal l sca le indus t r ies (SSIs )

inc ludes a l l loans g iven to SSI un i t s which a re engaged in

manufac tu re , p rocess ing o r p reserva t ion o f goods and

whose inves tmen t a re in p lan t and mach inery (o r ig ina l

cos t ) exc lud ing land and bu i ld ing .

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[a ] Smal l Sca le Industr ies

Smal l - sca le indus t r ies a re u n i t s engaged in the

manufac tu re , p rocess ing o r p reserva t ion o f goods and

whose inves tmen t in p lan t and mach inery (o r ig ina l cos t )

exc lud ing land and bu i ld ing does no t exceed Rs . 5 c ro re .

[b] Micro Enterpr ises

Smal l sca le un i t s whose inves tmen t in p lan t and

mach inery (o r ig ina l cos t ) exc lud ing land and bu i ld ing i s up

to Rs . 25 lakh , i r respec t ive o f the loca t ion o f the un i t , a re

t rea ted as Micro En te rp r i ses .

[ c ] KVI Sector

All advances g ran ted to un i t s in the KVI s ec to r ,

i r respec t ive o f the i r s ize o f opera t ions , loca t ion and

amount o f o r ig ina l inves tmen t in p lan t and mach inery come

under the ca tegory smal l - sca le sec to r . Such advances wi l l

be e l ig ib le fo r cons idera t ion under the sub - ta rge t (60 per

cen t ) o f the SSI se gment wi th in the p r io r i ty sec to r .

Indirect f inance

Ind i rec t f inance in the smal l - sca le indus t r ia l sec to r

wi l l inc lude c red i t to :

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[a ] Persons invo lved in ass i s t ing the decent ra l i sed sec to r in

the supp ly o f inpu ts to and marke t ing o f ou tpu ts o f

a r t i sans , v i l l age and co t tage indus t r ies .

[b] Advances to coopera t ives o f p roducers in the

decen t ra l i sed sec to r v iz . a r t i sans v i l l age and co t tage

indus t r ies .

[c ] Subscr ip t ion to bonds i s sued by NABARD wi th the

ob jec t ive o f f inanc ing exc lus ive ly non- fa rm sec to r (no t

e l ig ib le fo r c las s i f i ca t ion under p r io r i ty sec to r l end ing

wi th e f fec t f rom Apr i l 1 , 2007) .

[d] Loans g ran ted by banks to NBFCs fo r on lend ing to SSI

sec to r .

[ i i i ] Smal l bus iness / serv ice enterpr ises

I t inc ludes smal l bus iness , re ta i l t r ade , p ro fess iona l

and se l f -employed persons , smal l road and wate r t r anspor t

opera to rs and o ther en te rp r i ses .

[a ] Smal l Bus iness

Smal l bus iness would inc lude ind iv idua ls and f i rms

manag ing a bus iness en te rp r i se es tab l i shed main ly for

p rov id ing any se rv ice o ther than p ro fess iona l se rv ices

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whose or ig ina l cos t p r ice o f the equ ipment used fo r the

bus iness does no t exceed Rs .20 lakh .

[b ] Reta i l Trade

Advances g ran ted to re ta i l t r aders dea l ing in essen t ia l

commodi t ies ( fa i r p r ice shops) , consumer co -opera t ive

s to res and p r iva te re ta i l t r aders wi th cred i t l imi t s no t

exceed ing Rs .10 lakh .

[ c ] Profess iona l & Se l f -employed Persons

Loans to p ro fess iona l and se l f -employed persons

inc lude loans for the purpose o f purchas ing equ ipment ,

repa i r ing o r renova t ing ex i s t ing equ ipment and /o r

acqu i r ing and repa i r ing bus iness p remises o r fo r purchas ing

too ls and /o r fo r work ing cap i ta l requ i rements to med ica l

p rac t i t ioners inc lud ing den t i s t s , char te red accoun tan ts , cos t

accoun tan ts , p rac t ic ing company secre ta ry , l awyers o r

so l ic i to rs , eng ineers , a rch i tec t s , su rveyors , cons t ruc t ion

con t rac to rs o r management consu l tan t s come under the

ca tegory p r io r i ty sec to r loans .

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[d] Smal l Road and Water Transport Operators

(SRWTO)

Advances to smal l road and wate r t ranspor t opera tors

owning a f l ee t o f veh ic les no t exceed ing ten veh ic les ,

inc lud ing the one p roposed to be f inanced cons t i tu tes

p r io r i ty sec to r loans . Loans advanced by commerc ia l banks

to NBFCs fo r the purpose o f p rov id ing f inance to t ruck

opera to rs and SRWTOs o ther than t ruck opera to rs

sa t i s fy ing the e l ig ib i l i ty c r i t e r ia i s a l so inc luded under the

ca tegory p r io r i ty sec to r loans .

[ iv ] Micro cred i t

Prov is ion o f c red i t and o ther f inanc ia l se rv ices and

p roduc ts o f very smal l amounts no t exceed ing Rs . 50 ,000

per bor rower to the poor in ru ra l , semi -u rban and u rb an

a reas , e i ther d i rec t ly o r th rough a g roup mechan ism, fo r

enab l ing them to improve the i r l iv ing s tandards , cons t i tu tes

micro c red i t .

[v ] Educat ion loans

Educa t ion loans inc lude loans and advances g ran ted

to ind iv idua ls fo r educa t iona l purpose , up to Rs . 10 lakh

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fo r s tud ies in Ind ia and Rs . 20 lakh fo r s tud ies ab road and

th i s does no t inc lude those g ran ted schola rsh ip by the

ins t i tu t ions .

[v i ] Hous ing loans

Loans up to Rs . 15 lakh p rov ided fo r cons t ruc t ion o f

houses by ind iv idua ls , ( exc lud ing loans g ran ted by banks to

the i r own employees) and loans g iven for repa i r s to the

damaged houses o f ind iv idua ls up to Rs . 1 l akh in ru ra l and

semi -u rban a reas and up to Rs . 2 l akh in u rban a reas

cons t i tu te p r io r i ty sec to r loans .

[v i i ] Sta te sponsored organizat ion for scheduled

castes / scheduled tr ibes

Advances sanc t ioned to S ta te Sponsored

Organ isa t ions fo r Schedu led Cas tes /Scheduled Tr ibes fo r

the spec i f ic purpose o f purchase and supp ly o f inpu ts to

and /o r the marke t ing o f the ou tpu ts o f the benef ic ia r ies o f

these o rgan iza t ions cons t i tu te p r io r i ty sec to r loans .

[v i i i ] Consumpt ion Loans

Pure consumpt ion loans g ran ted to the weaker

sec t ions o f the communi ty under the Consumpt ion Cred i t

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Scheme shou ld be inc luded in th i s i t em. These inc lude

loans f inanc ia l as s i s tance p rov ide d to NGOs and Sel f he lp

g roups .

[ ix ] Food and Agro -based Process ing Sector

Food and agro based process ing sec to r would be

e l ig ib le fo r c lass i f i ca t ion as p r io r i ty sec to r loans by banks

l ike f ru i t and vege tab le p rocess ing indus t ry , food g ra in

mi l l ing indus t ry , da i ry p roduc ts , p rocess ing o f pou l t ry and

eggs , mea t p roduc ts , f i sh p rocess ing , b read , o i l seeds , mea l s

(ed ib le ) , b reakfas t foods , b i scu i t s , confec t ionery ( inc lud ing

cocoa process ing and choco la te ) , mal t ex t rac t , p ro te in

i so la te , h igh p ro te in food , wean i ng food and ex t ruded /o ther

ready to ea t food p roducts , ae ra ted wate r / so f t d r inks and

o ther p rocessed foods , spec ia l Packag ing for food

p rocess ing indus t r ies and techn ica l ass i s t ance and adv ice to

food p rocess ing indus t ry . Wi th regard to the s ize o f the

un i t s wi th in th i s sec to r , i t i s c la r i f i ed tha t food and agro -

based p rocess ing un i t s o f smal l and medium s ize wi th

inves tmen t in p lan t and mach inery up to Rs .5 c ro re would

be inc luded under p r io r i ty sec to r l end ing .

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[x ] Sof tware Industry

Loans to so f tware ind us t ry wi th c red i t l imi t up to

Rs .1 c rore f rom the bank ing indus t ry i s ca tegor i sed as

p r io r i ty sec to r loans .

[x i ] Venture Capi ta l

Inves tmen t in Ven tu re Cap i ta l wi l l be e l ig ib le fo r

inc lus ion in p r io r i ty sec to r , sub jec t to the cond i t ion tha t

the ven tu re cap i ta l funds / compan ies a re reg i s te red wi th

SEBI . However , f resh inves tmen ts tha t may be made by

banks on o r a f te r Ju ly 1 , 2005 sha l l no t be e l ig ib le fo r

c lass i f i ca t ion under p r io r i ty sec to r l end ing and the

inves tmen ts , wh ich have a l ready been made by banks up to

June 30 , 2005 sha l l no t be e l ig ib le fo r c lass i f i ca t ion under

p r io r i ty sec to r l end ing wi th e f fec t f rom Apr i l 1 , 2006 .

[x i i ] Leas ing and Hire purchase

Para -bank ing ac t iv i t i es such as l eas ing and h i re

purchase f inanc ing under taken depar tmen ta l ly by banks

wi l l be c lass i f i ed as p r io r i ty sec to r advances , p rov ided the

u l t imate benef ic ia ry sa t i s f i es the c r i t e r ia l a id down by RBI

fo r t rea t ing such advances as advances to p r io r i ty sec to r

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[x i i i ] Loans to urban poor indebted to non inst i tut iona l

Lenders

Loans to d i s t ressed u rban poor to p repay the i r deb t to

l enders in the in fo rmal sec to r would be e l ig ib le fo r

c lass i f i ca t ion under p r io r i ty sec to r . Urban poor fo r th i s

purpose may inc lude those fami l i e s in the u rban a reas who

a re be low the pover ty l ine . Such loans t o u rban poor may

be c lass i f i ed under weaker sec t ions wi th in the p r io r i ty

sec to r .

[x iv ] Weaker Sect ions

In o rder to ensure tha t more under -p r iv i leged sec t ions

in the pr io r i ty sec to r a re g iven p roper a t t en t ion in the

mat te r o f a l loca t ion o f c red i t , i t shou ld be ensured tha t the

advances to weaker sec t ions reach a l eve l o f 25 per cen t o f

p r io r i ty sec to r advances o r 10 per cen t o f ne t bank c red i t .

The weaker sec t ions under p r io r i ty sec to r sha l l inc lude the

fo l lowing :

(a ) Smal l and marg ina l fa rmers wi th l and ho ld ing o f 5

ac res and less and land less l abours , t enan t fa rmers and

share c roppers

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(b ) Ar t i sans , v i l l age and co t tage indus t r ies where

ind iv idua l c red i t l imi t s do no t exceed Rs .50 ,000 / - ,

( c ) Benef ic ia r ie s o f Swarn jayan th i Gram Swaro jgar Yojana

(SGSY) ,

(d ) Schedu led Cas tes and Schedu led Tr ibes ,

(e ) Benef ic ia r ie s o f Di f fe ren t ia l Ra te o f In te res t (DRI)

Scheme,

( f ) Benef ic ia r ie s under Swarna Jayan t i Shahar i Ro jgar

Yojana (SJSRY) ,

(g ) Benef ic ia r i e s under the Scheme for L ibera t ion and

Rehab i l i t a t ion o f Scavangers (S LRS) ,

(h ) Advances to Se l f Help Groups ,

( i ) Loans to d i s t ressed urban poor to p repay the i r deb t to

non- ins t i tu t iona l l enders aga ins t appropr ia te co l la te ra l o r

g roup secur i ty , sub jec t to the gu ide l ines to be approved by

the i r Boards o f Di rec to rs

( i ) Loans to d is t ressed u rban / ru ra l p oor to p repay the i r

deb t to non- ins t i tu t iona l l enders , aga ins t appropr ia te

co l la te ra l o r g roup secur i ty .

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[xv] Export Credi t

This ca tegory wi l l fo rm par t o f p r io r i ty sec to r fo r

fo re ign banks on ly .

Commercia l banks a t ta in ing target s by invest ing in

spec ia l bonds

As per the recommendat ions o f the Naras imham

Commit tee repor t , the commerc ia l banks can fu l f i l the i r

t a rge t s by making inves tmen ts in spec ia l bonds i s sued by

spec i f ied ins t i tu t ions as a par t o f p r io r i ty sec to r advances

sub jec t to the fo l lowing cond i t ions :

[ i ] S ta te F inancia l Corporat ions (SFCs) /Sta te Industr ia l

Deve lopment Corporat ions (SIDCs)

The commerc ia l banks can s ubscr ibe to bonds

exc lus ive ly f loa ted by SFCs and SIDCs fo r f inanc ing SSI

un i t s and th i s wi l l be e l ig ib le to be inc luded under p r io r i ty

sec to r as ind i rec t f inance to SSI .

[ i i ] Rura l Electr i f i ca t ion Corporat ion (REC)

Subscr ip t ion to spec ia l bonds i s sued by REC

exc lus ive ly fo r f inanc ing pump -se t energ i sa t ion p rogramme

in ru ra l and semi -u rban areas and the Sys tem Improvement

P rogramme under i t s Spec ia l P ro jec t s Agr icu l tu re (SI -SPA)

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wil l be e l ig ib le fo r inc lus ion under p r io r i ty sec to r l end ing

as ind i rec t f inance to ag r icu l tu re .

[ i i i ] NABARD

The banks can subscr ibe to bonds i s sued by NABARD

wi th the ob jec t ive o f f in anc ing exc lus ive ly

ag r icu l tu re /a l l i ed ac t iv i t i e s and the non - fa rm sec to r wi l l be

e l ig ib le fo r be ing inc luded under the p r io r i ty sec to r as

ind i rec t f inance to ag r icu l tu re / SSI , as the case may be .

[ iv ] Smal l Industr ies Deve lopment Bank of India

(SIDBI)

Commerc ia l banks can s ubscr ibe to bonds exc lus ive ly

f loa ted by SIDBI fo r f inanc ing of SSI un i t s and wi l l be

e l ig ib le to be inc luded under p r io r i ty sec to r as ind i rec t

f inance to SSIs .

[v ] The Nat iona l Smal l Industr ies Corporat ion Ltd .

(NSIC)

Subscr ip t ion to bo nds i s sued by NSIC exc lus ive ly fo r

f inanc ing o f SSI un i t s wi l l be e l ig ib le fo r inc lus ion under

p r io r i ty sec to r as ind i rec t f inance to SSIs .

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[v i ] Nat iona l Hous ing Bank (NHB)

Subscr ip t ion to bonds i s sued by NHB exclus ive ly fo r

f inanc ing o f hous ing , i r respec t ive o f the loan s ize per

dwel l ing un i t , w i l l be e l ig ib le fo r inc lus ion under p r io r i ty

sec to r advances as ind i rec t hous ing f inance .

[v i i ] Hous ing and Urban Deve lopment Corporat ion

(HUDCO)

Subscr ip t ion to bonds i s sued by HUDCO exc lus ive ly

fo r f inanc ing o f ho us ing , i r respec t ive o f the loan s ize pe r

dwel l ing un i t , w i l l be e l ig ib le fo r inc lus ion under p r io r i ty

sec to r advances as ind i rec t hous ing f inance . Inves tmen t in

spec ia l bonds i s sued by HUDCO for p rov id ing f inance to

a r t i sans , hand loom weavers , e t c . under t iny sec tor wi l l be

c lass i f i ed as ind i rec t l end ing to SSI (T iny) sec to r .

Recovery o f Pr ior i ty sector loans by commercia l banks

The two p r imary func t ions o f commerc ia l banks a re to

accep t depos i t s f rom the pub l ic and lend money to the

bor rowers . The depos i t s a re to be repa id on the due da tes

o r on demand depending on the na tu re o f depos i t s .

L ikewise , the money len t shou ld be repa id on the due da tes

206

or on demand depend ing on the na tu re o f advances . In the

p re -na t iona l i sa t ion per iod , tha t too befo re 1969 , rec overy

o f loans was no t much a prob lem fo r the bankers . Th is was

because the t rad i t iona l bankers were conserva t ive in the i r

approach and they knew the i r cus tomers persona l ly .

However , recovery o f loans dur ing the pos t -na t iona l i sa t ion

per iod has no t been smo oth fo r the commerc ia l bankers

espec ia l ly due to p r io r i ty sec to r l end ing . Th is i s because

p r io r i ty sec to r loans a re g ran ted to bor rowers of smal l

means who a re no t usua l ly in a pos i t ion to o f fe r adequa te

secur i ty to the bankers .

“The success o f any Gover nment sponsored scheme

shou ld be measured no t by 100 per cen t d i sbursa l bu t by

100 per cen t recovery . The mot to o f 100 per cen t recovery

i s mean t fo r bankers , Government se rvan ts and the

bor rowers as wel l . In case o f p r io r i ty sec to r l end ing too ,

100 per cen t recovery i s a mus t . I t shou ld no t be

miscons t rued as a p ressu r iz ing ac t to demand 100 per cen t

recovery fo r even p r io r i ty sec to r advances . P r io r i ty i s fo r

g iv ing the loans and no t fo r exempt ing them f rom

recovery .”6 Th is chap te r th rows an ins igh t in to t he

207

var ious a l t e rna t ives ava i lab le to the banker fo r the

recovery o f loans advanced by h im. I t h igh l igh ts the

fo l lowing i s sues :

[ i ] impor tance o f recovery o f loans .

[ i i ] f ac to rs con t r ibu t ing to poor recovery .

[ i i i ] s t eps in recovery o f loans .

[ iv ] sugges t io ns fo r improv ing recovery o f loans .

Importance o f recovery of loans

The impor tance o f recovery o f loans need no t be over -

emphas i sed . There i s a genera l say ing tha t in a bank , any

person can g ran t advances bu t on ly a wise person can

recover the loans . Fo l lowing a re some o f the reasons for

the impor tance accorded to recovery o f loans :

[ i ] Non- recovery o f loans e rode p ro f i t ab i l i ty o f l end ing

banks .

[ i i ] The funds , which have been prov ided as loan , canno t

be recyc led and to tha t ex ten t , the more deserv ing

cus tomers wi l l be depr ived o f bank c red i t .

208

[ i i i ] A bank saddled wi th huge overdue loans por t fo l io wi l l

su f fe r in i t s image a nd may lose pub l ic conf idence .

[ iv ] A loan , which has been cons idered as bad , when

recovered increases the p ro f i t ab i l i ty o f the bank .

[v ] Overdue advances resu l t s in a lo t o f co r respondence

and paper work . A good recovery percen tage wi l l avo id th i s

was tage o f t ime and energy .

[v i ] A good recovery percen tage qua l i f i es the b ranch fo r a

be t te r inspec t ion ra t ing .

Factors contr ibut ing to poor recovery o f loans

Innumerab le fac to rs con t r ibu te to the poor recovery

o f loans by banks . [See Diagram No.3 . 1 ]

209

All these fac to rs can be b road ly c lass i f i ed as fo l lows:

[ i ] Borrower -or iented: The fo l lowing fac to r s resu l t in

non- recovery o f loans and these fac to rs a re bor rower

o r ien ted :

[a ] Poor generat ion o f revenue: The inab i l i ty o f the

bor rower to e f fec t payment o f dues due to poor cash

genera t ion and /o r fa i lu re o f the p ro jec t , be i t i ndus t ry ,

t r ade o r ag r icu l tu re , resu l t ing f rom in f luence o f ex te rna l o r

in te rna l fac to rs .

[b] Unwi l l ingness o f the borrower: The bor rower may no t

be wi l l ing to repay the loans because o f d ivers ion o f funds

bor rowed to o ther avenues o f inves tmen t .

[c ] Wi l fu l defaul t : The bor rower , fo r no va l id reason , may

no t be wi l l i ng to repay the loans in sp i te o f hav ing

su f f ic ien t funds a t h i s d i sposa l .

[d] Po l i t i ca l in f luence: The bor rower may be po l i t i ca l ly

in f luenced no t to repay the loans in the expec ta t ion o f

waiver o f loans , which o f ten takes p lace in case o f

ag r icu l tu ra l lo ans .

210

[e ] Misut i l i sa t ion o f funds borrowed: The bor rowers wi th

a fa l se op t imism of ea rn ing s izab le sum ou t o f an

in te rmedia te inves tmen t , may mis u t i l i se the bor rowed sum

and d iver t the loan p roceeds . When the loan bor rowed i s

no t u l t imate ly u t i l i sed fo r the concerned p ro jec t , the

bor rowers f ind i t d i f f i cu l t to repay , espec ia l ly when the i r

es t imat ion o f y ie ld f rom a l te rna te source fa i l s .

[ f ] Lack o f in teres t : The borrower may no t have any

persona l in te res t in the p ro jec t fo r which the loan i s

bor rowed .

[g ] Other personal reasons: The bor rowers may no t repay

the loan p roper ly because o f g ross neg l igence and def ian t

l ine o f the th ink ing , ques t ionab le charac te r o f bor rowers ,

l ack o f exper t i se and the burden o f main ta in ing the se l f and

the fami ly .

[ i i ] Banker -or iented: The bankers , on the i r par t should

d i scharge the i r ob l iga t ions p roper ly fa i l ing which i t r esu l t s

in non- recovery o f loans . The be low -ment ioned fac to rs

con t r ibu te to poor recovery o f loans :

211

[a ] Lack o f fo l low -up by banks: Af te r p rov id ing the loans ,

i t i s the du ty o f the bankers to fo l low -up a t per iod ica l

in te rva l s and a t t imes o f d i f f i cu l ty fo r the bor rowers , l end

a he lp ing hand to so lve the i r p rob lems .

[b] Inadequate project appra isa l by banks: The banks

a t t empt ha l f -hear ted ly in the mat t e r o f app ra i s ing a p ro jec t ,

be i t ag r icu l tu re o r indus t ry lead ing to sub -s tandard

lend ing . The p ro jec t becomes improper ly implemented and

insuf f ic ien t f inance ends in to ta l fa i lu re o f the p ro jec t .

Poor o r inadequate appra i sa l o f the p ro jec t regard ing the

f inanc ia l feas ib i l i ty , t echn ica l feas ib i l i ty and economic

v iab i l i ty resu l t s in non - recovery of loans .

[c ] Under- f inancing: The bankers have to p rov ide loans in

accordance wi th the f inanc ia l requ i rements o f the

bor rowers . I f the bankers reso r t to under - f inanc ing , th e

bor rowers may bor row the ba lance amount f rom ou ts ide

sources a t exorb i tan t ra te o f in te res t . Th is may be ano ther

reason fo r non - recovery o f loans .

[d] Unrea l i s t ic repayment schedules : The bankers , be fo re ,

dec id ing the repayment schedu les fo r the bor rowe rs shou ld

212

make an in dep th s tudy abou t the bor rowers ’ repayment

capac i ty . I f the repayment schedu les a re unrea l i s t i c ,

r ecovery o f loans becomes d i f f i cu l t fo r the bor rower s .

[e ] Delayed in i t ia t ion o f recovery measures: The banker

shou ld take immedia te reme dia l ac t ion once he no t ices any

warn ing s igna l s . I f the re i s any de lay in in i t i a t ing the

recovery measures , i t w i l l r esu l t in non - recovery o f loans .

[ f ] Other factors: Apar t f rom these fac to rs , f ac to rs l ike

hand l ing la rge number o f advances , poor s ta f f in vo lvement

and o ther cons t ra in t s and ind isc ree t l end ing under

Government schemes a l so con t r ibu te to poor recovery o f

loans .

[ i i i ] Project -or iented: Non- recovery o f loans may be

because o f the p ro jec t chosen by the bor rower . The

fo l lowing fac to rs con t r ibu te to poor recovery o f loans :

[a ] Project fa i lure: When a p ro jec t i s no t su i tab le to

Ind ian cond i t ions , the p ro jec t f a i l s . Fa i lu re o f p ro jec t

resu l t s in non - recovery of loans .

213

[b] Technica l ly unv iable : I f a p ro jec t i s no t t echn ica l ly

v iab le , i t w i l l be a to ta l fa i lu re . Th is cont r ibu tes to poor

recovery o f loans .

[c ] Lack o f exper ience in market ing: Many o f the

p roduc ts fa i l no t because o f sub -s tandard qua l i ty bu t

because o f inexper ience o f the manufac tu re r /bor rower in

marke t ing the p roduc ts . I f the bor rower i s ine f f ic ien t in

marke t ing the p roduc t he p roduces , he wi l l be unab le to

repay h i s dues .

[d] Severe compet i t ion: I f the bor rower i s unab le to face

severe compet i t ion , he wi l l no t be ab le to repay h i s loans .

[e ] Other factors: P rob lems l ike e ros ion o f i nven to r ies and

secur i t i e s , accumula ted losses , wrong se lec t ion of

p roduc ts , ex te rna l fac to rs beyond the con t ro l o f the

bor rowers and subs tandard p roduc ts a re o ther fac to rs

con t r ibu t ing to poor recovery .

[ iv ] Government -or iented: Government i s a l so respons ib le

fo r non -recovery o f loans . The under -ment ioned fac to rs

con t r ibu te to poor recovery o f loans :

214

[a ] Target approach: The Government f ixes ce r ta in t a rge t s

to be a t t a ined by the bankers which the bankers a t t a in

wi thou t mak ing p roper appra i sa l o f loans . Th i s resu l t s in

non- recovery o f loans .

[b] Waiver o f loans: The Government , in o rder to c rea te a

good image abou t i t s par ty , wa ives the loans bor rowed .

Th is resu l t s in non - recovery o f loans .

Steps in Recovery o f loans

“Recovery o f loans , tha t too a t the r i gh t t ime , p lays

a v i ta l ro le in c red i t management as i t s t reng thens the

resource pos i t ion th rough recyc l ing o f funds and exerc i ses

favourab le impac ts on the cos t o f funds and p ro f i t ab i l i ty .

Recovery o f the loans g ran ted has , the re fo re , to be

managed e f fec t ive ly so as to ensure con t inuous f low of

c red i t , w i thou t which banks l iqu id i ty would be in jeopardy

as a l so p roduc t ion cyc les , income genera t ion , employmen t

oppor tun i t i es e tc . wou ld be adverse ly a f fec ted .” 7

There a re th ree s teps , the bankers used to fo l low in

o rder to recover the loans advanced . These s teps a re

dep ic ted in Diagram No.3 .2 :

215

[ i ] Persuas ion: Persuas ion i s the f i r s t s t ep in the p rocess

o f recovery . The reca lc i t ran t borrowers a re persuaded by

the bankers to repay the loan amount . Th is i s done by

means o f send ing p r oper no t ices to the bor rowers . I f the

bor rowers ignore no t ices , reg i s te red no t ices a re sen t to the

bor rowers . S t i l l , i f the re i s no rep ly f rom the borrowers ,

the nex t s tep i s to con tac t the bor rowers persona l ly o r over

phone . Af te r th i s , the banker con tac t s the bor rowers

in fo rmal ly wi th the e l i t e o f the p lace o f the defau l t ing

bor rowers to c rea te psycho log ica l p ressu res . Nex t , the

banker t r i es to conv ince the bor rower to ob ta in a new loan

as aga ins t fu l l r epayment o f the ex i s t ing loan , which i s

overdue over a per iod o f t ime .

[ i i ] Negot ia t ion: “The lend ing banker adop ts the nex t s tep

i f pe rsuas ion fa i l s to evoke the des i red resu l t . Bo th the

l end ing banker and bor rower have to make cer ta in

sac r i f i ces in the i r mutua l in te res t . The banker may have to

accep t rev i s ion in the repayment schedu le , in te res t

concess ions and marg in reduc t ion and waivers . Al l these

can be nego t ia ted ac ross the t ab le .

216

[ i i i ] L i t igat ion: The las t reso r t fo r the l end ing banker to

e f fec t recovery i s to in i t i a te l ega l ac t ions by f i l ing c iv i l

su i t s in the cour t o f law. ” 8

“Such a s tep i s t aken

par t i cu la r ly wi th incor r ig ib le bor rowers wi th whom a l l the

o ther t echn iques o f recovery a re exhaus ted . When i t i s

conf i rmed tha t recovery i s imposs ib le , su i t may be f i l ed

af te r consu l t ing the bank’s appr opr ia te au thor i ty and the

l ega l adv ise r because each case needs a separa te t rea tmen t .

The p rocedure fo l lowed may d i f fe r f rom bank to bank

bu t genera l gu ide l ines a re g iven be low:

[a ] P repare the case h i s to ry .

[b ] Ex t rac t the ba lances f rom the ledgers and p repare a

s ta tement o f accoun t .

[ c ] See tha t a l l documents a re in o rder .

[d ] Dec ide upon the l imi ta t ion per iod , i . e . whe ther

documents a re no t t ime bar red .

[ e ] Consu l t the l ega l adv ise r a f te r hav ing ob ta ined

permiss ion f rom the appropr ia te au thor i ty o f the bank .

[ f ] Serve lega l no t ice on the bor rower .

217

[g ] F i le a su i t in the cour t th rough the l ega l adv ise r .

[h ] F i le c la im wi th the DI and CGCI . ”9

Legal measures adopted by commercia l banks

“ Ind ian banks su f fe r f rom la rge deb t a r rea rs , wh ich

adverse ly a f fec t the i r cu r ren t cash f low pos i t ion and reduce

p ro f i t s .”1 0

[ i ] Establ i shment o f Debt Recovery Tribunals [DRTs]

To recover bad deb ts , a new Act known as , the

‘Recovery o f Debts due to banks and f inanc ia l ins t i tu t ions

Act , 1993’ has been passed to se t up Deb t R ecovery

Tr ibuna ls . Such t r ibunals have been se t up a t ma jo r

cen t res .” 1 1

For recovery o f deb ts o f Rs .10 lakhs and above , banks

can approach DRTs under the Recovery o f Deb ts to Banks

and F inanc ia l Ins t i tu t ions Act , 1993 . For recovery o f

advances , 75 per cen t o f the deb t in d i spu te i s depos i ted .

Deb t Recovery Appel la te Tr ibuna l en te r ta ins no appea l

aga ins t DRT’s order .

218

[ i i ] The Secur i t i sa t ion and Reconstruct ion o f F inancia l

Assets and Enforcement o f Secur i ty Interes t

[SARFAESI]

Banks have adop ted mul t i -p ronged s t ra teg ies to b r ing

down the vo lume o f bad loans . These in te ra l ia inc lude

aggress ive p rovis ion ing , Corpora te Debt Res t ruc tu r ing

[CDR], wr i te -o f f s and recover ies . The SARFAESI Act ,

2002 enab led banks to qu icken recovery p rocess by d i rec t ly

a t t ach ing asse t s o f defau l te r s .

The Act empowers c red i to rs to i s sue no t ices to the

defau l t ing bor rowers /guaran to rs under Sec 13 [2 ] ca l l ing

upon them to d i scharge the i r l i ab i l i t i e s in fu l l on fa i lu re to

d i scharge the dues , the secured cred i to rs can take recourse

to one o r more o f the measures under Sec 13 [4 ] .

The Lok Sabha c lea red the en fo rcement o f Secur i ty

In te res t and Recovery o f Deb ts Laws [Amendment ] B i l l to

a rm banks to recover dues f rom defau l t ing bor rowers on

December 7 , 2004 .

219

[ i i i ] Set t ing up o f Asset R econstruct ion Companies

[ARCs]

“SARFAESI Act enab les to se t up ARCs under the

Companies Act , 1956 . Of the th ree p roposed ARCs, one

ARC of Ind ia L td [ACRIL] i s a l ready func t ion ing . NPAs o f

the banks can be t ransfe r red to ARCs a t a p r ice fo r fu r ther

recovery by them. I t i s expec ted tha t the p rocess o f p r ice

de te rmina t ion o f NPAS would be more t ransparen t . ”1 2

“The leg i s la t ion p rovides for se t t ing up Asse t

Recons t ruc t ion Companies , which wi l l t ake possess ion o f

secured asse t s o f the bor rowers . They wi l l have t he r igh t to

l ease ou t , se l l and rea l i se the secured asse t s o f the

bor rowers and take over the mana gement o f the

bor rower .”1 3

[ iv ] Set t ing up Nat iona l Company Laws Tribunal

[NCLT]

By amending the Companies Act , NCLT has been se t

up to look a f te r res t ruc tu r ing o f advances . NCLT wi l l

r ep lace Board o f Indus t r ia l and F inanc ia l Recons t ruc t ion

220

[BIFR] , which was look ing a f te r res t ruc tu r ing o f advances

fo r s ick compan ies under S ICA.

221

References

1. Jyotsna Sethi and Nishwan Bhatia, Elements of Banking and Insurance,

PHI Learning Private Limited, New Delhi-1, 2008, p.83.

2. Agarwal, H.C., Banking Law and Practice, Swan Publications, Agra-4,

2006, pp.369-370.

3. ibid, p.83.

4. Report on Trend and Progress of Banking in India, 2006-07, p.72.

5. Report on Trend and Progress of Banking in India, 2005-06.

6. Kallapiran, T.R., Slogan for the Decade:100 per cent recovery, Indian

Overseas Bank Monthly News Review, Vol.IV, No.8, August, 1990.

7. ibid, p.271.

8. ibid, p.274.

9. Ajit Singh, Rural Development and banking in India-Theory and practice,

Deep and Deep Publications, New Delhi-27, pp. 365-378.

10. Jhingan, M.L., Monetary Economics, Vrinda Publications [P] Ltd.,

Delhi-91, 2004, pp. 669-672.

11. ibid, 669-672.

12. Janardhan G.Naik, NPAs Management Challenges before banking

sector, The Management Accountant, Vol.41, No.5, May 2006, pp.355-360.

13. Rajendra Singh, Improving Recovery Climate of banks’ dues through

SARFAESI Act, 2002, Professional Banker, December 2005, The ICFAI,

pp.48-52.

D iagram No.3 .1

FACTORS CONTRIBUTING TO POOR RECOVERY

S o u r c e : P a r t h o P r a t i m R o y , M a n a g e m e n t o f U r b a n C o o p e r a t i v e

B a n k s , H i m a l a y a P u b l i s h i n g h o u s e , M u m b a i - 4 , 2 0 0 1 , p . 2 7 2 .

Borrower oriented

Project oriented

Banker oriented

D iagram No.3 .2

STEPS IN THE RECOVERY PROCESS

Source: Par tho Pra t im Roy , Management o f Urban

Coopera t ive Banks , Himalaya Pub l i sh ing house , Mumbai -4 ,

2001 , p .273 .

PERSUASION

BANKER BORROWER

NEGOTIATION

BANKER BORROWER

LITIGATION

BANKER BORROWER

67

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68

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69

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70

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