Earlier, they were termed simply as bad loans. Today, they are termed as non-performing assets (NPA). To recover a bad loan, banks had to take recourse under the Transfer of Properties Act, 1882 (TPA). Today banks can take recourse under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act).

Under TPA, banks could seize a borrower's assets only after obtaining a court order, which has now changed under the Securitisation Act. Keeping in mind that the TPA was enacted in the year 1882 as also our long drawn out legal procedures, a period of ten to fifteen years would elapse before a bank could take possession of the borrower's assets. By that time, the assets would have decayed and the bank would hardly fetch any value for them. And if the consequent legal and administrative expenses are added, the bank could well have ended up showing higher losses than it showed at the time action for recovery under TPA was taken.

It is precisely to rectify this malady that the Securitisation Act was enacted. However, whether this Act will help reducing NPAs to the desired levels and within a desired timeline could still remain a rupee hundred thousand plus crore question.

A bank classifies a loan as an NPA when interest on the loan or the principal or both are not being serviced. As the nomenclature suggests, when that happens the loan or asset becomes non- performing. To illustrate, let us imagine that a bank has an asset worth Rs 10 lakhs lent to a borrower at an interest rate of 15 per cent that has to be repaid in equal instalments in 5 years. This means that the bank expects to receive Rs 2.98 lakh every year. The bank can now deploy the Rs 2.98 lakh received every year to create fresh assets, thereby giving further impetus to the economy. And if this amount is not paid, the asset becomes non-performing, which hinders economic activity since fresh assets cannot be created. Further, the bank's capital base gets eroded. If this continues, the bank will have to close shop one day.

According to the figures available from the balance sheets of the banks and financial institutions (FIs), the total NPAs in the banking system stand at rupees one hundred thousand crore today. An alarming figure, which is made more alarming by the following rider: Bankers of all hues window dress their balance sheets. Therefore the chances that the actual NPA level is more than rupees hundred thousand crore are real.

A look at the NPA profile adds further gloom to the feel alarm factor. One can assume that a vast majority of the NPAs rest in the balance sheets of public sector banks (PSU) and co-operative banks. PSUs have to compulsorily lend 40 per cent and co-operative banks 60 per cent of their total loans to the priority sector. The priority sector consists of agriculture, small business finance and small-scale industry. These loans are hardly backed by any security. So what can you securitise under the Securitisation Act when there is no security?

The fates of private banks and foreign banks are, to some extent, similar. These banks are strong champions of retail financing and have gone aggressive on credit cards and consumer finance where the security is nothing or at best a junked out refrigerator.

The Securitisation Act therefore can effectively address only one segment of the NPA problem, which is recovery of loans to industry. This however, is a very important segment as the assets here are plant and machinery which can be put to use by a more efficient user, and real estate which can be sold to recover, in some cases, the entire NPA amount.

But as soon as the Securitisation Act came into effect, a defaulter who received notices under the Act challenged the validity of the Act in the Supreme Court. The court upheld the constitutional validity of the Act this month but it struck out a section of the Act which stipulated that a defaulter had to deposit 75 per cent of the amount due in case he chose to appeal against the lender's action.

Any person who has lent money in his lifetime and whose loan has gone bad knows that he can count his blessings if he recovers 75 per cent of the loan amount. In that context, the stipulation of paying 75 of the loan amount before appealing is not only bizarre but it also goes against the principle of natural justice which should provide a fair hearing to any person, be he a genuine borrower or a criminal.

The Supreme Court in its wisdom did the right thing but at the same time this has created a catch 22 situation. Now, any defaulter can appeal, which means more litigation, hearings and delays reminiscent of earlier days, ergo, we return to square one.

Having said all that, the scenario is not all that desperate. NPA recovery subsequent to the enactment of the new Act has stepped up substantially. Banks and FIs now have an additional tool to help recover dues. This coupled with a proactive approach, which acknowledges the role of negotiated settlements and one time settlements will go a long way in bringing down NPAs.

Banks have to keep in mind that if it has an NPA worth Rs 10 lakhs today, it is preferable to foreclose by accepting Rs 5 lakh today and start recycling the money immediately rather than recover Rs 7.5 lakh ten years later.