Sell Bad Debts to the borrowers.

Odd as it may sound, but ironically true, this could, perhaps be one of the most workable options for reduction of Non Performing Assets. The secured creditors (the Banks) would get from the borrowers what they would get from their assignees any way, and in the process they may also not part from their borrowers on bitter terms. All it needs is a little bit of rethinking on the part of those who administer the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SRFAESI) Act.

Once the account has been declared as Non Performing Assets (NPA), and the initial due process of notices and has been completed the secured creditor is free to sell the account to any Asset Management Companies (AMC). The SRFAESI Act permits the secured creditors and AMC to settle between themselves the terms of sale of the NPA. In addition, the AMC need not pay the entire cash to the secured creditor in go. It can issue ‘receipts’ to be redeemed in due course of time. The AMC may in turn raise money against the receipts and pay back to the secured creditors. Such circuitous settlement of accounts between the secured creditors and an AMC makes the bankers wait for their cash. The only advantage that the secured creditors gets is immediate wiping off of the NPA from their balance sheets. The cascading effect is that the secured creditor need not make provisioning for the NPA which in turn adds up to the profit of the branch/ branch.

The nomenclature “AMC” is by and large a misnomer as many of these firms are nothing but recovery agents in suit and boots. These AMCs in turn hire recovery agents to go about the dirty job or recovering the dues from the borrowers. The end results is that the grass root recovery agents use third degree methods and recover, or rather extort what ever they can with the result that the original secured creditor is left with a bitter borrower. Neither the secured creditor nor the borrower is benefited by this arrangement. Some middle men, who have no stake either in the image of secured creditor nor in the welfare of the borrower makes a neat pile of money leaving behind shattered relationships.

The secured creditors has an enormous stake in the welfare of the borrower. For years the secured creditor has nurtured the borrower. A borrower is never an individual, but always has a family and close sympathizers. Each one of them is likely to turn an hater of the secured creditor.

The secured creditor should therefore pragmatically weigh options in the best interest of his organization. Brand image and good will, though in tangible, do carry an enormous market value. By giving some discount to the borrower and recovering a little less money but retaining the goodwill of the borrower is much more valuable than getting the same amount of money from the AMC and leaving behind a dozen of bitter critics. An AMC, on an average buys an NPA at about 40% to 60% of its face value. Which means that the secured creditors sells off the NPA varying between 40% to 60% of its value. However, the borrower is never offered even a penny as discount. On the contrary, borrower has to bear the burnt of legal charges, recovery charges and a number of sundry expenses not to speak of penal interests and other such levies. If these are eliminated, there is hardly any sacrifice for the secured creditor which is too onerous on them not to forego in the interest of retaining the good will of the borrower.
To sell NPA back to the borrowers is some thing that will call for a change in the mindset of the bankers. Bankers have been selling off their NPAs to AMC at such heavy discounts that the Reserve Bank of India had to issue a cautionary circular asking the bankers not to sell their NPA below assessed reserve price. Once the bankers weigh the costs towards brand image, good will and price of retaining a customer perhaps they can take a positive view of giving discounts to the borrowers and settle the NPA. The existing laws are quite adequate and allows the bankers to settle the accounts with their borrowers. I think that the Bankers will take a hard look at every account before selling the same to an AMC. Merely following the cold print in the circulars and instructions may not be the only way to go forward.

[To read the RBI circular use this link http://www.bankdrt.com/nf/rbi/describe.php?id=20071004_1 ]