Int ern at ion al Jo u rna l of App lied R es ea rch 2 015 ; 1 (1 3): 50-53

ISSN Print: 2394-7500

ISSN Online: 2394-5869
Impact Factor: 5.2 A study of pre and post impact of enactment of
IJAR 2015; 1(13): 50-53
www.allresearchjournal.com
Securitization Act 2002 on asset classifications of
Received: 15-10-2015
Accepted: 16-11-2015
public sector banks
Arti Bhola
M.Com. UGC-NET Arti Bhola
(Commerce), Kurukshetra
University, Haryana, India
Abstract
Commercial Banks are playing a very important role in the financial system and payment systems.
Banks are 'special' as financial intermediaries critical for mobilizing public saving and for deploying
them to provide safety and return to savers. The introduction of economic reforms gives greater
flexibility and autonomy to banks in increasing their profitability, productivity and efficiency. There is
large contribution made by the Public Sector Banks (PSB's) in Indian economy, such as agriculture,
various industries, trade and employment and infrastructure. Borrowers are not bounded to repay what
he took away from the Bank loan. So, the NPA increased in the alarming level due to the willful
defaulting on the part of the borrowers. NPAs have not only affected the efficiency and the profitability
of the Banks, but also the overall performance e of the banks. The asset quality is a main parameter to
assess the performance and overall functioning of banks. The reduction in asset quality results
increased the level of standard Assets. Mounting NPAs is a major problem in a public sector bank with
comparative to private sector banks. In this present research paper an attempt made to analyze the
trends in asset classifications and trends in NPAs of SCBs Recovered through SARFAESI Act 2002.
Statistical techniques like arithmetic mean, standard deviation and T-test have been employed for the
analyses of data.

Keywords: Standard assets, sub standards assets, NPAs, SARFAESI Act, PSBs

Introduction
Despite various correctional steps administrated to solve and end this problem, concrete
results are eluding, it is like a virus which effect universally on banking and financial
institutions. The severity of the problem is, however acutely suffered by Nationalized Banks
followed by SBI group and All India Financial Institutions. The concept of Asset Quality on
the books of Public sector Banks and FIs came into being when RBI introduced prudential
norm of asset classification on the recommendations of the Narasimham Committee in the
year 1992-93.
The concept of Asset Quality on the books of Public sector Banks and FIs came into being
when RBI introduced prudential norms on the recommendations of the Narasimham
committee in the year 1992-93.
The loans given by the Banks are classified into performing and non-Performing assets on
the following basis:
 Performing Assets: also known as standard assets are the assets which do not disclose
any problem and which do not carry more than the normal risk attached to the business.
Performing asset is one which generates income for the bank. It is an asset where the
interest and or principal are not overdue beyond 180 days (modified to 90 days w.e.f.
Mar 2004) at the end of the financial year.
 Non-Performing Assets: An amount is to be treated as non-performing asset when it
ceases to generate income for the Bank. An asset may be treated as Non-Performing
Correspondence Asset (NPA), if interest and /or installment of Principal remain overdue for a period
Arti Bhola exceeding 180 days (modified to 90 days w.e.f. Mar 04) and Banks and FIs should not
M.Com. UGC-NET
(Commerce), Kurukshetra
take into their Income account, the interest accrued on such NPAs, unless it is actually
University, Haryana, India received/recovered. NPAs are further classified into:
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a. Substandard Assets: Loans which are non-performing the recovery of security interests. To liquidate the firm,
for a period not exceeding two years, where the current secured lenders would have to go through a prolonged
net-worth of the borrower or the current market value of judicial process, during which the value of collateral
the security, against which the loan is taken, is not considerably depreciated in value. The reform significantly
enough to ensure full recovery of the debt. increased the rights of secured creditors by allowing them to
b. Doubtful Assets: Loans which have remained bypass the lengthy and judicial process and seize and
nonperforming for a period exceeding two years and liquidate the assets of the defaulting firm, thus improving the
which are not classified as loss assets by for the ability of lenders to access the collateral of the securities.
management or the internal/external auditor appointed
by RBI. Research Methodology
c. Loss Assets: Assets where loss has been identified by Research methodology is a way to solve the research
the internal/external auditor of the bank or the RBI, but problem systematically. While designing the research work
the amount has not been written-off wholly or partly. the following methodology will be adopted.
These assets are considered unrecoverable and are of
little value to the lending institution. Objectives of the Study
The specific objectives of the present study are given as:
Review of literature 1. To study the trends in the asset classifications of NPAs
Rajaraman Indira and Vasishtha (2002) [1] this paper was an before and after the enactment of SARFAESI Act 2002
attempt to study the relationship between non-performing in Indian public sector banks.
Assets and inefficiency of the borrowers. This study makes 2. To analyze the trends in the NPAs recovered through
more sense for India as India suffers from inefficiency SARFAESI Act 2002.
problems. The study was based on the secondary data. In
their empirical study proved that significant bivariate Hypothesis of the study
relationship exists between non-performing loans of public Ho: (There is no significant difference between the level of
sector banks and the inefficiency on the side of the asset classifications of NPAs in public sector banks before
borrowers. Being a closed economy for so long, India still and after the enactment of SARFAESI Act 2002.)
lacks the operating efficiency to push its manufacturing
sector like China has done so successfully. High inflation is H1: (There is a significant difference between the level of
also affects to the Indian economy and banks overall asset classifications of NPAs in public sector banks before
performance, especially NPAs. This is because when RBI and after the enactment of SARFAESI Act 2002.)
takes some actions related to interest rates to control
inflation, the defaulters list also grows longer for banks with Research design
rising interest rates. This research by and large is descriptive in nature. This
Mukherjee (2003) [3] pointed out that there were broadly two research used secondary sources in order to explain the
ways to financially restructure a banking system out of the impact of the enactment of SARFAESI Act 2002 on the asset
NPA situation. One can either follow the Asset classifications of public sector banks in India.
Management/Reconstruction Company (AMC/ARC) To achieve the stated objectives, data are collected from
approach to clean the balance sheet of banks of their NPAs various sources and include;
(at a discount) and use the greater efficiency of the Research reports, published articles, news reports and
(government-funded) specialized AMCs in realizing the bad conference proceedings available in both national and
debts. Alternatively one could follow the creditor-led international level related to NPA. The information obtained
reconstruction approach. Both channels have been tried out from these sources is used for critical evaluation of the
by countries around the world with mixed results. subject and identify research gaps in the area of study. These
Awasthi and Singh (2008) [2] examined the position of NPAs secondary sources are part of different chapters in this report.
in Indian public sector banks during recent years and found
that at the end of March2007, net NPAs in relation to net Sampling Unit
advances for a majority of public sector banks were below For Secondary data the sampling unit constitutes the public
the level of 2 percent. Further the study pointed out that lok sector banks to analyze the trends in asset classifications and
adalats, debt recovery tribunals (DRT) and scheme of recovery of NPAs through SARFAESI Act 2002 after the
corporate debt restructuring have provided special thrust to enactment of the Act.
banks to contain their NPAs. And also, Securitization and
Reconstruction of financial assets and enforcement of Tools of Analysis
security interest (SARFAESI) Act has been able to reduce In order to achieve the various objectives mentioned, the data
the NPAs with full vigor. collected were entered, arranged and presented using
Vikrant Vig (2011) [4] this paper revisits the positive link Microsoft Excel and SPSS 13.All information collected for
between greater creditor protection and expansion of credit the purpose of the study has been arranged in cross sectional
and asks whether there are situations in which strengthening tables, depending upon the requirements of the analysis. The
creditor rights could lead to a decline in credit usage by tabulation encompasses absolute figures supported by simple
firms. Specifically, the paper exploits a quasi-natural percentage and subjected to statistical analysis through the
experiment in India, the passage of a mandatory secured use of Average, Standard Deviation, CAGR and Independent
transactions law, the SARFAESI Act(Securitization and T-test.
Reconstruction of Financial Assets and Enforcement of
Security Interests Act 2002), to investigate the effect of law
on corporate debt structure. Prior to the SARFAESI Act, the
slow and rigid judicial process created severe bottlenecks in
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Analysis and interpretation

Table 1: Trends in Classification of Loan Assets before the SARFAESI Act 2002 (From year 1995-96 to 2001-02)
Standard Assets Sub-standard Assets Doubtful Assets Loss Assets
Year
Amount in crores % Amount in crores % Amount in crores % Amount in crores %
1995-96 189660 82.0 24707 10 4,391 1.9 9299 4.00
1996-97 200637 82.2 26015 10 6,509 2.1 12472 5.1
1997-98 239318 84 25819 9.1 5,371 1.9 14463 5.1
1998-99 273618 84.1 29252 9 6,425 2 16033 4.9
1999-00 326783 86 30535 8 6,398 1.7 16361 4.3
2000-01 387360 87.6 33485 7.6 6,544 1.5 14745 3.3
2001-02 452862 88.9 33658 6.6 7,061 1.4 15788 3.1
Mean Value 295748.3 84.97 29067 8.6 6,100 1.78 14165.8 4.2
CAGR 0.1324 .0116 .0452 -0.576 .0702 -0.042 0.0786 -.035
Source: (RBI) Report on Trend and Progress of Banking in India, RBI.

Table 2: Trends in Classification of Loan Assets after the SARFAESI Act 2002 (From year 2003-04 to 2013-14)
Standard Assets Sub-standard Assets Doubtful Assets Loss Assets
Year
Amount in crores % Amount in crores % Amount in crores % Amount in crores %
2003-04 610435 92.2 28756 4.4 5,876 0.9 16909 2.5
2004-05 830029 94.6 30799 3.5 5,929 0.7 11068 1.3
2005-06 1092607 96.20 25028 2.20 5,636 0.50 11453 1.00
2006-07 1425519 97.30 19873 1.40 4,826 0.30 14275 1.00
2007-08 1656451 97.80 19083 1.13 4,018 0.20 16846 1.00
2008-09 2237556 97.99 20708 0.99 4,296 0.19 19521 0.93
2009-10 2673534 97.81 24679 0.98 5,750 0.21 27685 1.10
2010-11 2455147 97.7 31955 1.04 6,463 0.19 33612 1.10
2011-12 3437900 97.6 47075 1.33 6,000 0.10 60376 1.7
2012-13 3899985 96.8 73485 1.8 6,834 0.10 76589 1.8
2013-14 3546782 95.5 63456 1.7 5,543 0.9 55436 1.4
Mean 2169631 96.5 34991 1.86 4,437 0.39 31252 1.3
CAGR 0.1735 0.0032 0.0746 -0.828 -.005 .0000 0.1140 -.0513
Source: RBI handbook of statistics on the Indian economy2014-15

Table 3: Analysis of classification of Loan Asset

Secu_Act N Mean Std. Deviation t df Sig. (2-tailed)
Before 7 84.9714 2.63357
Standard Assets
After 11 96.5000 1.79433 -11.102* 16 .000
Before 7 4.2571 .83238
Sub-Standard Assets
After 11 1.3482 .48181 9.455* 16 .000
Before 7 8.6143 1.27073
Doubtful Assets
After 11 1.8609 1.11871 11.857* 16 .000
Before 7 1.7857 .26095
Loss Assets
After 11 .3900 .30874 9.895* 16 .000
Note: * significant at 5 percent.

The Table 1.1 exhibited that amount of Standard Assets was shows reduction from 4% in the year 1995-96 to 1.4% in the
Rs. 189660 and Sub-Standard Assets was Rs. 24707 in the year 2013-14. The difference in the mean scores of Standard
year 1995-96 and then in the year 2001-02 increased up to Assets (84.9714v/s96.500, t-value-11.102) is significant at 5
Rs.452862 and Rs. 33658 and the amount of Doubtful Assets percent thereby concluding that bank’s Standard Assets has
was Rs. 4391 and Loss Assets was Rs. 9299 in the year increased after the enactment of securitization Act 2002 and
1995-96 and then in the year 2001-02 increased up to Rs. the difference in the mean scores of Sub-Standard Assets
7061 and Rs.15788. Table 4.8 highlighted that amount of (4.2571 v/s 1.3482, t-value 9.455) is also significant at 5
Standard Assets increased year on year i.e. 2003-04 to 2013- percent which concluding that there is significant decrease in
14 it is good for the bank but Sub-Standard Assets shows the Sub-Standard Assets after the enactment of the Act. The
fluctuating trends from year 2003-04 to 2013-14. The table table 1.3 also exhibited that the difference in mean scores of
1.2 also highlighted that amount of Doubtful Assets Doubtful Assets (8.6143v/s1.8609, t-value 11.857) and Loss
increased year on year i.e. 2003-04 to 2013-14 it is not good Assets (1.7857v/s.3900, t-value 9.895) is significant at 5
for the bank but Loss Assets shows fluctuating trends from percent thereby concluding that bank’s Doubtful and Loss
year 2003-04 to 2013-14. The result of the table also Assets have decreased after the enactment of securitization
revealed that percentage of Sub-Standard Assets shows Act 2002. There is marginal increase in the CAGR of all the
reduction from 10% in the year 1995-96 to 1.7% in the year loan assets of pre Act with comparative to post act period
2013-14. Table 4.9 revealed that percentage of Loss Assets except doubtful Assets.

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Table 4: NPAs of SCBs Recovered through SARFAESI Act 2002 (Amount in Crores) (from year 20003-04 to 2013-14)
Year No. of cases referred Amount Involved Amount Recovered Percentage (%)
2003-04 2,661 7847 1156 14.73
2004-05 39,288 13,224 2,391 18.08
2005-06 38,969 9,831 3,423 34.81
2006-07 60,178 9058 3749 41.4
2007-08 83,942 7,263 4,429 61
2008-09 61,760 12067 3,982 33
2009-10 78,366 14249 4,269 30
2010-11 1,18,642 30,604 11,,561 37.78
2011-12 1,40,991 35300 10101 28.6
2012-13 1,90,537 68100 18500 27.1
2013-14 1,94,707 94602 24402 25.8
CAGR 0.4774 -0.1750 -0.1319 0.0523
Source: (RBI) Report on Trend and Progress of Banking in India, RBI.

The Table 1.4 showed that data related to NPAs of SCBs 2. Awasthi BD, Singh R. Non –Performing Assets in
Recovered through SARFAESI Act 2002.Number of cases public sector banks; A study” the economic challenger,
referred under Act was 2,661 in the year 2003-04 and 2008; 1(39):67-72.
increased up to 1, 94,707 in the year 2013-14. Trend in the 3. Mukherjee, Paramita. Dealing with NPAs: Lessons from
no. of cases referred increasing year on year from 2003 to International Experiences, Money & Finance, January-
2014. CAGR of cases referred is 47.74%. The above table March, 2003.
exhibited that amount involved was Rs. 7,847 crore in the 4. Vig, Vikrant. Creditor Rights and Corporate Debt
year 2003-04 and increased up to Rs. 94,602 crore in the year Structure, February, 2011, 1-55.
2013-14. It also shows increasing trend year on year. Data
related to amount recovered highlighted that Rs. 1,156 crore
recovered in the year 2003-04 and increased up to Rs. 24,402
crore in the year 2013-14 it also shows increasing trends
which is good for all the banks. The result of the table
revealed that percentage of NPAs recovered in SCBs through
SARFAESI act 2002 shows increase from 14.73% in the
year 2003-04 to 25.8 % in the year 2013-14. The result of the
table concluded that recovery of NPAs in the SCBs improved
after the enactment of the Act 2002.

Conclusion
The analysis highlighted two major aspects (1) trends in the
movement of assets classification, (2) trends in the NPAs of
SCBs recovered through SARFAESI Act 2002. The amount
of Standard Assets increased during the study period it is
good for the bank but Sub-Standard Assets shows fluctuating
trends. The result of the study also highlighted that amount
of Doubtful Assets increased during the study period, it is not
good for the bank but Loss Assets shows fluctuating trends
from year 2003-04 to 2013-14. There is marginal increase in
the CAGR of all the loan assets of pre Act with comparative
to post act period except doubtful Assets. The result of the
study found that SARFAESI Act 2002 is helpful in the
increasing the level of standard Assets. Number of cases
referred under Act was also increased during the study
period.
Data related to amount recovered also shows increasing
trends which is good for all the banks. NPA is closely related
to the level of advances and this relationship is mediated and
moderated by many bank specific and economy specific
indicators. NPA can be reduced to a great extent if banks
plan and implement strategies looking into the mediating and
moderating nature of bank performance variables.

References
1. Indira Rajaraman, Vasishtha. Non Performing Loans of
Public Sector Banks-Some Panal Results,” Economic
and Political Weekly, (February), 2002.

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