The new legal provisions regarding the foreclosure enunciated in the Securitisation Act will have a "limited impact" on existing non-performing loans in the Indian banking system and the actual recoveries will be in the region of 12 per cent, according to the Credit Rating Information Services of India Ltd.
"This is due to a combination of factors such as the exemptions provided by the act, the impediments to the banks' ability to enforce security and the actual recovery rates for these assets," CRISIL said in a release in Mumbai on Monday.
The act would be instrumental for facilitating recovery from about 31 per cent of the outstanding gross NPLs. The actual recovery rate against those assets on which action could be taken would be about 40 per cent, it said.
"The efficacy of the new foreclosure laws can be enhanced by bringing more non-performing assets within its ambit," the release said.
Bringing loans below Rs 1 lakh within the ambit of the act and allowing enforcement of agricultural land, where it is a collateral, would help in efforts to the recovery of impaired assets.
CRISIL said the Indian banking system has a low provisioning cover of about 49 per cent and, therefore, many banks would be reluctant to sell NPLs because losses arising from the resolution of these cases would need to be booked immediately with a consequent impact on profitability.
CRISIL said this would reduce the banks' profit and adversely affect their ability to achieve their annual financial targets.
"Where recovery rates were lower than the outstanding provisioning cover, banks would have to book losses and these losses would increase with the rise in the proportion of NPLs that get resolved," the rating agency said.
For instance, if banks were to resolve 50 per cent of their NPLs with recoveries of about 30 per cent, the banking system would have to book losses of about Rs 7,070 crore (Rs 70.70 billion) which represents 58 per cent of the banking system's profits for fiscal 2002.
CRISIL estimates that this in itself would deter banks from going in for higher recoveries.
In fact, so far, a large number of banks have only initiated action against those defaulters where they have a high provisioning cover or where loans have been totally written off.
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