Critical analysis of bad loan recovery mechanisms in India

Abstract

Banks play a vital role in the economic growth and overall development of a nation. A strong and efficient banking system forms the backbone of a healthy financial system and significantly contributes to economic stability and progress. Banks primarily provide credit facilities to various sectors of the economy using the funds collected through public deposits. However, a major challenge arises when borrowers fail to repay the borrowed amount along with interest, leading to the creation of Non-Performing Assets (NPAs).The increasing level of NPAs continues to be a serious concern for the banking sector, as it adversely affects the operational efficiency, profitability, and lending capacity of banks while also slowing down economic activities. Therefore, resolving the issue of NPAs has become an important area of focus for policymakers, bankers, and researchers. Although several studies have examined the causes and impact of NPAs on banking performance, limited research has been conducted on the effectiveness of recovery mechanisms and methods for reducing bad loans.

The present study aims to evaluate the efficiency of various NPA recovery channels in India and compare their performance using appropriate statistical techniques. The major recovery mechanisms considered in the study include Lok Adalat’s, Debt Recovery Tribunals (DRTs), the SARFAESI Act, and the Insolvency and Bankruptcy Code (IBC). Secondary data related to NPA recovery through these channels during the period 2016–2024 has been analyzed using One-Way ANOVA and the Tukey-Kramer Test to test the proposed hypothesis. The findings of the study reveal a significant difference in the performance and effectiveness of various recovery channels. Based on the analysis, the study recommends the establishment of a single-window recovery mechanism that could improve the recovery process and help minimize losses arising from NPAs to a considerable extent.