r gandhi : problem loan management & msme financing valedictory speech by mr r gandhi, deputy governor of the reserve bank of india, at a workshop organised by crisil ( the credit rating information services of india ltd. ) on “ credit risk and problem loan management ”, goa, 30 january 2015. * * * assistance provided by mr a k choudhary and mr nethaji b are gratefully acknowledged. 1. i am very glad to be talking to you on a subject which is very contemporary and very critical for the economy. both the government of india and the reserve bank have long been convinced of the contribution, and of the enormous potential, of the sme sector to the economic growth, employment and income generation for vast masses of the country. recent government pronouncements about “ make in india ” are fundamentally based on these convictions. therefore, detailed discussions and debate on the ways, procedure, precautions and follow - up on sme financing are very apt and timely. i appreciate the efforts of crisil and others in this regard. i understand that in this workshop you all had discussed about sme loan life cycle management, credit scoring as a technique for credit appraisal, strategies and tools to monitor sme loans and handle problem sme loans, including building early warning systems, etc. i am sure all of you have been benefited by these discussions. let me dwell a bit more on the problem loan management, as currently it is a serious issue for the banking sector. asset quality 2. asset quality is an important parameter to measure the health of the banks. in the last twenty years or so, the gross non - performing asset ratio as well net non - performing asset ratio of indian banks have been showing a declining trend due to many factors, and very significantly due to the sustained improvements in the credit risk management practices adopted by the banks. the gross non - performing assets ( npas ), in percentage terms, have declined steadily from 15. 70 % at end march 1997 to 2. 35 % at end march 2011. however, asset quality of the banking system has suffered significant deterioration in the recent years. npas expressed in terms of gross npa ratio increased to 4. 11 % at the end of march 2014. during the period, the ‘ restructured but standard loans ’ ( restructured in terms of regulatory dispensation provided to banks for supporting viable accounts facing temporary difficulties and in line with public policy imperatives ) as a

recovery of npas. npas of scbs recovered through various channels ( amount in ₹ billion ) recovery channel year no. particulars sarfaesi act total 13, 408 1, 90, 537 10, 44, 636 lok adalats drts 8, 40, 691 no. of cases referred amount involved 1, 058 amount recovered * 3 as per cent of 2 6. 1 14. 1 27. 1 21. 9 no. of cases referred 16, 36, 957 28, 258 1, 94, 707 18, 59, 922 amount involved 1, 731 amount recovered * 3 as per cent of 2 6. 2 9. 5 25. 8 notes : 1. * : refers to amount recovered during the given year, which could be with reference to cases referred during the given year as well as during the earlier years. 2. drts : debt recovery tribunals. bis central bankers ’ speeches 17. however, the present legal system is unable to cope with the mammoth task, considering the ever increasing number of suits and the limited infrastructure available at drts / courts. further, there are various issues relating to drt and sarfaesi, which needs to be strengthened to make these channels more efficient and effective. they are being examined at various levels. 18. banks also explore entering into a compromise settlement / one time settlement with the borrower to optimise its recovery in present value term. msme financing 19. as this workshop was meant to specifically discuss sme financing, let me share a few thoughts on this matter. 20. as i mentioned in the beginning, micro, small and medium enterprises ( msmes ) play a major role in economic development, particularly in emerging countries. there is heightened attention by the international community on msme sector. this is primarily because of the critical importance of job creation in the recovery cycle following the recent financial crisis, and the msme ’ s potentials in that respect. 21. yet, lack of access to finance is a major obstacle to their growth. although the situation can differ among countries and individual businesses, the financing gap for smes in the developing country has a few well - accepted causes. these include information asymmetries, higher risks, sizeable transaction costs and a lack of adequate collateral. these factors can be exacerbated by institutional factors within a country. finally, there are a number of “ demand side ” considerations that deserve more attention.