Five major public sector banks—including State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda (BoB)—are planning a joint collection agency to recover stressed retail and MSME loans. This initiative aims to help banks focus on larger defaulters by delegating the recovery of smaller loan cases to a specialized agency.
Banks' New Loan Recovery Approach
Non-Performing Assets (NPAs) remain a significant challenge for banks. Recovery of loans, especially those from individuals and small businesses (MSMEs), is particularly low. Therefore, five major public sector banks—State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Union Bank of India, and Bank of India—have decided to jointly create a shared agency. This agency will handle the recovery of retail and MSME loans up to ₹5 crore.
Government Banks to Collaborate on a Joint Agency
According to a report in the Economic Times, this new agency will operate under the banner of PSB Alliance Private Limited. Initially, it will be launched as a proof of concept, with potential expansion to other banks later. Its structure will be modeled after the National Asset Reconstruction Company Limited (NARCL).
This model will allow banks to focus more on their core banking functions, while the shared agency handles the recovery of smaller stressed loans. This will be particularly effective in cases where a single borrower has taken loans from multiple banks, requiring coordinated recovery efforts.
Key Features of the Agency
- Recovery Uniformity: Management of the process by a single agency will ensure transparency and uniformity in recovery.
- Reduced Bank Burden: By delegating smaller loan cases to the agency, banks can concentrate on larger NPA cases.
- Fraud Control: As highlighted by previous instances like the PNB fraud case, timely initiation of recovery can help control future fraudulent activities.
Special Focus on MSME Loans
This initiative will prioritize the recovery of MSME loans. The MSME sector is considered the backbone of the Indian economy, but it also has a high loan default rate. Recovery in such cases is often challenging for banks, especially when the amount is small and the recovery costs are high.
Banks believe that centralized handling of smaller loan defaults through the agency will improve their recovery capabilities and allow for better resource allocation to larger cases.
Potential for Other Banks to Join
Currently, this initiative is being undertaken by five major banks, but other public sector banks may join in the future. If successful, the model could be expanded to include private and cooperative banks.
The agency is expected to accelerate the recovery of smaller loans and improve coordination. This will enhance transparency in the banking sector and put pressure on defaulters to repay their loans on time.
