E> GaThe value of NPA is currently about 8 trillion rupees reaching to about 9% of the total credit. 12-15% of the total credit of PSBs are classified as NPAs. At 2016-17, 27 PSBs collectively made an operating profit of Rs 1.5 lakh crores, which amounted to a paltry sum of Rs $74 crores, after accounting for bad debts. According loan RBI report, just 12 accounts are responsible for 25% of Rs 8 lakh crore bad debt with banks. About 4/Sth of the NPAs are with PSBs. Ata certain point in time, the collective market capitalization of 24 PSBs equaled that of HDFC bank. The Government norms, po- litical pressures mandated PSBs to lend the corporates whereas, private banks like HDFC dealt with retail loans which allowed them to stay away from NPAs.Lack of digitalization, lack of proper risk management practices, not amending to Basel norms caused this situation. Background: In 1991, Narasimham committee - headed by Mr. Nar- asimham (Ex-RBI governor), was formed to restructure the Indian banking sector, which was handling 80% flow of money in the economy. The committee submitted re- ports in 1991 and 1998 with major recommendations di- rected to the following issues. 1) Autonomy in Banking 2) Reform in role of RBI 3) Stronger Banking system 4) Non-Performing Assets (NPAS) 5) Capital adequacy and tightening of provisioning norms. 6) Entry of foreign banks. Among alll the issues, concentrating on NPA reduction ‘was of paramount importance’ Non-Performing Assets: RBI issued directives from 31/03/1993 and presented a concept of Income recognition. Banks w.r-t to the above directives have to classify their credit facilities as 1) Performing Assets 2) Non — Performing Assets Performing Assets are standard assets in which there ‘would not be any problem in clearing the credit and does not carry any risk more than normal risk attached to the business. Non-Performing Assets are the assets, including a leased asset, that ceases to generate the income to the bank. NPA is defined as a credit facility for which the interest or in- stallment of principal has remained ‘past due” for a speci- fied period of time. This specified period of time was reduced in phases: 1) 1993 — Four quarters 2) 1994— Three quarters 3) 1995 — Two quarters It was decided to dispense ‘past due” concept with effect from 31st March’2001. Accordingly, an NPA shall be an advance where the time period was standardized to greater than 180 days. To adopt the best international practices, it hhas been decided to adopt 90 days overdue norms for iden- tification of NPAs from the year ending 31st March’2004’. The rise of NPAs: In the mid-2000, the Indian economy boomed along with the Global economy. Conservative monetary policy re- stricted the companies from increasing the leverage too much, which helped India sail through Global Financial Recession of 2008. It also put a limit on bank credit from expanding excessively during the boom. The picture was looking good till then - no bank had gone bankrupt. But the high amount of unnoticed NPAs was re- vealed by the Asset Quality Review (AQR) which was conducted by the RBI in an attempt to sweep away the debris that had accumulated because of the boom period in 2000's. This statement looks contradicting but true. The explanation following this will unfold many unnoticed things. At mid-2000’s, the US banks had lent money to house- holds to buy property whereas banks in India lent money to corporates. A sudden downfall in prices of houses in- creased pressure on banks in the US that led to bankruptcy. But in India, during the same period GDP was growing at an aggressive rate of 9-10%. Corporate profitability was highest in the world which encouraged them to hire labor aggressively. With soaring growth rates, firms made plans accordingly in areas of Infrastructure, Power, Steel, and Telecom, As growth rate beckoned everywhere, the firms abandoned the Debw/Equity ratio and leveraged themselves up from various financial institutions to take advantage of per- ceived opportunities. lIM SAMBALPUR eAs we know when the bubble reaches its threshold, it is prone to a burst, which was seen in the form of .com bubble burst, East Asian crisis, Global Financial Recession - 2008. Same was the case here. As risk-taking by companies in- creased, things started going wrong. Reasons being high costs, too many regulatory procedures and sluggish growth of projects. Adding to these, the financing costs increased which was an extra burden. Firms that borrowed domesti- cally suffered when RBI increased interest rates to fight the soaring inflation rate, Firms which borrowed from foreign institutions suffered because of increase in Rupee to Dollar rate from 40 rupees/dollar to 60 rupees/dollar. All these to- gether accumulated in large numbers and by 2013 one third of the corporate debt was shared between companies with In- terest coverage ratio less than (which were termed as ICI companies). Many of them were from Infrastructure, Tel- ecom, Power, and Steel. By 2015 the IC1 companies reached 40% of the corporate debt which was previously 33%. Low global demand for steel and high steel supply by China made steel prices collapse which caused huge loss to Indian com- panies. Though government pitched in to curb this problem, ICI companies share remained above 40% in late 2016", To solve the problem of rising NPAs, Insolvency and Bank- ruptey Code 2016 was implemented through an aet of Parlia- ment in May 2016, Certain provisions of the act came into effect in August in the same year. KEY HIGHLIGHTS The Code highlights insolvency processes for individuals, companies and partnership firms. It may be noted that under IBC, debtor, and creditor both can start ‘recovery’ proceed- ings against each other. Two tribunals, National Company Law Tribunal for com- panies and Debt Recovery Tribunal for individuals, have been authorized to resolve insolvency issues and pronounce their judgment on them. WHICH COMPANIES CAME VIEW OF IBC 2016 UNDER THE PUR- The RBI’s internal advisory committee identified 12 ac- counts that covered about a quarter of banking systems’ non-performing assets and suggested that these require im- mediate resolution under the IBC. Alll these accounts have bank loans of over Rs.5000 crores each and out of those ac- counts, about 60% are identified as NPAs and thus qualify for resolution under IBC 2016. The central bank cautioned eae) that stress was coming from a few sectors such as power, telecom, steel, textiles, and aviation. Gross debt o Fig. List of major defaulters In order to empower the central bank, the government made certain amendments to the RBI Act. With these, the RBI can now take punitive action against individual, accounts under the Code. Earlier the central bank could give directions only on an industry basis. The resolution process begins with the banks approach- ing the National Company Law Tribunal (NCLT). The NCLT then appoints a professional to manage a com- pany as the existing board gets suspended. The profes- sional gets 180 days to come up with a workable solu- tion for the company so that it can repay its loans. This timeline can be extended by another 90 days. In case of small companies including start-ups, the deadline given is 90 days with an extension period of 45, days. If the company fails to come up with a solution, even after the completion of 270 days, a liquidator is appoint- ed. The banks and the company then submit their claims to the liquidator. A recent amendment has been made in the IBC code ac- cording to which certain promoters/directors and guar- antors, parties related to the corporate debtor or the company going for an insolvency process have been prohibited from filing resolution plans. The need for this was felt as many promoters used shell companies or back-door entries to take advantage of the haircut (discussed below) and enjoyed a premium over their wrongdoings.WHAT ARE THE WAYS IN WHICH BANKS CAN RECOVER NPAs? 1. Loan Restructuring It refers to a situation where the borrower is financially stressed and is unable to repay loans. In such a case the borrower asks the bank to ease the terms on which the loan was originally given to him. The banks may decide to reduce the rate of interest or give a moratorium period or so on. RBI came up with many such schemes like Capital Debt Restructuring, Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets (S4A) to be able to keep a check on NPAs and also formed a Joint Lenders’ Forum, 2. Taking possession of, managing and selling the securities The Securitization and Restructuring of Financial Assets and Enforcement of Security Interest Act (SARFAESI ACT, 2002) empowers the banks to take possession of the securities, manage them and sell them in auctions. A recent amendment has been made in this Act enabling the banks to manage and auction the securities without the in- terference of courts and tribunals as it took a lot of time to recover the assets. 3. Going for a ‘Haircut’ It refers to @ one-time settlement scheme where banks settle the loan for an amount which is lower than the actual amount due from a borrower. Thereafter, the loan is writ- ten off the books of the bank. But these things are easier said than done as can be seen from the example of Vijay Mallya, He took a loan amount- ing to Rs.9000 crores from a consortium of 16 banks headed by State Bank of India, Banks even after knowing his financial condition gave him a loan without exercising due diligence. Now he flew away from the country and banks are yet to recover their loans. He offered a one-time settlement which was rejected by the banks. The banks are unable to recover their loans by selling his possessions as their market value has fallen and are also unable to find buyers who are willing to buy these securities or assets. In such situations, even these measures don’t work. Any legal case cannot proceed against him as he has fled to a place which is out of the jurisdiction of these laws. eae) The prospect of recovering NPAs seem bleak. The rising ‘NPAs has resulted in the twin balance sheet crisis — an- other downward spiral affecting economic stability, which will be explored in our next issue. EXHIBIT - 1 Research by EY unveiled the following stats. Current] lenvironment: 172% NPA crisis in India is set to worsen 172% misuse of restructuring norms. Root Cause: 87% of NPAs is because of diversion of funds to unre- lated business or fraud. J64% lapses in initial borrower due diligence. 143% change in the political or regulatory environment leading to a business loss. EXHIBIT -2 Tred seeds ey m _ », * 2 g i eka eso Zug a“ e e e ¢ i Su8 EnF gsF Ses 18 8 & = = wi Se Eats NGA, WMS Owe sesedares ‘tye sre OO a sys rpg ts WO ne eres Sart References: 1)Narasimham Committee banking sector reforms, bttps://en. wikipedia org/wiki/Narasimham_Committee _on_Banking_Sector_Reforms_(1998) Dhtips:/Avww.rbi.org.in/script/BS_ViewMasCircular details. aspx?Id=449&Mode=0 3)""The Festering Twin Balance Sheet Problem” from the Economic Survey of India, bttp://indiabudget nic.in/es2016-17/e apd. pat