As per the information given by the Ministry of Finance (MoF) in Parliament, during the last nine years, scheduled commercial banks (SCBs) have undertaken an aggregate recovery of Rs 10,16,617 crore of loans that had gone bad or non-performing assets (NPAs) as these are called in banking parlance.
In reply to a question given in the lower house, Minister of state for finance Bhagwat Karad informed that “Comprehensive measures have been taken by the Government and RBI to recover and to reduce NPAs, including those pertaining to corporate companies”. These include the 2016 Insolvency and Bankruptcy Code (IBC), and the establishment of the National Asset Reconstruction Company Limited (NARCL), among other measures.
At banks’ level, the efforts involve early recognition and reporting of stress assets; prompt adoption of resolution plan (RP); creation of stressed asset management verticals for stringent recovery and extensive use of credit data available in the Central Repository of Information on Large Credits (CRILC) database.
Wilful defaulters (refers to borrowers who can pay back yet decide not to) are not sanctioned any additional facilities by banks or financial institutions, and their unit is debarred from floating new ventures for five years. Additionally, they and companies which have them as promoters/directors are debarred from accessing capital markets to raise funds. Furthermore, under IBC, such promoters can’t remain in control of the entity.
Looking at the quantum of reduction in NPAs, one gets a sense that the achievement is commendable; all the more when we consider the fact that the quantum of recovery at Rs 10,16,617 crore was almost close to the amount of bad loans written off by the banks worth over Rs 10,57,000 crore in the last five years (as per the information shared by RBI in reply to RTI question). But, there is a catch.
During 2016 – 2021, the Central government gave around Rs 300,000 crore as budgetary support to shore up the capital of public sector banks (PSBs). Furthermore, in the budget for 2021-22, it committed another Rs 200,000 crore by way of ‘sovereign guarantee for the security receipts (SRs) to be issued by NARCL where the majority shareholding is vested in PSBs. Surely, this Rs 500,000 crore would have gone towards reducing NPAs. Adjusting for this amount, recovery from defaulters would be only Rs 516,617 crore.
According to a joint report by ASSOCHAM and Crisil Ratings, gross NPAs of banks were around 5 percent as on March 31, 2023. Taking overall outstanding loans of Rs 143,00,000 crore across all SCBs on this date, the value of gross NPAs works out to Rs 715,000 crore. But, for Rs 500,000 crore PSBs got by way of budget support and sovereign guarantee for the SRs of NARCL, the NPAs would have been Rs 1215,000 crore. This would be even higher than the NPAs of Rs 1036,000 crore as of March 31, 2018.
Clearly, the recovery of bad loans has been dented. Look at it from another angle.
According to the Insolvency and Bankruptcy Board of India (IBBI), of the total 5,636 cases under IBC, 3,637 have been closed. Of the closed cases, nearly half i.e. 1,703 have ended in liquidation. Besides, the recovery by financial creditors was a record low of 13.4 percent of the admitted claims during October-December 2021 (during January-March 2022, this was even lower at 10.2 percent). Moreover, in 363 major cases, banks took a hair-cut of 80 percent on an average (for some such as Videocon, it was even higher at 95 percent).
Even in respect of bad loans transferred by banks to the NARCL, the haircut is expected to be steep. To get a sense of this, let us look at the broad contours of the action plan put in place by the finance minister, Nirmala Sitharaman on September 16, 2021 following announcement on NARCL in the 2021-22 budget. Under it, the NARCL will purchase NPAs worth Rs 200,000 crore (Rs 90,000 crore of fully provisioned stuff in phase I and remaining Rs 110,000 crore in phase II) from the banks under the so called 15:85 structure.
It involves the NARCL paying 15 percent of the agreed/discounted value of the loans in cash and issue Security Receipts (SRs) for the rest. The Union Government will provide sovereign guarantee – valid for a period of 5 years – for the SRs issued by NARCL. The guarantee would be invoked to cover the loss being the difference between the realized value (resolution/liquidation) and face value of SRs. A provision of Rs 30,600 crore has been made for this purpose. This budget provision tells the entire story.
It implies that the entire banks’ bad loan book of Rs 200,000 crore would be available to the NARCL for a mere 18 percent of the face value or Rs 36,000 crore. Of this, the latter pays 15 percent or Rs 5400 crore upfront in cash to the former and for the balance Rs 30,600 crore, it will issue SRs. To redeem these SRs, NARCL must realize at least Rs 30,600 crore from selling the NPAs to investors. Even if it doesn’t realize, the entire amount will be paid by the Centre.
Just as for major cases under IBC, the haircut to be taken by banks while taking NARCL route is a steep 82 percent.
A paramount reason for woefully low recovery inspite of credible steps taken by Modi – government has to do with judicial overreach that has rendered IBC process dysfunctional. How did it happen?
As per a circular issued by RBI on February 12, 2018, for accounts with aggregate exposure greater than Rs 2,000 crore, as soon as there was a default in the account with any lender, all lenders – singly or jointly – shall initiate steps to cure the default by preparing and implementing a resolution plan (RP). This needed to be done within 180 days from the date of default. In case of failure to meet this deadline, the lenders were required to refer the account to the National Company Law Tribunal (NCLT) for resolution under the IBC. The NCLT would get 180 days to complete the process.
Following petition by defaulting borrowers, the Supreme Court (SC) declared the February 12, 2018 circular unconstitutional.
This forced RBI come up with a revised circular dated June 7, 2019. It gives banks 180 days to come up with RP . If the banks don’t meet this deadline, they have to make an additional provision of 20 per cent. If they don’t finalize within a year, an additional 15 percent has to be made taking the total to 35 percent. Add to this, normal ageing provision of 40 percent (applicable in case the loan default extends upto 15 months), the total provisioning will be a steep 75 percent. Having provided for such a huge amount, there won’t be any incentive left for the bank to recover the money under IBC.
This has led to a scenario where the banks are neither under any compulsion nor have any interest in referring the NPA for resolution under IBC. The soul of IBC process lies in inviting bids for the entity as a ‘going concern’. This way alone, it is possible to maximize value thereby trimming the haircut. By striking down the February 12, 2018, RBI circular, the SC has struck at the soul.
Published in The Pioneer on August 7, 2023