Superficial Way of Tackling Corporate NPAs

C P Krishnan

IT is an acknowledged fact that the huge NPAs (non-performing assets) are the fundamental cause for the deep rooted maladies afflicting PSBs (public sector banks)out of which the contribution from the large borrowers (loan exposure of Rs 5 crores and above) is more than 90 per cent.

The entire energy and attention of the PSBs should be focused in recovering the NPAs from the large borrowers without any write off or sacrifice. But will it happen?

The common people have frank doubts whether enormous amounts running into lakhs of crores of rupees are going to be sacrificed, crippling the PSBs permanently and whether the decision makers would escape from any accountability. If that happens, the very existence and the sustainability of the PSBs would be greatly affected and huge amount of the people’s money in the form of savings would be doled out to corporates.  Why such doubts arise?  Let us see.

The insolvency and bankruptcy code (IBC) 2016

The government of India has come out with fresh legislations, apparently to show that they are also concerned about this issue. A new law called “The insolvency and bankruptcy code (IBC) 2016” was enacted in the parliament in May 2016. This law enables the banks (creditors) to refer NPA accounts to IBC. After enactment, six months’ time was taken to frame the rules for this law.

On November 30, 2016, the rules regarding application by the financial creditor have been framed and the law came into force on December 1, 2016.

It is claimed that this new law would enable expeditious resolution of bankruptcy of the debtor company and would help higher recovery of NPAs.  It is further said that once the claim was accepted “the whole process could be completed within 180 or maximum 270 days”.  But what is the reality?

The Wire in its article dated December 15, 2016 observes:

“The adjudicating authority National Company Law Tribunal (NCLT) currently has 11 benches with 16 judicial members and seven technical members among them. Its mandate includes hearing cases earlier dealt with by the Company Law Board (CLB) under the Companies Act 2013, in addition to cases under the IBC. As of March 2015, there were around 4,200 pending CLB cases. All of these will now be transferred to the NCLT. In addition, the CLB receives around 4,000 new cases every year. Now these will have to be dealt with by NCLT ….

Unless its adjudication capacity is enhanced, the NCLT will fail to hear and dispose cases in a timely manner from the start. For the IBC cases, this could mean the inability of the NCLT to adhere to the 180-day timeline that is the duration of the corporate insolvency resolution process (CIRP). This has earlier been seen in the case of DRTs too. DRTs were intended to dispose of recovery cases in 180 days, but given capacity issues and pendency, often the first hearing for a case takes place after 180 days. The 180-day timeline represents the core design intent of the IBC – rapid resolution of insolvency to maximise recovery. If this is compromised due to capacity constraints, the effectiveness of the IBC will get diluted”.

Thus in the present scenario, this new law also may not be that effective in recovering corporate bad loans as claimed by the authorities in power.


On finding that the banks have come to a dead end and are unable to progress in reducing the mounting corporate NPAs despite the enactment of the Insolvency and Bankruptcy Code (IBC) 2016, the government has recently come out with an ordinance amending the Banking Regulation Act, 1949.  The presidential assent was given to this new ordinance on May 4, 2017 and was published in the gazette on the next day. 

This ordinance empowers the government of India to authorise RBI to issue directions to banking companies to initiate insolvency resolution process in respect of a default, under the provisions of Insolvency and Bankruptcy Code, 2016 by adding section 35 AA to the Banking Regulation Act, 1949. Another Section 35 AB has been added to the said Act that without prejudice to the provisions of Section 35 A, the RBI, may from time to time, issue directions to the banking companies for resolution of stressed assets.

The press release of RBI dated June 13, 2017 reads: “The Internal Advisory Committee (IAC) also arrived at an objective, non-discretionary criterion for referring accounts for resolution under IBC. In particular, the IAC recommended for IBC reference all accounts with fund and non-fund based outstanding amount greater than Rs 5000 crore, with 60 per cent or more classified as non-performing by banks as of March 31, 2016. The IAC noted that under the recommended criterion, 12 accounts totaling about 25 per cent of the current gross NPAs of the banking system would qualify for immediate reference under IBC” 

After a lapse of 12 months since the IBC was enacted, now only RBI has referred 12 top NPA borrower accounts which constitute 25 per cent of the current gross NPAs amounting to around Rs 2,50,000 crores to the IBC. 

According to PTI news dated June 20, 2017, the 12 accounts are Bhushan Steel (Rs 44,478 crore), Essar Steel (Rs 37,284 crore), Bhusan Power and Steel (Rs 37,248 crore), Alok Industries (Rs 22,075 crore), Amtek Auto (Rs 14,074 crore) and Monnet Ispat (Rs 12,115 crore), Lanco Infra (Rs 44,364.6 crore), Electro steel Steels (Rs 10,273.6 crore), Era Infra (Rs 10,065.4 crore), Jaypee Infratech (Rs 9,635 crore), ABG Shipyard (Rs 6,953 crore) and Jyoti Structures (Rs 5,165 crore) and the bankers are led by the SBI, PNB, ICICI Bank, Union Bank, IDBI Bank and Corporation Bank.

With the large number of pending cases and the limited number of judicial members and supporting staff in the NCLT and with the scope for further litigation by the debtors, it has to be seen how much time consuming the resolution process will be.

The same press release of RBI further reads: “As regards the other non-performing accounts which do not qualify under the above criteria, the IAC recommended that banks should finalise a resolution plan within six months. In cases where a viable resolution plan is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC.”

Through this guideline, six months’ time has been given to the banks for finalising a resolution plan with regard to other non-performing accounts totaling around Rs 7,50,000 crores.  The resolution plan would naturally include methods like OTS (one time settlement) transferring to ARC (asset reconstruction company) etc. In that process, it is not known how much that is due to the banks from the borrowers would be sacrificed.


Finance Minister Arun Jaitley has expressed in clear terms that the present government at the centre intends to protect the top executives of the PSBs by amending the Prevention of Corruption Act.

As reported in ET dated April 28, 2017, Arun Jaitley said in New York that resolution of NPAs is a big challenge but noted that the problem was essentially about some 20-30 large accounts. “It’s not a problem spread over hundreds of thousands of accounts...And it’s not impossible for a large economy like India to resolve 20 to 30 accounts. So it’s not an insurmountable problem. I think it has just persisted too long, but it’s certainly adversely impacting us,” he had said. Further Jaitley had also said some decisions will be taken to empower bankers to take haircuts without the fear of vigilance agencies. “The law has to eliminate the possibility of commercial decisions being treated as an act of corruption,” he had said.

A new term haircut is often used nowadays. A haircut is the difference between the loan amount and the actual present value of the asset using the security against the asset. The amount of the haircut reflects the lender’s perceived risk of loss from the asset falling in value.

If the commercial decisions are taken based on sound and unambiguous policy, without fear or favour and in good faith, what is the need for the top executives to be exempted from the Prevention of Corruption Act?  It is inexplicable why the government wants the top executives of PSBs to get away with whatever decisions they take without any accountability.

There is a genuine apprehension that the result of this whole process may be cited as the weakness of the PSBs and again the same may be attributed as the reason for attempting to sell the PSBs to the same corporate borrowers who have benefited due to this write off policy of the bankers and the government of India.  The onus of proving otherwise rests with the government of India, RBI and the top executives of PSBs.


Newsletter category: