THE Non-Performing Assets (NPAs) is a burning issue of the banking Industry. The central government has been claiming that IBC would be an effective law to recover the NPA of the large borrowers.  But the present experience seems to prove otherwise and due to that, the additional NPA in the current financial year is feared to increase astronomically. 

The issue of bad loan has been in existence from the time the financial institutions started lending. Later in the neo-liberal era, “bad loan” has been euphemistically rechristened as NPA trying to convey a meaning that still the amount of bad loan was recoverable. Till 1993, only civil courts dealt with the recovery of NPAs of the financial institutions including banks.

The Recovery of Debts and Bankruptcy Act (RDB Act), 1993 provided for the establishment of Debts Recovery Tribunals (DRTs) with original jurisdiction and Debts Recovery Appellate Tribunals (DRATs) with appellate jurisdiction, for expeditious adjudication and recovery of debts due to banks and financial institutions, insolvency resolution and bankruptcy of individuals and partnership firms and matters connected therewith.

There were initially many deficiencies in the functioning of the DRTs like the insufficient number of tribunals covering a vast geographical area, huge volume handled by a few presiding officers and staff, lack of infrastructure etc. Later there was some improvement. On the whole, the DRTs, which were dedicated faster courts proved to be more effective than the civil courts to recover the NPAs of the small and medium borrowers.  But the DRTs were less effective with regard to corporate loan defaulters as they resorted to prolonged legal battle.

SARFAESI ACT
Later in the year 2002, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) was passed, to help the banks and financial institutions to recover their dues quickly. The SARFAESI Act essentially empowers banks and other financial institutions to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers. Prior to this act, financial institutions had to take the legal course to recover their dues, which was a lengthy and time-consuming process.

This act again proved to be effective only with regard to small and medium borrowers. In accordance with the lending policy of the Reserve Bank of India (RBI), huge loans amounting to hundreds and thousands of crores of rupees were lent to corporates with hardly 10 per cent to 20 per cent collateral security along with intangible primary securities in most of the cases. Hence the SARFEAESI Act also became ineffective for recovery of NPAs of the corporates.

LOK ADALAT
Lok Adalat is one of the alternative dispute redressal mechanisms. It is a forum where disputes/cases pending in the court of law or at pre-litigation stage are settled/ compromised amicably. Lok Adalats have been given statutory status under the Legal Services Authorities Act, 1987.  The banks could recover their dues through this forum only from the law-abiding citizens who were apprehensive of facing court proceedings.  Again, this does not have any impact on corporate borrowers. 

These acts and forum helped to reduce the NPAs from the small borrowers to a very great extent. But the NPAs from the large borrowers whose loan exposure was Rs 5 crores and above kept on increasing disproportionately. According to the financial stability Report of RBI, the share of the large borrowers in scheduled commercial banks’ total loan portfolios and their share in gross non-performing assets were at 53 per cent and 82.2 per cent respectively in March 2019. Remaining small and medium borrowers’ loan share was 47 per cent but their share of NPAs was only 17.8 per cent. 

DECLARE WILFUL DEFAULT AS A CRIMINAL OFFENCE
The bank employees’ movement and democratic forces have been making a powerful demand for a thorough change in the lending policy of the RBI with regard to large borrowers, mandating lenders to demand 100 per cent tangible primary and collateral security. They have also been demanding an effective law to recover the NPAs from the corporates, enabling the lenders to attach the properties of the partners/directors of the defaulting firms without the intervention of the Courts. The specific demand of the bank employees’ movement has been to declare wilful default as a criminal offence and a separate enactment to deal with these willful defaulters.

In February 2016, the standing committee on finance headed by Veerappa Moily, which consisted of the representatives from all political parties including the ruling BJP submitted a comprehensive report recommending sweeping policy changes to recover corporate NPAs effectively.  This report also emphasized the need for publicly naming and shaming the corporate willful defaulters and stringent measures to recover the NPAs due from them.  But the NDA-I government headed by the BJP did not bother to implement any of the recommendations of the standing committee on finance nor was it ready to bring any effective lending/ recovery policy to deal with the large borrowers as demanded by the bank employees’ movement. 

ENACTMENT OF IBC
In May 2016, the NDA-I government came out with a law called Insolvency and Bankruptcy Code (IBC). According to this act, a board called Insolvency and Bankruptcy Board of India would be created. The NPAs have to be taken up with this Board, which in turn will refer the cases to NCLT (National Company Law Tribunal) which will resolve these NPAs either by selling the defaulting firms to others within 180/270 days or by liquidating them and selling the same in parts. The ruling party has been making a tall claim that this act would prove to be highly effective in the recovery of NPAs from the corporates as otherwise, these corporate borrowers would face liquidation.  Under the direction of RBI, in June 2017, banks referred 12 largest NPA accounts amounting to Rs 3,45,000 crores constituting 25 per cent of the total NPAs of all the banks put together to the NCLT. Out of these 12 cases referred to NCLT, only seven cases were so far resolved even though three years have elapsed. The total amount NPAs of these 7 accounts is Rs 2,13,731 crores out of which only Rs 1,12,894 crores could be recovered. This too would not come in a single payment. It would be received by the banks in instalments in 4/5 years. The remaining amount of Rs 1,00,837 crores is fully gone and will never come back.

IBC HELPFUL TO OPENLY LOOT THE BANKS
Bank employees’ movement has been in the forefront exposing the hollowness of the claims of the rulers about the effectiveness of the new IBC law.  The IBC proved to be helpful to the corporate NPA borrowers to openly loot and plunder the banks.  But the ruling party and their loyal supporters have been misleading the public by launching a serious campaign through social media and the mainstream media projecting IBC as an effective law by quoting only the amount recovered and hiding the amount of hair-cut (write off).  The bank employees’ unions have been demanding for an effective law in place of IBC to recover the NPAs from the corporates. 

Now the cat is out of the bag. The finance minister while explaining to the media for five successive days about the relief package of the government of India has admitted that "In 221 resolved cases 44 per cent recovery has been achieved since the inception of IBC 2016.  The admitted claims amount to Rs 4.13 lakh crores and the realizable amount is Rs 1.84 lakh crores."  This clearly reveals that an amount of Rs 2.29 lakh crores has been written off to the corporates in these 221 cases.  It is further to be noted that the government itself admits that Rs 1.84 lakh crores are only the ‘realizable’ amount.

According to the daily newspaper-Business Line, dated May 22, 2020, “Financial and operational creditors have managed to recover money in just 221 cases, or 14 per cent, of the 1,604 cases resolved by the National Company Law Tribunal (NCLT) till March-end. The NCLT ordered liquidation in 914 cases (57 per cent) while 312 cases (19 per cent) went on appeal and about 157 litigations (10 per cent) were withdrawn, said Motilal Oswal Research’s three-year report card on the Insolvency and Bankruptcy Code (IBC).”

CASES WITHDRAWN BEFORE ADMISSION
Further, it is revealed by the government of India that “13,566 cases involving a total amount of Rs 5.01 lakh crores (approximately) have been withdrawn before admission under provisions of IBC till February 29, 2020”.  The government has not explained how and why such a large number of cases have been withdrawn, the role of the lenders and the RBI in this regard and the alternate mechanism to recover this huge NPA of more than Rs 5 lakh crores. 

In 2014 when the NDA-I government came to power, the quantum of gross NPAs of the public sector banks (PSBs)was around Rs 2,16,000 crores. It has risen to around Rs 8,95,000 crores in 2018 and come down to around Rs 7,39,000 crores in 2019 since a large amount has been written off through various processes. The gross NPA figures of the PSBs for the year 2020 are yet to be published. Given the approach of the government at the centre in handling the corporate NPAs, the gross NPAs are bound to increase astronomically in the coming year. Let us collectively raise our voice against this dangerous policy pursued by the government, which will ruin the banking industry and ultimately endanger the depositors’ money.