- Bad loans spiralled between 2008 and 2014, under the last government
- Not only did banks not recover the same, but they were made to give out additional loans to the defaulters who stayed on as non-NPA accountholders while the NPAs remained hidden
- This created the crisis of NPAs which burdened PSBs
- The current administration began redressing this by first accounting for the real amount of NPAs, which is the figure the media has been concerned with since
- Current government did not create NPAs or give out bad loans, it discovered and made public the correct data on actual NPAs
- For systemic overhaul, the Insolvency and Bankruptcy Code was enacted, the RBI was further empowered by the Banking Regulation (Amendment) Bill, 2017
- Today, operational creditors, who are usually smaller and weaker than financial creditors like banks, are empowered and taking defaulting corporates to the NCLT
- Defaulters and debtors, as a result of the bankruptcy law, are repaying, settling or ensuring they do not default
On Monday, December 25, 2017, CPM General Secretary Sitaram Yechury tweeted that the recovery of bad loans from corporates has “fallen sharply since BJP came to power”. Mr Yechury alleged that the government was “[h]elping friends to help themselves to public money”, with the hashtag #Cronyism:
Mr Yechury’s tweet is along the lines of the rumour that has been circulated by vested interests that banks were giving loan waivers to corporates and defaulters under the watch of the current administration, even as Public Sector Banks (PSBs) are struggling with stressed or non-performing assets (NPAs) on the verge of collapse or shutdown.
All of this has been alleged against the backdrop of the expansive PSB recapitalisation plan, the FRDI Bill and the operation of the Insolvency and Bankruptcy Code (IBC).
Therefore, we need to look at when the bad loans were offered, when and how banks became stressed, what the current administration has done to redress the issue and how this process is working.
No Loan Waivers
But, first of all, let us look at the allegation of loan waivers.
The fact is that despite the near-persistent media and political narrative from certain quarters, there has been no loan waiver given to any big NPA defaulter. Nobody is going scot-free. Under the Insolvency and Bankruptcy Code, brought in by the current administration, cases have been instituted in the National Company Law Tribunal (NCLT) for the timebound recovery from the 12 largest defaulters in six to nine months, with cases amounting close to Rs 1.75 lakh crore.
Again, write-offs of NPAs is a regular exercise conducted by banks to clean up their balance sheets. It is merely technical in nature, primarily intended to achieve taxation efficiency. But this does not mean that it goes with foregoing the right to recovery. So, a bank write-off is not a form of waiver.
Origin of Bad Loans & NPAs
Between 2008 to 2014, when the last administration was in office, PSBs disbursed disproportionate sums of loans to several industries.
Since it is expected that a bank would not disregard its own financial security, and since these are PSBs we are talking about, the correct question that needs to be asked is whether there was any external pressure or otherwise on the banks to take such decisions in the period mentioned above.
To see when the bad loans came about and to understand who was responsible, let us look at the following graph from the Ministry of Finance:
So, between March 2008 and March 2014, total loans grew from Rs 18.16 lakh crore to Rs 52.15 lakh crore, which is a whopping threefold increase in 6 years to the tune of Rs 34 lakh crore. But thereafter, total loans rose to only Rs 58.65 lakh crore in the next three years till March 2017. At the same time, by March 2014, stressed assets had grown to 11.9%.
What happened when debtors delayed the repayment of these loans?
No action was taken by the then government between 2008 and May 2014. Therefore, the likely contribution of the then administration in the creation of the persistent problem of NPAs must be kept in mind.
Moreover, the then government had banks relax the loan classifications and keep these defaulters as non-NPA accountholders. The bad loans were restructured using this mechanism and the losses incurred by the banks in the process were kept under the surface. All the time, the process of granting fresh and additional loans to these defaulters-cum-debtors went on.
Now, what did the current administration do?
The evidence shows that it busted this NPA-nurturing process. It brought in the Insolvency and Bankruptcy Code and it was enacted into law in May 2016. The Code set up the Insolvency and Bankruptcy Board of India (IBBI) as the regulator on October 1, 2017. The NCLT was, of course, already in place.
The timebound recovery made possible by the bankruptcy law has been mentioned above. But the code was also amended to ensure debtors were barred from further involvement in the business of such defaulting companies.
Even earlier, the current government had recognised and classified the problem of NPAs after the Asset Quality Review (AQR) in 2015. This recognition of the correct amount of NPAs in PSBs raised the NPA amount from Rs 2.78 lakh crore in March 2015 to Rs 7.33 lakh crore by June 2017.
Thus, it is because of the correct action taken by the current administration that the correct amount of NPAs was first of discovered.
Critics like Mr Yechury should first of all take cognisance of that fact and then draw their conclusions as to who perhaps allowed public money to be squandered by extending loans to defaulters and debtors at the expense of the PSBs.
What followed the recognition of the correct amount of NPAs was up-front provisioning for losses by the PSBs. Estimating a capital need of about Rs 1.8 lakh crore till fiscal 2018-19, the government provided Rs 70,000 crore up front.
A complete recapitalisation of PSBs, for Rs 2.11 lakh crore over the next two years, was announced on October 24, 2017, with recapitalisation bonds as a major component (64%) of the capital infusion plan. This infusion of capital will be via budgetary provisions of Rs 18,139 crore, recapitalisation bonds of Rs 1,35,000 crore, and the balance capital will be raised banks from the market while diluting government equity (estimated potential of Rs 58,000 crore). Again, In August 2017, the Alternative Mechanism was approved by the Union Cabinet, which will oversee mergers of Public Sector Banks (PSBs).
But leaving the full scope of the plan apart for the moment, let us return to the question of loan recovery.
We have already discussed the Insolvency and Bankruptcy Code which was a revolutionary step for the Indian financial system for which the current administration is responsible. What has the bankruptcy law been achieving?
As per the latest Financial Stability Report from the RBI, the bankruptcy code has empowered creditors, especially operational creditors who are usually smaller and weaker than financial creditors like banks and include entities like employees, workers, trade suppliers, etc. This is what the RBI report says: “Such creditors were served neither by previous restructuring mechanisms (such as SICA) nor the existing recovery mechanisms (such as SARFAESI)”.
SICA (Sick Industrial Companies Act) and SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) primarily gave agency to empowered financial creditors, but the revolutionising impact of the bankruptcy has been acknowledged by the central bank.
Now, armed with the bankruptcy law, the IBBI and the NCLT, the system saw remarkable progress. Let us see what the RBI has to say about the same:
Let us see Chart 3.7 next:
It must be noted, too, that this “market-determined and time-bound mechanism to handle insolvencies has been recognised in the World Bank Group’s ‘Doing Business 2018: Reforming to Create Jobs’ report issued in October 2017. India’s ranking on ease of doing business has jumped from 130 to 100. The ranking under the Insolvency head, taken alone, also improved sharply from 136 to 103.” (Source: RBI)
Again, these are facts that are available in the public domain and even the media has reported on the same. For instance, the report “‘Pay up or we go to NCLT’ is proving to be a very credible threat”, published on December 26, 2017, in Mint, says the following: “Between December 2016 and August 2017, operational creditors filed 267 petitions with NCLT, or 52% of the total number of petitions filed. About a third of these cases (86 petitions) have been admitted by NCLT and are in various stages of the insolvency process. Among the petitions that were dismissed, 79 or about 44% were either settled or withdrawn, indicating that operational creditors got their dues back in a large number of cases.”
The report adds: “Operational creditors have finally gotten hold of a useful tool to get their dues back from defaulting companies. When the bankruptcy code is triggered, an insolvency professional is given charge of the business and the management of the company can be temporarily dispossessed. The prospect of losing control is causing defaulting companies to settle, especially in cases where the dues are relatively small.”
But it must be remembered again that the government did not stop with identifying the correct volume of NPAs or enacting the bankruptcy law alone. It even brought in the Banking Regulation (Amendment) Bill, 2017 which became law in August this year.
This law empowers the RBI in the recovery of bad loans. As per this act, the following may be done:
- Initiating insolvency proceedings: The Centre can authorise RBI to issue directions to banks to initiate proceedings in case of a loan repayment default. Such proceedings will occur under the Insolvency and Bankruptcy Code.
- Directions on stressed assets: RBI can issue directions to banks for the resolution of stressed assets.
- Advising banks: RBI can specify authorities or committees to advise banks on the resolution of stressed assets. Members will be appointed or approved by RBI.
In conclusion, it may be said that there is a plethora of facts and data that Mr Yechury has not taken into account, which he and political critics like him must take into account before they make their allegations or insinuate cronyism, etc.
The whole business of handing out loans which became bad loans and which were compounded by further loans to the same defaulters dates back to the era of the last government. These bad loans resulted in the NPAs which have burdened the PSBs. Not only was the current administration not in office when this was happening but it has taken firm and serial action to redress the problem.
If recovery has slowed in recent times that could be because of the sheer volumes of bad loans and NPAs. At the same time, it should be noted that what the current administration has been putting in place are big structural changes in the financial system at large. Thus, we are also looking at a critical and sizeable transition process in operation. Once the dust settles, we have to see the figures afresh.
In the meantime, there is plenty of evidence available, as we have noted above, that the new processes are changing things for the better. It is perhaps more pertinent to see what is happening to operational creditors first because they usually happen to be smaller and weaker than financial creditors like banks. If operational creditors are finally being empowered to go to the NCLT and recover their dues, and if corporates are being scared into ensuring they settle, repay or not even default, then that is the best endorsement possible for the actions of the government.
As for PSBs, readers may also want read about the recapitalisation plans in detail here:
A Concerted Effort Aimed at Recapitalising (and Reinventing) PSBs