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The NPA Story: From Bad Loans to Good Recoveries

On July 17, the Union Cabinet approved eight amendments to Insolvency and Bankruptcy Code (IBC) to make the resolution process even better. The IBC, introduced in 2016 had forced the corporate defaulters either to pay back their dues to banks or lose control over their businesses. Now, the amendments, among other things, stipulate a strict 330-day timeline for the insolvency resolution process, including any legal challenges. This strengthens the IBC process which is predicated on timely resolution for faster exit of businesses, thus tackling NPAs, if any, faster.

This provides an opportunity to look at the IBC and Non-Performing Assets (NPAs) story so far.

Further Financial Discipline- The Story Continues

So, the resolution process under IBC has played a major role in cleaning the NPA mess. Among 12 large defaulters Bhushan Steel Ltd., Electrosteel Steels Ltd and Monnet Ispat & Energy Ltd were resolved under the code. Liquidation orders have been served to ABG Shipyard Ltd. and Lanco Infratech Ltd in order to sell their assets to recover the value associated with them.

Why did the other cases not see the resolution? It is mostly because the promoters of large bankrupt companies have entered into the long judicial procedure by challenging the decisions of the tribunal and higher courts.

This is where the Modi government acted swiftly by proposing amendments to IBC. At present, IBC allows 270 days for clearing a resolution plan but the time spent on legal challenges by various parties excluded. But once these amendments are cleared by the Parliament, the time spent on litigation also will be counted. ‘On 331st day the corporate debtor will automatically go into liquidation’ Live Mint reported quoting the secretary, ministry of corporate affairs.
Once the IBC takes the decision, it is binding on all governments.

In this evolving story of NPA, it has been obvious to see who created this burden of bad debt and who is resolving the mess with a consistent effort.

The UPA Era

The years between 2008 and 2014 had seen aggressive lending practices, wilful default/loan frauds/corruption in some cases, and economic slowdown. But the stressed assets were not treated as NPAs.

Enter NDA with Reforms

The first step in addressing the problem is acknowledging it.  Asset Quality Review initiated in 2015 for clean and fully provisioned bank balance-sheets revealed high incidence of NPAs. As a result, NPAs in Public Sector Banks (PSBs) rose from Rs 2,67,065 crore as on March 2015 to Rs 8,45,475 crore as on March 2018. Remember, much of this was due to the unearthing and identification of NPAs which were ‘hidden’ earlier.

After diagnosing the problem, what was the solution the government came with?

4R strategy consisting of recognition of NPAs transparently, resolution and recovering value from stressed accounts, recapitalising PSBs, and reforms in PSBs and financial ecosystem to ensure a responsible and clean system.

Results are Showing

Gross NPAs of PSBs, as per RBI data on domestic operations, have reduced over the last financial year by Rs 1,35,366 crore.

Also, PSBs have recovered an amount of Rs 3,09,568 crore over the last four financial years.

Over the last four financial years, PSBs were recapitalized to the extent of Rs 3.12 lakh crore, with an infusion of Rs. 2.46 lakh crore by the Government and mobilisation of over Rs. 0.66 lakh crore by PSBs themselves.



You may also like to read our earlier articles on this topic:

How NDA Government is Turning Around the Indian Financial Sector

The Steely Resolve of Government: Essar Steel Only the First to Fall

How IBC Has Pushed the Big Corporates to Clean Their Debt Mess