NPA Crisis Current Affair

Will the Modi government's Insolvency and Bankruptcy Code be able to resolve India's Bank NPA crisis, help recover bad loans, and strengthen the banking system?

Here’s a brief synopsis of India’s Bank NPA crisis and the ongoing resolution process -

• 2015: “Deep Surgery” started with Asset Quality Review (AQR)
• One time special review of Bank Assets was completed under AQR in second half of 2015
• All large borrower accounts were comprehensively audited
• Findings of AQR
• AQR revealed higher level of asset quality deterioration or NPAs within the banks
• Most Banks were reported to be hiding bad assets under the practice of forbearance (a temporary repayment relief)
• AQR overrode such practices and helped determine the accurate level of bad loans that Banks were hiding. NPA levels suddenly shot up
• NPAs in March 2015: INR 2.78 lakh crores 
• NPAs in March 2018: INR 9.50 lakh crores 
• Please take a moment to consider the enormity of crisis
• INR 10 lakh crores (US $150 billion) is larger than the GDP of 130 countries
• This amount was stuck with corporate borrowers, not returning to banks, thus choking credit growth, impacting other growing businesses and impeding India’s economic growth
• From IMF’s 2016 data, India’s bad loans (8.6%), were much higher than any other prominent economy like China, Japan, USA, UK where this is below 2%

• May 2016: Insolvency and Bankruptcy Code (IBC) was passed
• Created a one stop solution for resolving insolvencies
• The greatest strength of IBC - it set strict time limit for cases and the process could not go beyond 270 days (9 months)
• June 2016: National Company Law Tribunal (NCLT) was constituted
• Constituted as a quasi-judicial body overseeing the insolvency process under IBC
• June 2017: RBI identified 12 accounts (“The Dirty Dozen”), each having more than INR 5,000 crore (US $745 million) of outstanding defaults
• These 12 accounts comprise 25% of total Bank NPAs 

• April 2018: The first case (Electrosteel) is resolved under IBC
• NCLT approves Vedanta Group’s bid for Electrosteel at INR 5,000 crore ($750 million)
• Final outcome – creditors will take a haircut of about 50% but 5,000 crore out of a total 10,000 crore default would return to the system
• All the other remaining accounts from the list are expected to be resolved within this year (under 270 days deadline). Possibly, more money is likely to return to creditors within 2018
• The current status of each individual case from the list can be viewed here in this report
• Next steps:
• RBI has created a second list of 28 accounts which comprise 40% of bad loans 
• These are expected to be resolved by 2019
• To address defaults in future, the government has also rolled out “Fugitive Economic Offenders Ordinance” in April 2018 [7]
• This bill allows Government of India to henceforth confiscate all assets, both within and outside the country, of declared economic offenders, who have left the country to avoid facing criminal prosecution
• Summary:
• Between 2018 and 2019, 65% of bad loans will be addressed from 30 accounts in the two lists submitted by RBI
• Many other smaller accounts are being addressed separately. Assuming average 60% haircut, a total of INR 4 lakh crore out of INR 10 lakh crore NPAs is likely to return to system by 2019
• NCLT benches (currently 11) may also be increased to support speedier resolution
• The government deserves credit for
• Uncovering the mountain of NPAs that was created over the years and hidden under the carpet but was choking country’s economic growth
• Rolling out Insolvency and Bankruptcy Code (IBC) which provides 6 months (extensible by 3 months), time bound insolvency resolution process
• Arresting the leakages and bringing a part of the capital back into the system, which was lost in defaults
• Infusing an additional INR 2.11 lakh crore (US $30 billion) through a recapitalization plan for banks to spur economic growth [8]
• It’s still early days and one needs to wait for results, but it’s a promising indicator if Stanley Pignal (Banking Editor at “The Economist”), who is quite vocal and generally critical of India’s economic policies also gives a thumbs up and says this about IBC -

“It used to be Indian tycoons could borrow as much as they wanted & default with no fear of losing their companies. No more. The impact is potentially far reaching”

“welcome development: the humbling of India’s tycoons. A tough Bankruptcy code, chastened banks and probity in Delhi have dealt a blow to cronyism”

Read the detailed report here

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