Non Performing Assets (NPA) and Recovery Measures in India

A Non-Performing Asset is a serious and global concern for any country. However, for emerging countries such as India, the enormity of this worry is undeniably great. The Indian government's economic reforms to keep up with the global economic challenge will be difficult to undertake without a full and strategic overhaul of the Indian banking and financial industry. The problem of non-performing assets (NPAs) is steadily increasing which is posing a threat to banks survival, reducing their profitability, and harming the economy as a whole. In simpler terms, NPAs are those kinds of loans or advances that are in default or in arrears wherein principal or interest amounts are late or have not been paid. These are also the kinds of loans where the lender considers the loan agreement to be broken and the receiver of the loan is unable to pay back the loan amount. So, if the customers do not repay principal amount and interest for a certain period of time, then such loans are considered as Non-Performing Assets. 

 As per the Reserve Bank of India (RBI), it is defined that when an asset stops providing income and profit for the bank, it is referred to as a non-performing asset. This might occur as a result of leased assets or a bank loan or advance. In Non-Performing Asset, it usually refers to a loan or advance where the interest or installment is past due for more than 90 days.

Looking back, in India there are now many overlapping laws that deal with financial failure and insolvency of businesses and individuals. The current legal and institutional framework hinders lender’s ability to collect or restructure defaulted assets in a timely and effective manner, putting unnecessary burden on the Indian credit system.

The framework attempted to incorporate a time-bound and methodical resolution of insolvencies in order to maximize value for all stakeholders while also balancing information asymmetry and protecting all stakeholders' interests. The number of non-performing assets (NPAs) skyrocketed in the year 2000. From 2008 to 2014, banks lent indiscriminately, resulting in a large percentage of non-performing assets (NPAs), which was highlighted by the RBI's Asset Quality Reviews, prompting swift action by the government. 

Though India's overall performance is disappointing, the Insolvency and Bankruptcy Code’s time-bound resolution of non-performing assets should relieve banks of their burden. The non-performing asset (NPA) problem that banks are facing has dominated headlines for some months, and the fact that we still don't know whether or not all of them have been recognised is of concern. In this context, it would be interesting to compare the Indian financial system to others throughout the world as this is critical since NPAs have arisen as a result of a number of poor judgements in the past since the banking system's lending activities are tied to how the economy is expected to perform.

As we already know before the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) there were different statutes for recovery of the due amount. To name a few we can say the Recovery of Debts due to Bank and Financial Institution Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Under these two act the banks use to initiate the case against the debtor for recovery of dues. And there were other acts too like the Sick Industrial Companies (Special Provisions) Act, 1985 and the Companies Act, 1956 (winding up provision) where under bank, non-bank lenders or even a corporate debtor use to sought for legal action for collective resolution of insolvency and there were other mechanisms also for restructuring of corporate debtor. 

Section 6 of the IBC allows any type of creditor, including financial and operational creditors, as well as bank and non-bank creditors, to file a corporate insolvency petition. Also, because there is a time limit specified, the process must be completed within 330 days. So, even non-bankers who are enduring long delays can file a lawsuit with the NCLT, and banks will be forced to participate in the process. Hence, IBC can take place on a large scale for existing NPAs. 

The reasons for rise in NPAs in India is mainly due to some of the external factors contributing to the rise in NPAs, such as weaker global commodity prices resulting in slower exports that are inextricably linked to the Indian banking industry. Many of the loans now classed as non-performing assets were made in the mid-2000s, when the economy was flourishing and the economic outlook was bright. As back then, loans for projects were given to large firms based on extrapolation of their current growth and performance and corporations became heavily leveraged as the loans became more readily available than before, suggesting that the majority of funding came from outside sources rather than internal promoter equity. However, as the economy slowed during the global financial crisis of 2008, these companies’ ability to repay their debts shrank. 

This contributed to what is now known as India's Twin Balance Sheet Problem, in which both the banking sector which lends the money and the corporate sector which borrows money and must repay it are experiencing great financial difficulties. The borrowers lost their ability to repay the bank when the project for which the loan was taken began to underperform. At the period, banks practiced a technique known as "evergreening," in which new loans were made to some promoters in order for them to pay down their debt. This effectively postponed the designation of these loans as non-performing, but it did not solve the underlying problem of their unprofitability. Furthermore, there have been recent large-scale frauds that have contributed to increased NPAs. Despite the fact that the size of scams is minor in comparison to the entire number of NPAs, they have been increasing, and no high-profile fraudsters have been punished.

To address these problems of growing Non-Performing Assets measures haven been taken to resolve and prevent them and can be divided into two categories. Firstly, regulatory means of resolving NPAs under various laws such as the Insolvency and Bankruptcy Code, and Secondly, the RBI-prescribed and regulated remedial measures for banks for internal restructuring of the stressed assets.

The Insolvency and Bankruptcy Code (IBC) was enacted like mentioned earlier to provide a time-bound of 180 days recovery process for insolvent accounts where the borrowers are unable to pay their dues. Under this code, the creditors of these insolvent accounts, presided over by an insolvency professional, decide whether to restructure the loan or to sell the defaulter’s assets to recover the outstanding amount. If a timely decision is not arrived at that time, the defaulter’s assets are liquidated and proceedings under the IBC are adjudicated by the Debts Recovery Tribunal (DRT) for personal insolvencies, and the National Company Law Tribunal (NCLT) for corporate insolvencies. 

Over the years, the RBI has issued various guidelines aimed at the resolution of stressed assets of banks. These included introduction of certain schemes such as the Strategic Debt Restructuring that allowed banks to change the management of the defaulting company, and the Joint Lenders’ Forum where lenders evolved a resolution plan and voted on its implementation. In line with the enactment of the Insolvency and Bankruptcy Code, the Reserve Bank of India had issued guidelines for application of the Insolvency and Bankruptcy Code on the NPAs. After much debate in the past where in the year of 2018 the RBI had issued a Circular on 12 February 2018.

In that circular the RBI mandated for all the banks and the financial Institution to initiate corporate Insolvency Resolution plan against the borrower which is the defaulting company having a loan exposure of more than Rs. 2000 Crore, if the bank unable to implement a resolution plan within 180 days of the default. The circular made it clear that it is mandatory for the bank to identify and classify the stressed asset as special mention account immediately and even on a single day of default of repayment the banks had to report to the RBI and implement the resolution plan.

A petition was filed against this circular issued by the RBI in 2018. There was the issue with regard to the one-day default norm which was there in the circular. So, petition was filed by the textile industry, power industry etc. stating that it is arbitrary and discriminatory as it did not comply with few requirements for instance the framed timeline of 180 days without taking into consideration the issues faced by several sectors. Also, it had not taken the prior authorization by the central government which was mandatory under the Section 35AA of the Banking Regulation Act. The RBI has the authority under Section 35AA of the Banking Regulation Act to direct any banking company to commence an IRP in the event of a failure. However, it had to get authorization from the central government before issuing a circular under section 35AA. As a result, the Supreme Court in the case of Dharani Sugar and Chemical Limited v. Union of India and Others, REED 2019 SC 04589, ruled that this circular violated section 35AA of the Banking Regulation Act.

After two months after the Supreme Court quashed the RBI 2018 Circular which mandated the Bank to start the Insolvency Resolution Process even in case of one day default, the RBI issued a revised circular in the year 2019 for resolving stressed asset by offering banks or lenders a thirty days period to label an account to be an Non performing asset. Lenders will have complete authority to design and implement resolution plans under the new circular. It can begin the IBC process with a default of 30 days. The inter-creditor agreement must be signed by the lenders since it establishes a majority decision-making requirement. The RBI also modified its creditor approval criterion to 100 percent. And, any judgement reached by a lender representing 75 percent of the entire outstanding credit facility's value and 60 percent of the total number of lenders shall be binding on all lenders. There are so many non-performing asset cases that have been resolved using NCLT under the IBC code. Here are a few case laws mentioned for a better understanding. 

The Bhushan Steel case, REED 2019 Bom 03552, was one of the large non-performing cases brought to the National Company Law Tribunal for settlement under the insolvency law by the Reserve Bank of India. The bank took Bhushan Steel to bankruptcy court in 2017 due to non-payment of loans totaling thousands of crores of rupees. Tata Steel afterwards purchased Bhushan Steel. The total amount claimed in this case was Rs. 56,022 crore. Moreover, the amount realised was Rs. 35,571 crore. There was 63.5 % recovery.

In the case of Essar Steel, REED 2019 SC 11505, the Supreme Court's decision not only gave disappointed banks hope, but it also boosted money recovery through the ever-changing Insolvency and Bankruptcy Code. ArcelorMittal purchased the Essar steel assets. The claim was for Rs. 49473 crore. The total amount of money recovered was Rs. 42000 crore. The recovery rate was 84.89 percent.

There have been other instances when banks have recovered a significant amount of money in various cases, such as Jyoti Structure Ltd., REED 2017 Del 12676, which was acquired by a group of HNIs and had a recovery percentage of 50.12. Monnet Ispat & Energy, REED 2018 NCLT Mum 06509, was purchased by a consortium of JSW and AION Investment Pvt. Ltd., and banks recovered 26.26% in this case as well. Alok Infrastructure, REED 2018 NCLT Mum 10544 had the lowest recovery rate as their banks could recover only 17.11 % out of total amount claimed.

It could be made of a note here that, according to the Economic Survey Report 2020, the Insolvency and Bankruptcy Code has enhanced India's resolution procedure over previous mechanisms. The IBC has a recovery rate of 42.5 percent of the sum involved in NPA cases, compared to 14.5 percent under the SARFAESI Act. The World Bank's "Ease of Doing Business 2020 Report” also says that India has risen 14 places to 63rd place, up from 77th place in 2018. India jumped 56 places to 52nd place in the resolving insolvency index in 2019 from 108th place in 2018. In 2018, the recovery rate was 26.5 percent, whereas in 2019, it was 71.6 percent. Recovery time has significantly decreased, from 4.3 years in 2018 to 1.6 years in 2019.

In today's society, banks are confronted with a slew of issues, the most serious of which is non-performing assets which we have discussed in depth above. The non-performing assets must therefore be properly controlled and managed in order for the banks to increase their efficiency and profitability. The analysis reveals that the Insolvency and Bankruptcy Code has had a positive impact on the Indian economy and banks by looking at the number of cases settled, and the time taken to resolve such dues, and the percentage of recovery made. When compared to the time when the Insolvency and Bankruptcy Code was not present, here the time taken is also very less and the sum which have been recovered by the banks is fairly good as well. The Code has been implemented in a good and suitable manner. If this trend continues in the future, the Insolvency Code will be a boon to the Indian economy and will boost investment in the country and this will no doubt boost the convenience of doing business further.