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Topic – Report on Banking Reforms and NPAs

Name – Vidyank Nayar

Subject – Legal Aspects of Banking
PRN – 18020942076
Division - B
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BANKING REFORMS AND NPA

The NPA crisis can be traced back to the high growth of 2006-2008, when the optimism over
GDP growth of above 9 per cent led companies to borrow heavily and banks to accept higher
leverage. Politically-connected promoters of projects had significant power over the banks, who
often hid NPAs in their books by marking them as restructured loans. The crisis worsened as a
result of the 2008 financial crises, the cancellation of coal mine allocations, project delays, and a
series of bank frauds and corruption scandals. Possibly corrupt big borrowers made the
Government reluctant to rescue the banks it owned, although it had influenced choices that
turned out badly.

A number of steps have been taken to expedite and enable resolution of NPAs of banks. The 5
R’s which effectively deal with NPAs are as under:

1. Recognition of NPAs
Most of the non performing assets in India are loans by government banks, because the
management of these banks gives loan to companies without checking the viability of the
project or the ability of the client to pay back. They do so because companies bribe these
employees, and the employees get money without any liability on them for the default in
repayment of loan. Since the RBI launched the Asset Quality Review (AQR) in 2015,
Indian banks have had to progressively reveal the true extent of their NPAs. The
NPAs were close to Rs 10 trillion at the end of March 2018, of these over Rs 9.62 lakh
crore were in PSBs. The RBI, in its bi-annual Financial Stability Report (FSR) said NPAs
in the banking sector may reduce from 10.8 percent (registered in September 2018) to
10.3 percent by March 2019 and further to 10.2 percent by September 2019. The ratio
was 11.5 percent at the end of March 2018.

2. Recapitalisation of banks
PSBs have been recapitalised to credibly stay within Basel III guidelines. According
to data provided by the government, Rs 51,533 crore were injected in the PSBs till
December 31, 2018 out of budgetary allocation of Rs 65,000 crore. It is significant that
capital is being infused into banks. This could give the banking system a good breathing
time to enhance its credit portfolio and restore value out of the NPA accounts. We may
have to watch the situation unfolding over the next three years. During this time, the
regulator, banks and the government will have to focus on the quality of public sector
banking assets, the NPAs and the recovery. There has been a broad-brush approach to the
quality assessment. The system will have to conduct more analysis, more evaluation
sector-wise in terms of its potential for value restoration and enhancement. They will
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have to understand which sector is in a position to restore more economic value in six to
eight quarters. Some sectors may perhaps take longer.

3. Resolution of NPAs
The PM Modi led government took strong decisions to wipe out NPAs from Indian
banking industry. The Insolvency and Bankruptcy Code (IBC) is proving to be the most
powerful weapon against the NPA problem, even the Economic Survey 2018 said the
new Insolvency and Bankruptcy code (IBC) was helping improve the health of banking
sector. Bhushan Steel and Electrosteel were both among the first twelve companies
which were referred by RBI to National Company Law Tribunal for proceedings under
Insolvency and Bankruptcy Code, the other being Essar Steel, Alok Industries, Amtek
Auto etc. The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 has been amended to make it more effective with provision
for three months imprisonment in case the borrower does not provide asset details and for
the lender to get possession of mortgaged property within 30 days. Also, six new Debts
Recovery Tribunals have been established to expedite recovery.

4. Reforming our PSBs

Neither recapitalisation nor a one-time resolution of stressed assets guarantee that
these cycles of lend and write-off will stop. The PJ Nayak committee recommended
the formation of a Bank Investment Company (BIC) to hold government’s PSB
stakes. The government would then distance itself from managing banks, repeal the
Bank Nationalization and State Bank of India acts, and put all PSBs and the BIC
under Companies Act. This would in turn allow the BIC to operate as a professional
manager of PSBs. It would allow PSBs to develop market-linked human resource
policies including pay, promotion and performance accountability, in line with other
professionally managed companies. It would also bring all of banking regulation
under RBI, rather than the dual government/ RBI framework for PSBs today.
Eventually, the BIC would downstream governance fully to individual bank boards,
including the responsibility for selecting CEOs, business strategy, financials, risk
and human resources.

5. Realpolitik
It’s easy to list the above, but politically, very challenging to implement. Each stage
has ramifications that cannot be ignored. Full disclosure of NPAs, provisioning, and
recapitalisation will be portrayed as a reflection on the current government
performance and that the seeds were sown many, many years ago. A big political
issue around the bad bank would be the transfer of loans at a haircut. This will be
portrayed as waivers to big borrowers; many of whom are also suspected of
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malpractice, while ordinary retail borrowers are given no such respite. We need a
government that is both convinced on the way forward, and is confident it has the
political capital and savvy to shape the narrative or is patriotic enough to do the
right thing, even if it means paying the supreme political price.

Various actions with regard to control and resolution of NPAs have been taken through the
above legislative, legal, regulatory and reform measures. If banks, government, regulators, and
monetary and fiscal policy work in tandem, the problems of NPA can be overcome.