Home Opinions Why Modi government deserves huge applause for the Insolvency and Bankruptcy code

Why Modi government deserves huge applause for the Insolvency and Bankruptcy code

While it was a known fact that Bank NPAs had been growing consistently under UPA 2, the true extent of the issue was uncovered only under the current NDA government.

“Deep Surgery” of India’s Banking system started in second half of 2015, with RBI conducting Asset Quality Review (AQR), a one-time special review of most of the large borrower accounts across the Banking system. AQR revealed a much higher asset quality deterioration than was earlier known. Many banks were found 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 were earlier unreported by Banks. Not surprisingly, the true NPA level shot up and are now projected to be INR 9.5 lakh crore in March 2018, from INR 2.78 lakh crore in March 2015.

To emphasize the enormity of this crisis, INR 10 lakh crores (US $150 billion) is larger than the GDP of 130 countries. Due to legacy issues from previous governments, this amount is stuck with corporate borrowers, not returning to the banks, thus choking the credit growth, blocking the capital availability for other growing businesses and impeding India’s economic growth.

- Advertisement - - article resumes -

From IMF’s 2016 data, India’s bad loans (8.6%), were much higher than other prominent economies like China, Japan, USA or UK where this is below 2%

India’s Bad Loans compared to other economies (source: here)

In order to address the issue of mounting NPAs, Insolvency and Bankruptcy Code (IBC)was passed in May 2016, which created a one-stop solution for resolving the insolvencies. The greatest strength of IBC is that it set a strict time limit for cases and the process could not go beyond 270 days (9 months).  Shortly thereafter in June 2016, National Company Law Tribunal (NCLT)was constituted as a quasi-judicial body with the responsibility of overseeing the insolvency process under IBC.

In 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 NPAs of banks.

Top 12 accounts with largest default amounts

IBC started showing results in May 2018, when NCLT approved Tata Steel’s resolution plan for Bhushan Steel. Yesterday, Tata Steel formally took control of Bhushan Steel settling about Rs 35,200 crore, or nearly two-thirds, of the loans owed to lenders. Banks, which though have taken a more than 37% haircut on their outstanding loans of Rs 56,079 crore, can now classify the assets as standard, reducing their bad loan burden. They are expected to reverse the provisions they had made against the account, significantly boosting their first-quarter results

Further, the RBI has also created a second list of 28 accounts for resolution under IBC. These accounts together amount to 40% of bad loans and are expected to be resolved by 2019. To address willful defaults in future, the government has also rolled out “Fugitive Economic Offenders Ordinance” in April 2018. This bill allows Government of India to henceforth confiscate all assets within and outside the country, of loan defaulters and fraudsters who have left the country to avoid facing criminal prosecution.

In a nutshell, between 2018 and 2019, 65% of total bad loans amount will be addressed by NCLT from the two lists of 40 account submitted by RBI. Many other smaller accounts are being addressed separately. NCLT benches (currently 11) may also be increased to support a speedier resolution. The NDA government deserves credit for –

  • Rolling out the much-needed Insolvency and Bankruptcy Code (IBC) as a framework 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 completely lost in defaults
  • Further strengthening the banking system with INR 2.11 lakh crore (US $30 billion) recapitalization plan for state-run banks
  • Preventing loss to country’s wealth in future by “Fugitive Economic Offenders Ordinance” which enables Government of India to confiscate assets of economic offenders who leave the country

It’s still early days and one needs to wait for more results, but it’s a promising indicator if Stanley Pignal (Banking Editor at The Economist), who is quite vocal and generally critical of Indian Government’s economic policies also gives a thumbs-up to IBC and says this

“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”

“A tough bankruptcy code, chastened banks and probity in Delhi have dealt a blow to cronyism”

Help Us Reach Every Indian, Please Share This Post
We need your support to survive in the media industry. Please consider paying us for the content we produce:

To know more about these payments, please click here.


Advertisement

Big Story

80 doctors at the RG Kar Medical College and Hospital in Kolkata have resigned demanding an apology from the Chief Minister for her remarks.

2019 World Cup Is Here!

Catch the latest on Cricket World Cup as it unfolds, special coverage by Opindia

NDTV's takes journalism to new heights by asking Rahul Gandhi how did he like his samosa

Rahul Gandhi got conned by his own men: Report says ‘Big Data’ head Praveen Chakravarty billed Congress 24 crores and is now absconding

A day prior to election results, Rahul Gandhi had reportedly even contacted UPA allies and offered to accommodate them in the cabinet.

Pakistani pop singer wanted a Dutch MP killed for blasphemy, this is where she learnt bigotry from

The irony of all this is that Tablighi Jamaat promotes segregation and believes that women should stay at home

Even as 700 doctors resign, TMC leader Abu Taher Khan Chaudhury accused of threatening doctors with rape and murder

There are videos circulating on social media which purportedly show the Trinamool MP from Murshidabad, Abu Taher Khan threatening the doctors at the institution. The politician, however, has denied all allegations.

Pakistani Twitter erupts in self-deprecating humour as their cricket team stares at imminent defeat

India registered its 7th consecutive win against Pakistan in Cricket World Cup tournaments.
Order to demolish and remove cross

Village officer issues order to demolish and remove crosses planted by Church on encroached land near Sabarimala

Crosses have been planted on the sacred lands of Panchalimedu, believed to be a place inhabited by Pandavas during the 12 years of exile.
Women cop killed

Ajaz, a civil police officer, hacked to death his colleague Soumya Pushpakaran with a sword, set her on fire

The accused suffered burns while trying to set her ablaze and has been admitted to a hospital

A dystopian future where Hindu nationalists take over: Social media reacts to Netflix’s latest Hinduphobic show ‘Leila’

After Ghoul and Sacred Games, Leila is the third show on Netflix that demonizes Hindus.

Demographic impact of Christian Missionaries: India needs the equivalent of Russia’s Yarovaya law

Christian Missionaries are still aggressively targeting the economically deprived section of India’s population and rapidly converting them into Christianity with a mission to increase the number of “believers”.

Bengal doctors crisis: A state which has pulled out of Ayushman Bharat, the poor are the worst affected of Mamata’s apathy

Further escalation of the crisis will be detrimental to the interests of the patient community at large.

Mamata didi, we upheld our Hippocratic oath during trying times, you failed the allegiance you swore to the Constitution

The Bengal Health Crisis has escalated to immense proportions. With Doctors across the state submitting their resignations, Mamata Banerjee has a severe crisis on her hands.
Subscribe to Day's Top Stories
- Advertisment -

Latest articles

Connect with us

170,322FansLike
149,249FollowersFollow
69,741SubscribersSubscribe
Help Us Reach Every Indian, Please Share This Post