.png)
This piece has been authored by Akshat Jain, a fourth year student of B.A.LL.B.(Hons.) at the Rajiv Gandhi National University of Law, Patiala.
The Problem of NPAs
The instability of the Indian financial market has been a subject of great attention for policy makers, in the recent years. A number of factors have contributed to this adverse situation including sore international speculations, insolvency of the companies operating at a very large scale, and their consequent failure to pay off their debts. This trend has resulted in a surge in the stressed assets and the Non-Performing Assets (NPAs) of the lenders. The loans advanced by the banks constitute their assets and are accordingly reflected on the assets side of their balance sheet. As the debtor defaults, the quality of these assets is compromised as the risk of non-payment looms high. While there are other measures to rescue the creditors, recapitalization has been adopted as one of the most effective methods.
Bank Recapitalization
Recapitalization means, “to change the capital structure”. Hence, a company is said to have undergone recapitalization when it reorganises its capital structure from “equity to debt” or from “debt to equity”. The latter method of recapitalization is adopted in order to reduce the stressed assets. Recapitalization is mostly popular among the banking corporations as a method to curb the NPAs. Under this process, more capital is infused into the banks by the government or recapitalization bonds are issued for this purpose.
Insolvency and Bankruptcy Code, 2016 and Revaluation of Non-Performing Assets
IBC, 2016 has ushered an era of revolutionary change in the banking sector in India. The process of recovery of debts has never been so effective. The earlier mechanism under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act, 2002 faced serious challenges because of the delayed resolution process. Under the IBC, a time limit has been specified to recover the NPAs from the defaulters by initiating insolvency resolution proceedings against them. Another significant advantage of the IBC is the due involvement of judiciary (NCLT) in cases of failures of proceedings.
Banking Regulation (Amendment) Act, 2017
The Banking Regulation (Amendment) Act, 2017 is a huge step taken by the government in order to check the stressed assets in the economy. The Act amends the Banking Regulation Act, 1949 to give additional powers to the RBI to issue directions to the commercial banks with respect to the recovery of loan from the defaulters. According to the Act, the central government can direct the RBI to issue directions to commercial banks to initiate proceedings against loan defaulters under the Insolvency and Bankruptcy Code, 2016. Further, RBI can establish various committees, the members of which will be approved by the RBI itself, to help the banks with the above process.
Revised Prompt Corrective Action (PCA) Framework
The Reserve Bank of India vide its April, 2017 circular revised its PCA framework.[i] This mechanism gets triggered when the stipulated regulations regarding minimum capital, return on asset and quantum of NPAs is violated by the scheduled commercial banks. In order to serve this end, RBI has formulated some trigger points to assess, monitor, control and take corrective actions on banks which are under stress. A Board for Financial Supervision (BFS) is responsible to regulate the banks. Recently, on 26th February, 2019, PCA regulations were lifted from Allahabad Bank and Corporation Bank as a result of the infusion of capital by the government as a recapitalization measure for these banks.[ii]
Scrapping of the Traditional Debt Restructuring Mechanisms
India’s central bank in February, 2018 scrapped various debt restructuring mechanisms earlier used by commercial banks to deal with loan defaults by debtors.[iii] These included Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), Sustainable Structuring of Stressed Assets (S4A), and Flexible Structuring of Existing Long Term Project. The measure has been aimed to expedite the process of loan realization by the banks through the mechanism under the Insolvency and Bankruptcy Code, wherein time bound resolution process is provided for.[iv]
Mission Indradhanush for Banks
In 2015, the Government of India launched a scheme known as ‘Indradhanush’ for helping the wrecked ship of the PSBs.[v] Under the scheme, the government decided to recapitalize the PSBs by infusing an amount of ₹ 70,000 crores. Another measure was taken in the form De-stressing the stressed assets of the banks by evaluating and executing the stalled projects in the infrastructure sector, which contributes highest to the problem of NPAs. However, the scheme has been criticised on various fronts including its non-implementation and insufficiency in the sanctioned amount for the purpose of recapitalization.
Merger of Large Banks with Smaller Banks
Recently, Bank of Baroda has been merged with Dena Bank and Vijaya Bank.[vi] Also, the State Bank of India was merged with five smaller banks two years ago.[vii] The rationale behind this initiative is manifold. This step helps the larger bank to increase its capital base and hence makes it easier for the banks to advance loans to the public. Further, merger of PSBs with private sector banks reduces the burden of government to recapitalize the PSBs from time to time. This ultimately reduces the problem of NPAs as well since the capital base of the banks will be wider the offset the effect. However, such a measure of merging larger banks with smaller banks might concentrate the effective control of banking sector in few hands due to the further enlargement of the larger banks resulting in unfair practices in the sector as a whole.
Conclusion
The banking sector, marred by NPAs, stalled real estate projects, frauds having huge domino effects such as the IL& FS case, etc. has faced various adversities in the recent years. The government and the Reserve Bank have made concerted efforts in order to curb the problem of stressed assets by mechanising expedited resolution process through IBC and infusion of capital for the purpose of bank recapitalization. The recapitalization of banks and resolution of stressed assets under the IBC has helped the banks in infusing credit in the economy which has led to an increase in the investment activities and employment generation in the economy. During a time when the economy has been suffering at the hands of policies like demonetization and frauds as huge as the PNB fraud, these policy reforms would feed the banking sector to re-stabilise the influx of credit in the economy.
[i] Reserve Bank of India, Revised Prompt Corrective Action (PCA) Framework for Banks, DBS.CO.PPD. BC.No.8/11.01.005/2016-17 (Apr.13, 2017).
[ii]Abhijit Lele, RBI removes Allahabad Bank, Corp Bank, Dhanlaxmi from PCA framework,
Business Standard, https://www.business-standard.com/article/economy-policy/rbi-removes-allahabad-bank-corp-bank-dhanlaxmi-from-pca-framework-119022601058_1.html (last visited Sept. 6, 2019).
[iii]Reserve Bank of India, Resolution of Stressed Assets – Revised Framework, DBR.No.BP.BC.101/21.04.048/2017-18 (Feb.12, 2018).
[iv]ET Bureau, What RBI’s February Circular Means: Should India Inc Worry?, Economic Times, https://economictimes.indiatimes.com/news/economy/policy/what-rbis-february-circular-means-et-in-the-classroom-should-india-inc-worry/articleshow/64073271.cms (last visited Sept. 6, 2019).
[v]BS Reporter, Govt launches mission 'Indradhanush' to revamp PSU banks, Business Standard,
https://www.business-standard.com/article/finance/govt-launches-mission-indradhanush-to-revamp-psu-banks-115081401145_1.html (last visited Sept. 6, 2019).
[vi]ET Bureau, Bank of Baroda, Vijaya Bank and Dena Bank to be merged, Economic Times,
https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-of-baroda-vijaya-bank-and-dena-bank-to-be-merged/articleshow/65844142.cms (last visited Sept. 6, 2019).
[vii]PTI, Five Associate Banks Merge with SBI, The Hindu. https://www.thehindu.com/business/Industry/sbi-five-associate-banks-bmb-merge-with-sbi/article17757316.ece (last visited Sept. 6, 2019).