(Article) Bad Loans in Infrastructure Sector and Ordinance on New NPA Resolution Policy

 (Article) Bad Loans in Infrastructure Sector and Ordinance on New NPA Resolution Policy


As   per   the   S&P   Global   Ratings,  Indian   banks’ stressed assets  are   likely  to  increase  to  15%  of total  loans  by  March  end,  2018.  Top  50  bad  loans of  corporates engages  in  core   and   infrastructure sectors have been identified by Reserve Bank of India (RBI) who’s over dues are  as  high as  4.5 lakh crore forming  85  percent of the  total  bad  loans  of public sector banks. Recognizing this  growing  concern  of the  banking industry  and  recovery measures  to  be undertaken on  a  war  footing,  the  Government has recently  come out  with an  ordinance on  NPA Loan Policy  Resolution. The  ordinance aims  at amending two  laws  namely,  the  Banking  Regulation (BR) Act,

1949 to tackle the menace of massive stressed assets in the banking system granting more  specific  powers to  the  RBI and  the  Prevention of Corruption  (PCA) Act ,1988 to encourage bankers to take commercially bold decisions, especially on haircuts on toxic assets, without  fear  of  subsequent  prosecution. As  follow up  of the  ordinance, the  RBI has  issued a directive bringing certain  changes to the  existing  regulations on dealing with stressed assets, besides planning to reconstitute the over sight  committees and  exploring the feasibility of rating assignments being  determined by  itself.  Many  more   initiatives  are  expected  from RBI  to  resolve  top   35-40   stressed   assets.   While the   ordinance  is  far  superior  to  earlier   initiatives to  resolve stressed  assets  in  terms   of  its  unique provisions and  proposed arrangements proposed by RBI and  Government, its success in implementation

depends  on  coordination among  all  stakeholders including banks,  Asset  Reconstruction Companies, rating agencies, Insolvency and  Bankruptcy Board  of India and  PE firms. In this context, it is necessary to develop a fair understanding of the  ordinance by all stakeholders dealing resolution of corporate stressed assets in  core   and   infrastructure sectors.  Towards this end,  the present article makes an overview of the ordinance to deal  with mega bad  loans.


Gross Non- Performing Assets (NPAs) of just 37 listed banks were  as  high as  7.1 lakh crores as  at March end,   2017  as  against 5.7  lakh  crores in the  last year  (1). About  50 top  stressed corporate accounts, mostly  engaged in core  and  infrastructure sectors, have  been identified  by Reserve Bank  of India (RBI) as  being   under the  watch  list  of  the  Government. The  total  loan  amount due  from these top  stressed assets is  around 4.5  lakh  crore  which  is  almost

85  percent of  the  total  bad   loans   of  public  sector banks(PSBs).  Hence,  both   RBI  and   Government have   taken   several measures  since   2002,   starting with setting up  of Asset  Reconstruction Companies (ARCs)  for purchase of  bad loans,making amendments in Corporate Debt  Restructuring(CDR) mechanism after accepting recommendations of the Mahapatra  Working  Group,  installing   a  framework for monitoring of Special Mention  Accounts (SMAs), coming out with Flexible Restructuring of Long Term Project   (5/25)   scheme,   introducing  Special  Debt Restructuring (SDR)  scheme, initiating  Scheme for Sustainable  Structuring of  Stressed  Assets  (s4a), enacting Insolvency Bankruptcy Code (IBC) etc. Despite these and  many  other  measures, the level of NPAs in corporate and  infrastructure sectors is now unprecedented. Appreciating this growing concern of banks, the  Government has  now  come out  with an Ordinance on  NPA Policy  Resolution which  seems to  be  an  effective  tool  by  granting more  powers to RBI and  also  building  up confidence in the  minds  of bankers in taking  decisions on  huge write off/ write downs as   part  of  resolution  of  mega  problematic projects. Although  this is considered to be a onetime exercise to  resolve mega top  stressed loan  assets, the  Ordinance is  expected to  create a  conducive environment for further lending  to other corporate and infrastructure projects. In view of the new era to begin with the introduction of Ordinance, it is necessary for bankers at this stage to develop a fair understanding of the  new  Ordinance by going  through its historical background, initiatives taken  by RBI and Government during the  recent past, features and  likely impact  of the  Ordinance. Towards the  end,  the  present article makes an overview and offers suggestions for effective implementation of the  Ordinance. To begin  with, let us study  the need for introduction of Ordinance.

Mounting  Bank Over dues from Corporates - Historical  Background:

For  better   understanding of non-performing assets (NPAs) resolution of corporate and  infrastructure projects in India,  it is necessary to study  the  origin of  NPA problem for  which  reference to  Economic Survey  2016-17  report  is more  appropriate, sharing certain   interesting piece  of  information.The  origin of the  NPA problem arose when  decisions taken  by corporates, mostly  engaged in core  (industrial  and service) and  infrastructure sectors, based on a set  of assumptions went  wrong  during  the  mid-2000s. To elaborate, during  that period, economies all over the world were  maintaining high  GDP growth  which was around 9-10  percent per  annum and,  India  was  no exception to this. Consequently, corporate profitability in India was very much impressive. So, the corporates started hiring labour  aggressively for expansion and diversification  of business activities which in turn sent wages soaring. Encouraged from high  GDP growth, corporates also  launched new  and   mega projects particularly   in  infrastructure-related  areas such as power  generation & steel,  and  telecoms, setting off the biggest investment boom in the country’s history. In the  span of just  three  years running from  2004-05  to 2008-09,  the  amount of non-food bank  credit was  doubled. It was  also  observed that  corporates were highly debt  burdened to take  advantage  of anticipated growing  business opportunities. But assumptions  made  for  forecasting  higher   growth did  not  materialize. As  corporates were  taking   on more  risk,  things  started to go  wrong.  Cost  soared far above the  budgeted level,  as  securing land  and environmental clearances  for infrastructure projects proved  much   more   difficult  and   time   consuming than  expected. At the  same time, budgeted revenue collapsed after the Global Financial  Crisis (GFC); projects that  had  been built around the  assumption that   growth   would   continue  at  double-digit  levels were suddenly confronted with growth  rates half that level. As if these problems were not enough, financing costs   also    increased   sharply.     Corporates   that borrowed  domestically suffered  when   the  Reserve Bank of India (RBI) increased interest rates to contain double digit inflation. Further,  the corporates that had borrowed abroad when the rupee was trading  around 40/dollar were hit hard  when  the rupee depreciated, forcing  them  to  repay  their  debts at  exchange rate closer to  60-70/dollar. Thus,  high  direct  cost,   low revenue and  increasing financing cost  squeezed corporate cash flow, quickly leading to debt  servicing problems and  thereby banks witnessing high level of NPAs in corporate sector(2).To resolve NPA problems relating to corporate and infrastructure projects , both Reserve Bank  of India  ( RBI) and  Government took initiatives, calling for a review.

Initiatives    taken    by   RBI   and   Government  to Resolve Bad Loans  from Corporates - A Review:

To  start  with,  the  RBI introduced CDR  mechanism in 2002  to  give  corporates more  time  to  repay.  To elaborate, debt  restructuring refers  to reallocation  of resources or change in the  terms  of past  and  future loans   involving  reduction  in  interest  rates,  waiver of penal charges, re-scheduling of unpaid loan installments, conversion of irregularity  in cash credit into working capital  term loan (WCTL), sanctioning  of fresh  loan  etc.  For infrastructure projects, additional concessions were  offered  in  terms   of  reduction  in provisions to be  made. Thus,  CDR mechanism is an adjustment made by both the debtor and  the creditor to smooth out temporary difficulties in loan repayment by entering into Debtor  Creditors Agreement (DCA). It is  also   an  arrangement among  the  creditors  to assist cash troubled corporates by entering into Inter Creditors Agreement (ICA). Appreciating relevance of  CDR  mechanism,  the   RBI  made  changes   in it in the wake  of the Mahapatra Working Group recommendations. Thus,  if  the  CDR  process is  to be  judged from an  independent perspective, it is a beneficial process  which  endeavors to  help  viable corporates to come out of financial crisis which may be faced by them due to several external  factors  and also creditors to recover their dues by debt  restructuring. Though the  CDR mechanism is well designed and amended from time to time, the financial position of the stressed corporates continued to deteriorate despite restructuring. Hardly 15 percent of corporates came out of CDR successfully (3). Therefore, the RBI thought of other  measures to resolve NPAs. In this context, in the  same year,  ARCs were  allowed  to  be  set  up  in the  private  sector under SARFAESI Act, hoping that they  would  buy  up  the  bad  loans  of the  commercial banks. In that way, there  could  be an efficient division of labour,  as  banks could  resume focusing on  their traditional  deposit-and-loan operations. This strategy, however, has  had  only limited  success. By now, as many  as  16 ARCs have  been created, but they have solved only  a  small  portion  of the  problem, buying up only about 5 percent of total NPAs at book  value (Economic  Survey   2016-17).   The  problem  is  that ARCs have  found  it difficult to recover much  from the debtors. Hence, they  have  only  been able  to  offer low prices to  banks. Further,  it is  disheartening  to note  that  just half of the  SRs  issued were  redeemed completely by ARCs, indicating, liquidity problems of ARCs on account mismatch in cash flows due to slow loan recovery(4). While efforts  were  on  to  resolve bad  loan,  the  RBI paid   attention  to  arresting slippage  in  loan   asset quality  and   undertake timely  preventive  action   by strengthening credit  monitoring system in banks. In February 2014,  the  RBI came out  with a Framework to monitor SMAs more effectively (5). Under the Framework, Standard Assets are classified into three categories :  SMA-0,  SMA-1  and   SMA-2  based  on the period of default  of up  to  30  days, 31-60  days and  61-90  days  respectively. Under  the  Framework. lenders are asked to form Joint Lenders Forum  (JLF) and  prepare Corrective Action Plan (CAP) for SMA-2 accounts with a total debt  of more  than  `100 crores. For  restructuring of debt  of more  than  `500 crores, Technical  Evaluation  Viability  (TEV)  study   should be  prepared by  professional agencies identified  by Indian Banks  association (IBA) and  approved by JLF creditors with super majority of more  than  75 percent of  value   (total   debt)and  60   percent  of  creditors in  number. Based  on  reduction in  slippage in  the asset quality  during  the  recent past, this Framework has  come to  stay  and  is found  to  be  a  useful  tool for monitoring of SMAs. But the  age  old  high  value NPAs  from  corporates  continued to  remain   in  the books of banks due  to difficulties in resolving  them through legal  measures.  Therefore in July 2014,  the RBI introduced 5/25  scheme which  involves  flexible structuring of long term project loans  to infrastructure and   core-sector  industries (6).  Under   the  scheme,

banks can  extend a loan  for a period of 20-25  years in such a way that it matches with the cash flows. The term  5/25 is used since  the  loan,  with maturity  up to 25  years, would  be  subject to  refinancing every  5 years. However, both lenders and the borrowers have to adhere to certain  conditions which  were  found  to be  difficult to fulfill. Consequently, there  is hesitancy on the part of banks to associate with such long term projects due  to their perception of high credit  risk.

As a next  step towards strengthening the  NPA resolution, in  June 2015,  the  RBI introduced  SDR to  bypass legal   hurdles  faced  by  the  bank   while taking  over a defaulting company by converting part/ full of its debt  into  equity  to acquire management control  and  finding  a  new  buyer  for equity  holding within 18 months. However,  if the  bank  does not get the  new  buyer  during  the  period, the  asset has  to be  classified as  an  NPA(7). After introduction of this scheme in few cases, very soon banks realized that the  period of 18  months was  too  short  to  comply with the  requirements. Further  for resolution of large corporate accounts which are facing severe financial difficulties, it also requires coordinated deep financial restructuring which calls for a substantial write-down of debt  and/or making  large  provisions towards bank sacrifice.  Hence, banks made a representation to RBI for allowing  more  time  to  write down  the  debt  and make  the  required provisions in cases of resolution of large  core  and  infrastructure projects, which  was not  considered. As a result  of this,  while two dozen cases were   entered into  negotiations  under  SDR, only  two  cases have   actually   been concluded as of  end-December  2016   (Economic  Survey   2016- 17). Appreciating difficulties faced by banks in implementing in SDR with special reference to acquiring management control,  in June 2016 the RBI came out with yet another measure i.e. s4a to facilitate the resolution of large accounts (8). For being  eligible for resolution of large  accounts under the  scheme, certain  conditions need to be  fulfilled which  include: (i) The project must  have  commenced commercial operations.(ii)  The  aggregate exposure should be more  than  500 crores. (iii)The debt  should meet  the requirement of test of sustainability of debt i.e. a portion of total debt  can  be  serviced over the same tenor  as that of the existing facilities even if the future cash flows remain  at their current level and,  (iv) The sustainable debt  should not  be  less  than  50  percent of current funded liabilities. Under  the Resolution Plan,  it is not necessary to  change the  management.  Regarding formalities,  the  JLF shall,  after  an  independent TEV, bifurcate  the  total  bank   debt   of  the  borrower  into two parts: Part A debt  ( subordinated debt)  and  Part B debt  i.e. total  debt  minus  Part  A debt. For Part  A debt, there  will be  no  fresh  moratorium granted on interest or principal  repayment and  extension of the repayment schedule or reduction in the interest rate. Part B debt  shall be converted into equity/redeemable cumulative optionally  convertible preference shares, the  fair value  needs to  be  calculated by  following the   prescribed  methodologies.  JLF  shall   engage the services of credible professional agencies to conduct the  TEV and   prepare the  resolution plan. The  resolution plan  should be  agreed upon   by  a super majority i.e. minimum  of 75 percent of lenders by  value  and  60  percent of lenders by  number. At individual bank  level, the  bifurcation into Part  A debt and  Part  B debt  shall  be  in the  proportion of Part  A debt  to Part B debt  at the aggregate level. Overseeing Committees (OCs), comprising eminent persons were also  constituted by Indian Banks  Association (IBA) in consultation with RBI. The  resolution plan  shall  be submitted by the JLF to the OC which will review the processes involved  in preparation of the  resolution plan  etc.  for reasonableness and  adherence to  the provisions of these guidelines, and  opine  on  it. The success of s4a  , however,  has  been limited  due  to several reasons and  one  of them  is delay  in decision making   by  JLF  due   to  failure  to  fulfill the   super majority  criterions for approval of Corrective  Action Plan ( CAP) by lenders . Hence, the RBI subsequently reduced the  minimum  stake of  creditors for super majority from 75 percent to 60 percent by value  and from 60 percent to 50 percent by number (9). Under s4a,  hardly  only one  case been cleared by National Company Law Tribunal  (Economic Survey  2016-17). Hence to facilitate the process NPA resolution, it was felt necessary to undertake a more  serious measure to enact a new law..

Insolvency  and   Bankruptcy Code  was   enacted   in 2016  since  there  was  no  single  law that  deals  with insolvency and   bankruptcy in  India  for  individuals and  corporates. A timeline  of 180  days   which  can be  extended by another 90 days, in all 270 days, by the  adjudicating authority  in exceptional cases,  for dealing with applications of insolvency resolution. The IBC envisages a  competitive industry  of insolvency professionals,  insolvency professional agencies and   information   utilities.  These  will  be   regulated by   an    insolvency   regulator   namely,    Insolvency and   Bankruptcy Board   of  India  (IBBI), to  regulate insolvency professionals and agencies (9). Regarding the process is concerned, during  the insolvency resolution period of 180/270  days, the  management control  will be passed on to a resolution professional who will come up with an insolvency resolution plan which  has   to  be  approved by  lenders with  super majority  and   also   by  the  adjudicating authority.   If rejected, the  adjudicating authority  will order  for liquidation.  Under  the OBC , Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) are deployed as  the  adjudicating authority.  While NCLT will deal  with rehabilitation and  restructuring matters, DRT will look after loan recovery if not found  feasible for rehabilitation and restructuring. About the process to be adopted during  the period of 180/270  days, the regulatory authority appoints the administrator to take the control  of the assets and  management of the firm and  prepare a resolution proposal about information asymmetry between creditors and  debtors about the financial status of the company, it is proposed to set up an industry  of information  utilities so that decision on turnaround strategy or bankruptcy shall be  taken up  quickly.  It is  also  proposed to  strengthen DRTs since  they are already overburdened with insolvency cases by  increasing their  number. Further,  secured creditors with  more  than  75  percent share in total debt   will be  allowed   to  file an  application for  the rescue of the  company at  a sufficiently  early  stage, rather  than  wait for the same to have  defaulted on 50 per cent of its outstanding debt, as currently provided for  in  the  Companies Act,  2013.   Even  unsecured creditors representing 25  per  cent  of the  total  debt shall   be   allowed    to   initiate   rescue  proceedings against the debtor company. Further,  workers  will get last  one  year’s  salary  first and  then  payments shall be  made to  secured  lenders, followed  by  others. Lastly,  all existing  laws  that  deal  with insolvency  of registered entities  will be  removed and  replaced by this  single  Code. Since  the  regulatory authority  has just begun its functioning, NPA resolution of projects in core  and  infrastructure sectors under IBC can  not be  expected in a big way in the  near  future.  Hence, the  Government thought it to appropriate to amend existing  Debt  Recovery Laws, while execution under IBC will continue.

Debt Recovery Laws requiring  amendments include: Securitization and  Reconstruction of Financial  Assets and   Enforcement of  Security   Interest   (  SARFAESI) Act  2002,   Recovery  of  Debts   Due   to  Banks   and Financial   Institutions  (RDDBFI)  Act-  1993,   Indian Stamp Duty  Act- 1899  and  Depositories Act- 1996. In May  2016,  the  Enforcement of  Security   Interest and  Recovery of Debt Laws and  Miscellaneous Provisions (Amendment) Bill, 2016  was  cleared by the  Parliament to  amend Debt  Recovery Laws  (11) Under  SARFAESI Act, RBI will conduct inspection of the ARCs annually. Central Registry will record details of all secured assets to avoid multiple finance  against the same property. More importantly, priority will be given  to bank  dues over  all other  debts and  claims

Lastly, foreign  investor  shall  sponsor an  ARC after observing ‘fit  and   proper’   norms of  RBI. All these amendments are  expected to ensure more  recovery under the  Act. Under  RDDBFI Act, time  for filing an appeal to the Appellate Debt Recovery Tribunal (DRAT) is cut  from 45 days  to 30 days. Similarly for appeal, the  deposit amount of 50% of bank  dues by the  aggrieved borrower is cut  down  to 25%.  These would  reduce the  time  involved  in disposal of DRT cases. Regarding Indian Stamp Act, sale  of assets to ARCs is exempted for payment of stamp duties which was  one  of major  constraints in promoting business of  ARCs..  Regarding miscellaneous amendments  , banks shall  provide  further  time to the  borrowers to pay  dues if 25% of the  same is paid.  Protection will be  provided to  any  officer  of banks ,  RBI, Central Registry  etc. for action  taken  in good faith.

To sum  up,  despite various  initiatives  taken  , banks have   continued  to   witness  a   very   high   level   of stressed assets particularly  in core  and  infrastructure sectors .The  problem is  simply  that  initiatives  like SDR, s4a and IBC are new, and financial restructuring negotiations under these mechanisms inevitably take some time. But the country cannot wait till then  since over dues from the corporates are mounting. Hence, the  Government thought  it inevitable   to  come out with an  Ordinance on New NPA Resolution Policy in May 2017 to resolve the age  old high value corporate NPAs once for all.

Features of Ordinance :

The  Ordinance aims  at amending two laws  namely, the  Banking  Regulation (BR) Act, 1949  to tackle  the menace of massive stressed assets in the  banking system  granting more   specific   powers to  the  RBI and   the  Prevention of  Corruption (PCA)  Act  ,1988 to  encourage  bankers to  take   commercially bold decisions,  especially on  haircuts  on  toxic  assets, without fear of subsequent prosecution(12). To state specific  amendments to BR Act, a  new  Section i.e.

35AAis inserted to empower the government to authorize the  RBI to issue directions to banks as  it deems fit to  initiate  insolvency process  in  case  of a  default  under the  provisions of the  IBC . Further, another  section  i.e.  Section  35AB  is  included   in the  Act to grant  power  to the  RBI to specify  one  or more  authorities or committees (called  as  Oversight Committees- OCs)  to advise banks on  resolution  of stressed assets. These OCs will be able to help banks in decision-making and  also  to monitor  the progress in resolving   stressed  assets  (gross non-performing assets and restructured standard advances).Thus, the central  bank  could  monitor  specific  cases, especially the   more   difficult  ones in  core   and   infrastructure sectors , even  when  the  resolution process through the IBC is under way. Bankers could  also  pursue the IBC mechanism more vigorously  if other mechanisms to deal  with the  NPA issue does not succeed. Immediately upon  the promulgation of the Ordinance on May 22, 2017, the Reserve Bank issued a directive bringing certain  changes to the  existing  regulations on  dealing with stressed assets. It was  clarified  that CAP  also   includes flexible  restructuring, SDR  and s4a.  With a view to facilitate  decision making  in the JLF, the  consent required for approval of a proposal is  now  changed to  60  percent by  value  instead  of 75  percent  earlier,   while  keeping  that   number  at 50  percent. Banks  who  were  in the  minority  on  the proposal approved by the  JLF are  required to either exit by  complying with the  substitution rules  within the  stipulated time  or adhere to the  decision of the JLF.  Participating banks  have   been  mandated  to implement the decision of JLF without any additional conditionality.  Lastly,   the   Boards  of  banks  were advised to  empower their  executives to  implement JLF decisions without further reference to them.  The RBI has  made clear  to the banks that non-adherence would  invite  enforcement actions. It has  also  been decided to  reconstitute the  OC  under the  aegis  of the  RBI and   enlarge it to  include   more   members so  that  the  OC  can  constitute requisite benches  to deal  with the volume  of cases referred to it. While the current members will continue in the  reconstituted OC, names of a few more  will be  announced soon. The  RBI is planning to  expand the  scope of cases to be  referred to the OC beyond those under s4a  as required currently. It is also working on a framework to facilitate an objective and  consistent decision making process with regard to cases that may be determined for reference for resolution under the  IBC. The  RBI has  already sought information  on the current status of the large  stressed assets from the banks. It would also  be constituting a Committee comprising majorly of its independent Board  Members to advise it in this matter.   The  current guidelines on  restructuring are under  examination for  such  modifications as   may be  necessary to  resolve the  large  stressed assets in the  banking system in a value  optimizing  manner. This envisages an important role for the credit  rating agencies in the scheme of things  and,  with a view to preventing rating-shopping or any conflict of interest, is exploring the feasibility of rating assignments being determined by the RBI itself and  paid  for from a fund to  be   created out  of  contribution  from  the  banks and   the  central   bank.   More  importantly,  this  calls for coordination with and  cooperation from  several stakeholders including banks, ARCs, rating agencies, IBBI and  PE firms. In this  regard, the  RBI will make further arrangements.

Likely Impact of Ordinance:

With   the    introduction   of   the    Ordinance,  banks would  be   able   to  identify  NPAs  early  and   initiate loan   recovery proceedings  without  waiting  for  an account to be  formally classified as  non-performing. Under   the   present RBI prudential guidelines  on asset   classification, an   advance   becomes   non- performing when  interest or  installment of principal remains overdue for more  than  9o  days. But under the  Ordinance,  the   default   will be   considered as per   bankruptcy  law,  which  means if  the  payment is missed, it turns  into  a  default  the  next  day  itself.

Further,  it would  enhance transparency in NPA resolution of high value NPAs since  RBI and  OCs will be directly engaged in NPA resolution and monitoring the performance of JLF. This would also  improve  the quality of NPA resolution which will be performed the guidance of RBI and  OCs  by ensuring collective  and coordinated efforts. In view of the long drawn process involved  in NPA resolution particularly   in core  and infrastructure sectors, it is unlikely that  the  recovery mechanism will improve  substantially this year  only, but  credit  growth  will certainly  pick up  due  to better quality NPA resolution. Similarly, this pick up in credit growth would bring down the share of bad  loans  as a percentage of total advances. Further,  it is quite likely that  the  next  fiscal  i.e.  2018  would  be  much  better in terms  of asset quality than  the current fiscal 2017. It seems that  the  government is all out  war  against NPAs  in  core   and   infrastructure sectors  which  will help  in cleaning the  balance sheet of state-  owned banks and  expedite fund raising  via markets to meet the  global  Basel  III capital  adequacy norms. As part of NPA resolution plan,  the  RBI proposes to involve rating  agencies to  rate  assets charged and  assess viability of the project. It is also exploring the feasibility of rating  assignments being  determined by the  itself and  these rating agencies would be paid  from a fund to be created out of contributions from the banks and the  RBI. With the  central  bank  paying  for the  rating engagement, it would  give  space for  independent opinion  to avoid  problems in information  disclosure by the company. Thus, the Ordinance would produce many more benefits being a very effective mechanism for NPA resolution in core and  infrastructure sectors. .


With the  RBI directly  is  coming into  the  picture   in NPA resolution besides being  a regulator, it will also have  to play a role of a banker to take  decisions on commercial considerations. Similarly, the  success  of NPA resolution will depend on  the  selection of the members of the OCs, based on professional expertise and   sufficient   experience  in  commercial  banking with special reference to sanction and  loan  recovery of mega and  infrastructure projects. In the  wake  of resolving  high  value  NPAs, it is necessary for banks and  also for RBI to set a target  for loan recovery from mega NPA borrowers for each of the next 3-5 years so that it is possible to review achievements periodically. Further,  the time consumed in making  NPA resolution decisions relating to IBC is critical because if it is done in a piecemeal fashion  the  measures considered for resolution may  not  produce desired results. Hence, timelines  need to  be  fixed for processes  under the bankruptcy law to be competed timely, besides ensuring  coordinated  efforts.   It  is  also   important that  the  back-end infrastructure should be  in place. In this  regard, RBI should have  enough manpower to handle matters concerning NPA resolution under the Ordinance. Similarly, the  legal  system should be well equipped to take  on this challenge by ensuring early  disposal of cases. If  we are  targeting only the top 35-40 defaulters in core and infrastructure sectors , then  the job may be  easier. But if all mega NPAs to be  addressed, a planned approach is called  for and, implementation should be  done in a  true  spirit  by involving all stakeholders.


For RBI, the Ordinance is an additional tool available to take a targeted approach and  deal with the top 35-40 non-performing assets  in core  and  infrastructure projects that  can  be  resolved quickly.  It can  break the deadlock and   get  the  banking system to  gain further   by  resolving   bad   loans.  The  OC  can   use its powers to  restart  the  process of NPA resolution more  professionally with due  respect to compliance and  get  rid of the  old  problem when  bankers were afraid   of  investigations against  them   in  deciding huge debt  write off / write down.  The  government’s approach towards resolving  the  issue of NPAs has been remarkable and  the  various  schemes brought out  are   part   of  the   fine-tuning   mechanism  where lessons of  the  failure  of  the  existing   mechanisms have   been  improvised. The   present  dispensation appears to have  reached the  so-called last mile and definitely looks superior to the other attempts. But the execution would  have  to be  planned meticulously to move  towards a  successful conclusion. The  RBI is also working on a framework to facilitate an objective and  consistent decision making   process for cases that  may  be  determined for reference for resolution under the  IBC.  As  per  news   reports, the  Reserve Bank  has  already sought information  on  the  current status of the  large  stressed assets from the  banks. It would also  be constituting a committee comprised majorly of its independent board members to advise on the subject(13). The success in implementation of the Ordinance would require coordination among all stakeholders including banks, ARCs, rating agencies, IBBI and PE firms. Thus, the challenge is to effectively implement the  Ordinance . Quite  likely, we  have  a long way to go in this regard.


1.            Economic Times, May 30, 2017.

2.            Address by  Dr K C Chakrabarty, Deputy  Governor, Reserve Bank  of India,  titled  “Corporate Debt  Restructuring- Issues and   Way  Forward” at the   Corporate  Debt   Restructuring Conference 2012,                Mumbai, dated 11 August  2012

3.            CDR Web-site.

4.            Report  on  Trend  and  Progress of Banking  in  India  2013-14,  Reserve Bank of India.

5.            Framework for Revitalizing Distressed Assets in the Economy, RBI Circular February 26, 2015.

6.            Flexible    Structuring   of    Long    Term    Project    Loans     to Infrastructure and  Core industries, RBI Circular, July 15, 2014.

7.            Strategic Debt  Restructuring Scheme, RBI Circular,  June 08, 2015.

8.            Scheme for Sustainable Structuring of Stressed  Assets, RBI Circular, June 13, 2016.

9.            Timelines  for Stressed  Assets Resolution, RBI  Circular,  May 05, 2017.

10.           Insolvency  and   bankruptcy  Bill,  Tabled   in   Parliament on December 15, 2015

11.           The  Enforcement of Security  Interest  and  Recovery of Debts Laws and  Miscellaneous Provisions (Amendment) Bill, Tabled  in Parliament on May 11,2016.

12.           Financial  Express, May 05, 2017.

13.           Financial  Express, May 31, 2017.

Courtesy:  Dr V.S. Kaveri (Professor (Retd),NIBM,Pune)