While the government has taken a big leap with a creditor-friendly, time-bound bankruptcy law, it must also pay heed to the existing lacunas in the judicial process to ensure that the new insolvency law is indeed effective
India is sitting on a ticking time bomb — the mounting non-performing assets (NPAs) of its bank. Already plagued by muted economic growth since 2011, even when the country is looking to set its house (read, economy) in order, it faces an unprecedented problem of worsening assets qualities of banks.
As a result of the prolonged slow growth of domestic as well as global economy, a number of businesses have seen their income falling and profit margins shrinking over the past six-seven years. This seriously impacted these companies’ capacity to repay bank loans taken to finance some of their over-ambitious projects undertaken when the economy was galloping at a rate of eight-nine per cent.
Now, things have come to such a pass that the banks’ overall stressed assets touched 11.5 per cent of their total advances in March 2016. The worst affected by this mounting NPA levels are public sector banks, whose gross NPA levels had increased from 5.5 per cent of total advances in March 2015, to 7.3 per cent in December 2015. In absolute terms, gross NPAs of public sector banks stood at Rs 3.6 lakh crore in December 2015, up from Rs 2.7 lakh crore in March 2015.
Although private sector banks have fared better with the gross NPA levels below the three per cent level, the overall NPA levels have increased from 2.36 per cent in 2010-11, to 4.5 per cent in June 2015.
While a lot of these NPAs were either buried under books of the banks or restructured to avoid recognising them as bad loans, it was Reserve Bank of India Governor Raghuram Rajan’s diktat that banks must clean up their books by identifying many of the stressed assets as NPA and provide for them, that we came to know about the gravity of the situation.
The banks have taken a hit to their bottomline due to the cleaning exercise they were nudged into by the RBI governor. Of course, the move was criticised by many for pushing the Indian banking system to the edge, but there are times when shock treatment is the best treatment. At least we now know how deep the malaise is.
Looking for cure
The disease is deep-rooted, and while we may blame slow economic growth, stalled projects and indiscreet lending practices for the precarious situation banks are in, one of the main reasons for this situation is the lack of an effective bankruptcy law in the country.
While in the past we have tried many laws such as SICA (Sick Industrial Companies Act) and SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), none of them have enabled faster recovery of assets by creditors. They were all framed in such a way that debtors could use many loopholes to delay the liquidation process and, hence, a meaningful recovery.
The failure of the previous laws necessitated the government to frame a new bankruptcy law that not only plugs the gaps in earlier laws, but also expedites the insolvency process.
The Insolvency and Bankruptcy Act, which was recently passed by the Parliament, tries to compensate for lacunas in earlier laws. It not only has a scope for time-bound resolution of insolvency process, it also has limited scope for judicial review so that a case is not unnecessarily dragged through unending appeals.
It has provision for separate tribunals — The National Company Law Tribunal (NCLT) corporate insolvency cases and Debt Recovery Tribunal (DRT) for individual cases — for hearing and arbitrating cases related to bankruptcy so that such cases do not get into the rigmarole of our slow judicial system.
The new law also gives more control to creditors to ensure that debtors do not take advantage of loopholes in the system. Once a creditor starts bankruptcy proceeding against the debtor and the same has been approved by the adjudicating agencies (NCLT or DRT), the defaulting entity would be taken over by a committee of creditor and insolvency professionals — a new set of professionals to be regulated by the Bankruptcy and Insolvency Board (the regulator). They together would try to revive the company, and within 180 days (which can be extended to another 90 days), come up with a resolution plan with approval from 75 per cent (by value) of the committee of the creditors. If the revival plan fails, the company goes for liquidation.
So far, so good. However, there is no time limit for the liquidation process to be completed. The liquidation process would again go to DRTs and NCLTs.
Chock-a-block DRTs
The Debt Recover Tribunals (DRTs), which at present work as an agency for recovery of debts, are burdened with work. It is a common practice for cases in DRTs to go on forever due to delaying tactics of the debtors and their lawyers.
As a result, the number of cases pending is mounting over years. At the end of June 2016, around 73,600 cases were pending in 33 DRTs across the country. The pace of work can be gauged by the fact that in June, only 1,304 cases were disposed off.
The DRTs are facing severe infrastructure constraints. As already mentioned, there are only 33 DRTs, with an average disposal rate of 35-40 a month despite the fact that a presiding officer, who is equivalent of a district judge, on an average hears 60-80 cases a day. If the government is indeed serious about addressing the slow judicial process, it must also look at reinforcing the infrastructure. It is learnt that there is a plan to add 10 more DRTs within a year. This is a good move. Besides, with NCLTs finally taking shape, some of the burden of DRTs would be shift to it.
However, technology should be used in a big way to buttress the legal system of bankruptcy. Although the idea of digital courts has not become popular in India yet, experts believe this is the way forward.
Another big issue is the mindset problem of judges. Corporate professionals believe that bankruptcy is a business problem and judges (presiding the NCLTs and DRTs) must understand that there is only business solution to this problem.
The judges manning the adjudicating agencies must also be aware of the usual delaying tactics of the debtors and they must ensure that the defaulters do not unnecessarily take advantage of the “natural system of justice”.
While the whole system (under the bankruptcy law) may take another year before it is rolled out, we can hope that it addresses the issue of bad loans in an effective manner.