A STUDY ON THE IMPACT OF INSOLVENCY AND BANKRUPTCY

CODE, 2016 ON INDIAN COMMERCIAL BANKS

- Mayank Srivastava

Introduction:-

Non-performing Assets (NPAs)​ is the smoking gun of the threat to the very stability of India's
banks. India badly needed a magic pill that would revitalise the system, curing the bad loan
problem. The ​Reserve Bank of India (RBI)​ had pointed out the lack of modern bankruptcy
legislation in India which was affecting the recovery of loans since quite a long time.
When it comes to resolving insolvency, India's rank is low at 103. This is much below our
neighbouring countries. On both factors - the recovery rate and the time to resolve a
bankruptcy - India is slower than its poorer neighbours. Indian banking sector is going
through a tough phase where the GNPA (Gross Non-performing assets) are all time high and
there seem to be no respite in this coming quarter, at least. An asset is classified as NPA
(Non-Performing Assets) which ceases to generate income for a bank.
The gross Non-performing asset ratio stood at 11.5% in March, 2018 and this could reach to
12.2% by March 2019 (RBI financial stability report). There seems to be some respite on this
increase where GNPA declines from 11.5% in March 2018 to 10.8% in September, 2018
(RBI financial stability report). India has seen various debt resolution mechanism namely
BIFR (Board for Industrial and Financial Reconstruction), CDR (Corporate debt
restructuring), SARFAESI (Securitization and reconstruction of financial assets
andEnforcement of Securities Interest) Act, 2002 to IBC (Insolvency and Bankruptcy Code)
in 2016. Insolvency and bankruptcy code (IBC) 2016 was enacted in India in May 2016 with
the intent of providing a solution which is efficient and time bound. The code has a time
frame of 180 day and extension of 90 days which makes a total of 270 days for a
company to “resolve or liquidate”.
Immediately after passing resolution of IBC in Parliament in May, 2016, NCLT (National
Company Law Tribunal) was constituted on 1st June, 2016. It started receiving cases of
insolvency and bankruptcy from end of 2016 and presently NCLT has 11 benches
through which it operates. IBC and NCLT operate under IBBI (Insolvency and Bankruptcy
board of India) which was established on 1st of October, 2016. IBBI regulates and
supervises professional, agencies, and entities related to insolvency along with information
utilities. IBBI has also been entrusted to enforce rules related to corporate insolvency
resolution, corporate liquidation, individual bankruptcy and individual insolvency resolution.
IBC has been instrumental, so far, in bringing a much needed change in the credit discipline
of the borrowers. It is expected that given the time-bound resolution, it will help banks to
recover its loan faster along with controlling the losses which occur due to passage of time.
The present study focuses on the loans and advances extended to Iron and Steel companies in
India and performance of these loan over a last decade. Iron and steel sector contributes to
24% of the GNPA in basic metal and metal product category as on January, 2018. Due to
mounting pressure on the service of the loans for Iron and steel industry, the growth of
bank credit to iron and steel sector fell to 2.5% in 2017, which is all time low. The gross
bank credit to Iron and Steel sector stood at Rs. 2,908 billion as of November, 2018. The
total default of Rs. 570.01 billion has been admitted under IBC 2016 as on December,
2018. The study focuses on the trends of bank credit to this sector along with recovery and
default in Iron and steel sector. The total of Rs. 1,288 billion defaults were with IBC 2016
and around 44% of the default is coming from Iron and Steel sector.

Keywords: Insolvency and Bankruptcy Code, 2016, Non-performing assets, Iron and  
steel sector, Liquidation, National Company Law Tribunal  
Abstract:-

Banking sector plays a very significant role in the growth and development of nation and it is
considered as the backbone of any industry. The financial sector reforms as led by Shree M.
Narasimhan Committee in 1991, the banking system of India has undergone
significant transformation with a vision and mission to boost the banking sector and its
operations in the economy.
The Indian Banking System comprises of Scheduled and Non- Scheduled banks. Schedules
banks are included under the 2nd Schedule of Reserve Bank of India, Act 1934, where it is
further classified into nationalized banks; State Bank of India and its associates; Regional
Rural Banks (RRBs); foreign banks; and other Indian private sector banks. The term
commercial banks refer to both scheduled and non-scheduled commercial banks regulated
under the Banking Regulation Act, 1949.
The concern of NPA for any country is very deep and global. But for the developing 
countries like India, the magnitude of this concern is undoubtedly very high. The economic 
reforms led by the Indian government to match the speed of global economic challenge 
cannot be achieved without the complete and strategic overhaul of Indian banking and 
financial sector. The problem of NPAs is continuously growing which is threating banks 
existence, shrinking their profitability and affecting the economy in general. 
Non-performing assets is termed as the loan or lease that does not meet the stated principal 
amount and the interest amount payments. NPA is further classified into commercial loans 
which are overdue for more than 90 days, and consumer loans which are due for more 
than 180 days.  
Literature Review:-

● Commercial Banks in India: Assessment and Emerging Issues” (2011)

described the concept of NPA and its impact on financial soundness of general banks;
it also presented a trend analysis of NPAs and in deep as saying on the lofty level of
borrowings from banking sector. The final part deals on the significance of
restructuring of advances and the Basel III norms. It has also mentioned the impacts
of NPA on the operation of banks and it has been divided to profitability, liquidity,
involvement of management, credit loss. The NPAs under priority sector has
decreased mainly from the contribution of agriculture sector due to the debt waiver
schemes for farmers and the sudden increase in non-priority sector is due to the
slowdown in the economy and stressed financial conditions of corporates.

● Laveena in her paper “​A Study of Non-Performing Assets of Public Sector Banks
in India​“ (2016) how the economies are affected by NPAs and comprehending the
reasons of it and discussed about the importance of its effects. The author has
segmented the factors into two headings internal and external. The author has also
tried to equate the performance of public sector banks and private sector banks in
India. According to the RBI data the NPAs are accelerating in the public sector
banks as to private sector banks and its having an adverse effect in their operational
activities. The author also studied the causes of account becoming NPA and
highlighted that in the perspective of a borrower and banks.

● Richa Barnerjee, Deepak Verma and Dr. Bimal Jaiswal in their paper
“​Non-Performing Assets: ​A Comparative Study of the Indian Commercial
Banks​” (2018) has analyzed the impact on the asset quality of the Indian banks due to
the presence of NPAs. The author has also compared the ROA selected private and
 public sector banks. The author has taken data of 4 banks to conduct the study. The
4 banks are: SBI, PNB, AXIS Bank and HDFC Bank.

After Implementation:-

After the implementation of IBC, India’s ranking in the latest World Bank Doing Business
report in “Resolving Insolvency” category has jumped to 52 from 108 a year ago. A
number of big cases got resolved and monies were recovered in 2019. But will the
proceedings continue to be uninterrupted? Will the number of cases reported be
accurate? ETBFSI spoke to a few insolvency lawyers to understand what holds for
IBC in 2020.
Indian banks have faced difficult situations in getting back their dues on time from
recalcitrant borrowers. When the time gets stretched, bad loans get worse, and this forces
banks to increase provisioning at the cost of their profits. Here’s a look at what measures
speeded up the ​resolution​ process in 2019 and will the speed be maintained in the year 2020.
How will 2020 be for IBC?
Some feel that next year is going to be difficult as there is a lack of enough investors from
within the market willing to invest into the companies under process in IBC. Promoters, too,
are disqualified from putting in the plan. All this can make the recoveries drop unless there is
further relaxation to section 29A.

Sumant Batra​ of Kesar Dass B Associates feels that recoveries in 2020 may not be as good. “I
don’t think that the numbers you see should be set as the benchmark for IBC as these are
largely based on big accounts being settled. In other smaller cases, recoveries have not been
as good. If you start analysing the cases individually, you will see that the signs are not very
attractive. This will get amplified next year and be difficult to resolve them as we do not have
those kind of investors available in the market who will go for such distressed companies.”
All the good that happened in 2019:-

The Reserve Bank of India in June 2018 came out with a new circular on resolution of
stressed assets asking lenders to recognise stress early. It also gave the lenders complete
discretion to decide on a resolution plan, and sign a binding inter-creditor agreement to
finalise and implement the resolution plan, and focused on a faster provision if the
time-bound resolution failed.

Later, on November 18th, the government amended IBC 2016 by allowing resolution of
NBFIs, including housing finance companies, with asset sizes greater than Rs 500 crore via
the IBC​. ​In December, the Union cabinet cleared an ordinance to amend IBC that would
ring-fence successful bidders from criminal proceedings against offences committed by
previous promoters. This will attract more bidders to bid for stressed assets by boosting and
restoring their confidence in the IBC process.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Timeline of the Issue:-
 
▪ 4 May 2017 - The government of India issued an order to amend the Banking
Regulation Act that conferred powers on RBI to issue directions to banks. It
included directing banks to refer NPAs to the insolvency and bankruptcy
courts.
▪ June 2017 - The RBI issued a list of the 12 largest loan accounts in default.
The banks were required to start proceedings under the IBC.
▪ 12 February 2018 - The RBI came out with a new resolution framework, to be
used by banks before triggering the IBC.

Banks had no choice but to trigger IBC if the loans were not restructured within a deadline.
Finally, the previous mechanisms the RBI had created pre-IBC were all withdrawn.

These mechanisms - Joint Lender's Forum (JLF), Corporate Debt Restructuring (CDR),
Scheme for Sustainable Structuring of Stressed Asset (S4A), and Strategic Debt
Restructuring (SDR) had all been criticised for being too easy on borrowers. The schemes
allowed for ever-greening of loans, where the banks would pour more money in a company
which had already defaulted and were generally considered to be poorly designed. Now, as
per the 12 February circular, the RBI disclosed the top 12 loan defaulters accounting for
around 25% of the total bad loans. As the chart shows, the biggest defaulter was Bhushan
Steel with ​bad loans​ of Rs 559 billion.

CONCLUSION AND SUGGESTIONS:-

Mounting NPAs are a major concern for any bank, economy and country and more important
for a country like India which is on growth phase. India has been recognized from developing
economy to emerging economy and in order to sustain the long term growth, it is important
that the industry and businesses grow. This can be achieved by having a proper economic
policy of giving and extending credit to those who need this and ultimately help the country
to grow, however the default rate for these loans has been on an increasing trend. India has
had many other ways to deal with these NPAs right from BIFR Act, 1985 to SARFAESI Act,
2002 to S4A 2016 but nothing seem to working in the desired way. This paved way for IBC,
2016.