A Study on the Impact of Insolvency Bankruptcy Code

(2016) on the Banks Profitability

Submitted by:

Aakanksha Agarwal
St. Xavier’s College (Autonomous), Kolkata

Bachelors of Management Studies(Finance)

Registration Number- A01-2112-2086-17
Roll Number- 2-28-17-0071

Supervised by:
Prof. Basuli Dasgupta
2020
 St. Xavier’s College (Autonomous)
Department of Management Studies
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1
STUDENT DECLARATION

I hereby declare that the Project Work with the title “A Study on the Impact of
Insolvency Bankruptcy Code(2016) on the Banks Profitability” submitted by
me for the partial fulfillment of the degree of BMS. Honors – Finance
Specialization under the University of Calcutta, is my original work and has not
been submitted earlier to any other University /Institution for the fulfillment of the
requirement for any course of study.
I also declare that no chapter of this manuscript in whole or in part has been
incorporated in this report from any earlier work done by others or by me.
However, extracts of any literature which has been used for this report has been
duly acknowledged providing details of such literature in the references.

Name: Aakanksha Agarwal

Address: 56A,Kankurgachi 2ND Lane, 2Nd floor,Kolkata-700054

Room No: 43

Signature:

Date:

Place: Kolkata

2
ACKNOWLDEGEMENT

I express my sincere gratitude to every individual who has been instrumental in

the successful preparation of this project report.

I am highly grateful to St. Xavier’s College (Autonomous) Kolkata for giving us

an opportunity to do this project. I take immense pleasure in thanking my
respected supervisor and my college for permitting me to carry on this project.

I would like to sincerely thank my supervisor, Prof. Basuli Dasgupta for

extending her cooperation, guidance and regular encouragement during my
project.

I am extremely grateful to my parents, brother, friends and all the other people
who have directly and indirectly helped me in building my project.

3
TABLE OF CONTENTS

SR NO. CONTENTS PAGE NUMBER

1 CHAPTER 1-INTRODUCTION 5-7
1.1 ABSTRACT 5
1.2 BACKGROUND 6-7
2 CHAPTER 2-REVIEW OF LITERATURE 8
3 CHAPTER 3-OBJECTIVE OF THE STUDY 9-10
3.1 OBJECTIVES 9
3.2 NEED FOR THE STUDY 9
3.3 RESEARCH MOTIVATION 9-10
4 CHAPTER 4-RESEARCH METHODOLOGY 11-13
4.1 RESEARCH TYPE 11
4.2 DATA TYPE 11
4.3 DATA SOURCE 11
4.4 SAMPLE SIZE 11
4.5 SAMPLE SET OF BANKS TAKEN 11
4.6 PERIOD OF STUDY 11
4.7 RESAERCH TOOLS 12
4.8 RESEARCH TECHNIQUES 12-13
5 CHAPTER 5-CONCPTUAL FRAMEWORK 14-17
5.1 KEYWORDS 14
5.2 BACKGROUND OF IBC 15
5.3 OBJECTIVES OF THE CODE 15
5.4 INSTITUTIONAL FRAMEWORK 15
5.5 CIRP 16
5.6 CORPORATE LIQUIDATION 17
6 CHAPTER 6-DATA ANALYSIS AND FINDINGS 18-29
6.1 NPA TREND ANALYSIS 18-19
6.2 SLIPPAGE TREND ANALYSIS 19-20
6.3 RECOVERY UNDER IBC VS OTHER MECHANISMS 21
6.4 IBC REPORT CARD 22
6.5 CORRELATION BETWEEN NPA AND PROFIT 23
6.6 REGRESSION ANALYSIS BETWEEN NPA AND PROFIT 23
6.7 RESOLUTION STATUS OF TOP 12 DEFAULTERS 24-25
6.8 IMPACT OF IBC ON BANK’S PROFITABILITY 26-29
7 CHAPTER 7-CONCLUSION 30-31
7.1 CONCLUSIONS OF THE STUDY 30
7.2 LIMITATIONS OF THE STUDY 31
8 CHAPTER 8-BIBLIOGRAPHY 32-33
8.1 REPORTS AND JOURNALS 32
8.2 WEBSITES 32-33
9 CHAPTER 9-ANNEXURE 34-37

4
CHAPTER 1: INTRODUCTION

1.1ABSTRACT

The Indian Banking Industry has been witnessing difficulties in getting back their
dues on time from the recalcitrant borrowers. This has led to a huge stacking of
large quantum of Non-Performing Assets (NPA’s) in the Banking Industry.
Managing these Non-Performing Assets requires adept expertise and diligence as
there are many stakeholders who are involved with every call back of loan on an
NPA except the lender and the borrower. “Insolvency Bankruptcy Code” (2016)
was a brave move by the government in cleaning up the Stress accumulated
throughout the Indian Financial sector. The impact of clearance of these Stressed
Assets from the Economy will help the Banks to ramp up their cash flows and
increase profitability. As banks are the backbone of our Economy it also
contributes to its growth and welfare.

The mounting of NPA have a detrimental impact on the performance of the bank
and hence it is important to study the trend of NPA, Impact of IBC on the
accretion of NPA, and to predict the expected profitability of Banks in line with
the resolutions under IBC. This paper aims in understanding and analysing the
above mentioned prospects. A sample set of major Public and Private Banks
Annual Statements have been taken to calculate the gross and net NPA for a
period of 5 years to understand its trend and a Pre and Post IBC Analysis on the
recovery rate has been conducted. Some important ratios have been calculated to
get the forecasted “balance sheet” and “profit and loss statement” in line with the
expected resolutions under IBC. ROA and ROE percentage has been calculated
from the forecasted statements to understand the expected profitability of the
Banks.

5
1.2 BACKGROUND

The “Insolvency Bankruptcy Code”, 2016 has played an insightful role in

resolving the Non-Performing Assets conundrum in the Indian Banking Industry.
It has a vital position to play in the profitability of the banks as well as it governs
the resolution process in a time bound manner. Timely resolution is important
because if the bad loans resolution time gets stretched provisioning has to increase
at the cost of the Banks revenue thereby affecting the overall profitability.

With a strict 180 + 90-day ' resolve-or liquidate ' regime, the Code was
commended not only by Indian industry, but also by global fraternity, like the
World Bank and the IMF, and significantly contributed to India's 63rd position in
the 2020 ' Ease of Doing Business ' rating. India also secured a position among the
top ten enhancers in business ease in the world for three straight years. India's
ranking increased from 108 last year to 52 this year for “resolving insolvency”
metric.

Source: “World Bank’s Ease of Doing Business Report”

Due to the creation of a new framework for managing insolvency, India has
found it simpler to address insolvency by encouraging reorganization. The DBR
acknowledged that the current regime established the possibility of insolvency
settlement for corporate firms as a substitute to liquidation other debt management
procedures, reshaping the insolvent businesses that may recover or exit their
financial health. The Code has developed valuable methods for creditors to
negotiate effectively and has improved the likelihood for them to recognize their

6
dues. The result being that the creditors average recovery rate increased from 26.5
per cent to 71.6 cents on the dollar, and the period needed to address insolvency
has declined dramatically 1.6 years from 4.3 years. Among all the South Asian
countries India is now the strongest in solving the insolvency portion and is doing
better compared to other OECD countries.

As stated by the BLRC, the rate of recovery from the corporate or individual
resolution mechanism in India was lower as compared to other countries, with
lenders recovering only 20% of the asset valuation on NPV basis. The code
addressed the time delays which was a drawback in the earlier mechanisms as a
result of which recovery rates witnessed an increasing trend.

The accumulation of NPAs has a significant effect on the profitability of the

banks as it decreases the prodigality of the banks by the sum of NPAs and
contributes to the cost of investment equal to the amount of income invested in
any return-generating asset or scheme.NPA accumulation also affects the liquidity
and credit loss of the banks as reduction in the quantum of cash in hand creates
liquity crunch and poor recycling of funds leads to less credit deployment by the
banks.

Thus out of the many paramters that affect the Bank’s profitability like
macroeconomic factors i.e. Inflation and GDP growth or internal factors like bank
size, bank ownership,ECTA,operating efficiency,credit risk, ,ratio of interest
income,ratio of wages to total income,cost of funds etc NPA is allso one of the
major factors which have significant impact in the Banking Industry.

Introduction of “Insolvency Bankruptcy Code” was an attempt to procide a

framework to better manage and clear the NPA from the Banking Industry
.Thus,IBC also pose significant impact on Profitability of the Banks because more
will be the case resolutions under IBC more will be the asset and credit
depolyment capacity of the banks.Hence,higher profit can be expected through
this new framework.

7
CHAPTER 2: REVIEW OF LITERATURE

YEAR TITLE AUTHOR OBJECTIVE FINDINGS

The study concluded that

introduction of IBC was
“A study on the initially a shock to the
impact of Banking Industry and it
Insolvency and “To study the impact brought in results which
Bankruptcy Code, of IBC on Indian were contrary to what
Esther
2019 2016 on Indian Banking Sector – was expected. However,
Tensingh
Commercial both long term and FY2019 saw a shift in
Banks- a pre and short term” NPA and increased
post event profitability thereby
analysis” concluding that IBC had
a positive impact on the
Industry.

“A Study to The study concluded that

Analyse Impact of IBC impact is yet to be
Insolvency and “To identify
seen. It has been that IBC
Bankruptcy Code emerging trends of
works with 11 divisions
2016 On NPA’s Arti NPA, impact of IBC
of the NCLT, which is
Of Commercial Chandani, and amount of
2019 too low as compared to
Banks With Rajiv outstanding loans
the pending cases. The
Reference To Iron Divekar and number of cases
paper suggests adopting
and Steel Sector” under IBC in iron
technology so as to
and steel industry.”
bridge the time gap
caused by manual work.

The study highlights that

IBC has been a welcome
“Bank Quest- “To study the step in simplifying the
2017 Micro Research Venkat P. Futuristic Impact of Bankruptcy Process and
Paper” IBC” has contributed in
promoting Transparency
in the system.

The study identified d

“A Study of
some of the economic
Insolvency and
Srijan “To study the impact effects of IBC which
Bankruptcy Code
Anant, of IBC on the macro were Increase in FDI and
2019 and Its Impact on
Ayushi environment of FIIs, Improved Ease of
Macro
Mishra India.” Doing Business
Environment of
Rankings, Reduction of
India”
Crony Capitalism etc.

8
CHAPTER 3: OBJECTIVES OF THE STUDY

3.1 OBJECTIVES

This research is conducted for the following specific objectives:

 To understand the trends of NPA and Analyse the Impact of IBC on NPA
accretion in selected commercial banks of India.
 To analyse the impact of Gross NPA on Net Profit.
 To analyse the Top 10 defaulter Status of Resolution and its expected impact
on the Profitability of the Banks.

3.2 NEED FOR THE STUDY

There is a need to research the effect of IBC implementation to appreciate the

improvements that the banking sector has undergone in the past 4-5 years. It is
important to study this in order to test whether it provides a comprehensive
resolution process for coping with bankruptcies and proves to be effective in
mitigating and cleaning up the NPA stress that has been building up in the Indian
Banking Sector over the last decade. Insolvency codes around the globe have
taken years to reform and it is anticipated that its correct implementation would
benefit the economy.

3.3 RESEARCH MOTIVATION

The banking industry serves as a mechanism for a country's rapid economic

growth. They serve as an intermediary to leverage the surplus funds of the surplus
sectors to provide the required financing to those sectors that are essential to
support the sound growth of the economy. The strong financial status of the bank
relies on the repayment of deposits or the amount of non-performing assets of the
business. With the increase in scams in the Banking Industry , revenues have
followed a drastically declining trend which has not only affected the Bank’s
Profitability but has increased its credit loss. This paper attempts to analyse how

9
these scams and big ticket defaulters pile up NPA in the economy and the IBC
Code which governs the process of Insolvency and Bankruptcy to minimise and
clear these logjams and helps the Banks manage its revenues.

10
CHAPTER 4: RESEARCH METHODOLOGY

4.1 RESEARCH TYPE

A Descriptive and Exploratory Type of Research has been conducted to

understand the impact of the code which the government introduced to uplift the
financial health of the banking industry.

4.2 DATA TYPE

Secondary Data has been taken to analyse the past trends and predict the future
statements.

4.3 DATA SOURCE

RBI Annual Reports, Banking Company Reports, Public and Private Banks
Annual Statements and Consolidated Reports, IBBI Reports, CRISIL Report

4.4 SAMPLE SIZE

15 Private Sector Banks and 22 Public Sector Banks

4.5 SAMPLE SET OF BANKS TAKEN

4.6 PERIOD OF STUDY

2015-2016 to 2018-2019

11
4.7 RESEARCH TOOLS

 Line Chart, Bar Graphs and Tables have been used for Data Analysis.
 SPSS has been used for conducting the Correlation Regression Analysis.
 MS Office Excel has been used to prepare a model to forecast the Bank’s
profitability.

4.8 RESEARCH TECHNIQUES

 Ratio Calculation for NPA trend:

 GNPA Ratio(%) , Slippage Ratio

 Impact of IBC on NPA:

 Recovery Rates across various mechanisms Comparison.

 Insolvency Scores comparison Pre and Post-IBC.

 IBC Report Card.

 Impact of Gross NPA on Net PROFIT

 Correlation Regression

 Defaulter Status and Impact of Profitability

 A table of the Lenders claim and haircut rate has been prepared for the top 12
defaulters using newspaper reports about individual cases.

 Amount Recovered is calculated by – (Lenders Claim*Haircut Rate expected)

 Total amount Recovered in FY2019 and Expected to be recovered in

FY2020,and FY2021 is calculated.

12
 The Blocked Amount Recovered or Expected Amount to be recovered is
added to the Total Asset.

 “balance sheet” data as a proportion of net assets has been determined.

 Profit and Loss Statement data as a proportion of Advances /Investments

/Assets has been calculated .

 After the forecasted Statements have been prepared the following Ratios have
been calculated

13
CHAPTER 5: CONCEPTUAL FRAMEWORK

5.1 KEYWORDS:

14
5.2 BACKGROUND

“Insolvency Bankruptcy Code”,2016 as defined by the code is,

IBC, 2016 is an effort to rebuild the insolvency settlement system in India by

removing “The Presidency Towns Insolvency Act, 1909” and “The Provincial
Insolvency Act, 1920” and amending 11 statutes, including “The Companies Act,
2013,” “The DRT Act, 1993” and “The SARFAESI Act, 2002”. It was introduced
on 21st December 2015 and came into effect in December 2016.

5.3 OBJECTIVES OF THE CODE

 To amend and consolidate the existing laws involving Insolvency and

Bankruptcy.
 Time Bound Resolution to revive the Companies and expedite the IB
Proceedings.
 Maximization of value and protection of creditors including the stakeholders.

5.4 INSTITUTIONAL FRAMEWORK

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“Corporate Insolvency Resolution Process is a mechanism during which financial creditors
assess viability of the debtor’s business whether it can continue its operations and find ways
for rescue or revival, if any. In cases when the debtor’s business cannot be carried on in a
profitable manner then the Company should be wound up followed by liquidation of the
debtor.”

Diagrammatic Representation of all the steps from Application to

Acceptance of Resolution plan is given below:

16
5.5 CORPORATE LIQUIDATION

Corporate liquidation shall begin upon issuance of the winding up order.

“Under the Law, a corporate debtor can be liquidated under the following scenarios:

 A 75% majority of the creditor's committee shall vote to liquidate the corporate debtor at
any point during the insolvency proceedings;
 The creditor's committee shall not accept the resolution plan within 180 days (or within 9
0 days);
 The NCLT shall refuse the resolution plan presented to it on technical grounds; or
 The debtor contravenes the agreed Resolution Plan and the agrieved party asks the NCLT
to liquidate the corporate debtor.”

17
CHAPTER 6-DATA ANALYSIS AND FINDINGS

 OBJECTIVE 1: STUDYING THE TREND IN NPA AND IMPACT OF

IBC ON NPA

6.1 NPA TREND ANALYSIS

Through the introduction of the IBC the government aimed at clearing the logjam
of the Non-Performing Assets from the Banking Industry which severely affects
bank’s lending capacity. Contrary to the expectations, the NPA ratio showed a
sharp increase after the Implementation of IBC due to higher provision
requirement after resolution of stressed assets and also high magnitude frauds in
the recent past. The GNPA ratio helps us to assess the asset quality management
of the banks; lower GNPA ratio is a good indicator regarding the financial health
of the economy whereas higher GNPA ratio represents bad asset quality
management by the bank.

Particulars FY2015 FY2016 FY2017 FY2018 FY2019

GNPA 2784679 5399564 6847320 8956013 7678775
Advances 54762496 55935767 55572317 56973497 58905113
GNPA (%) 5.1% 9.7% 12.3% 15.7% 13.0%
Source:Calculated in Excel Model as per Annual Statements of Public Banks

Particulars FY2015 FY2016 FY2017 FY2018 FY2019

GNPA 292714 504218 850697 1184613 1321166
Advances 14516146 18239484 20958791 25138890 30705041
GNPA (%) 2.0% 2.8% 4.1% 4.7% 4.3%

Source:Calculated in Excel Model as per Annual Statements of Private Ban

Source: Calculated as per Annual Statements of Banks

18
While analysing the graph above it is found that GNPA ratio showed an
increasing trend from FY2015 to FY2018 i.e., 5.1% to 15.7% for Public Sector
Banks and 2.0% to 4.7% for Private Sector Banks at a very high rate. This
suggests that a growing proportion of the bank's assets have ceased to produce
income, that the competitiveness of the business and the capacity of the bank to
attract credit has been detrimental. This mounting of NPA requires a bank to make
higher provisioning for future losses which led to low profitability. In FY2018 to
FY2019 a sharp decline in the GNPA ratio has been observed i.e.; from 15.7% to
13.0% in Public Sector Banks and 4.7% to 4.3% in Private Sector Banks. This
indicates that NPA recovery was very high in this year with some big ticket
defaulters getting realised and the financial health of the banking industry showed
improvement.

The overall analysis also shows that although Private sector banks work in the
same economic climate and the same ecosystem, it has relatively low NPAs as
compared to the Public sector banks. This clearly indicates that asset quality
management of Private Banks is placed in a better position as compared to the
Public banks.

6.2 SLIPPAGE TREND ANALYSIS

Slippage Ratio as per RBI definition is “Fresh accretion of NPAs during the year / Total Standard Assets at
the beginning of the year)*100”.

It can be considered as falling below the present position of standard assets of the
bank. An increase in the slippage means higher accretion of fresh NPA creating a
logjam for the Banks and leading to reduced profitability. Slippages have been on
wane since FY2019 as the rate of accretion of fresh NPA have declined for both
Private and Public Banks.The Slippage ratio is sexpected to decrease in FY2020
due to large amount of NPA already being recognised by the banks as per the
stringet norms and asset quality reviews prescribed by RBI.

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 Slippage Ratio
Private Sector Banks FY2015 FY2016 FY2017 FY2018 FY2019
Additions in Gross GNPA(in Rs M) 2,66,799 4,75,225 8,13,676 10,65,345 11,18,872
Standard assets of previous (in Rs M) 1,21,95,437 1,45,16,146 1,82,39,484 2,09,58,791 2,51,38,890
Slippage Ratio 2.2% 3.3% 4.5% 5.1% 4.5%

Source:Calculated in Excel Model as per RBI reports

Source: Constructed as per table above.

From the graph above it can be observed that Slippage Ratio has shown an
increasing trend from FY2015 to FY2018 showcasing the high rate at which
Banks quality of standard assets detoriated.However, in 2018-19 the Indian
Commercial Banking Industry saw an improvement in its financial well-being as
after straight seven years of uptrend the NPA deteriorated and new slippages were
detained.

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6.3 RECOVERY UNDER IBC VS OTHER RESOLUTION MECHANISMS

IBC’2016 has brought a substantial amount of metamorphosis in the Insolvency

Resolution process in India that has shifted the balance of negotiating force from
the debtors to the creditors. The objective is to accelerate debt reduction and
transfer the potential assets to a new management that can bring in the resources
needed to ramp up the cash flows. IBC has structured the legal framework to
provide for a time-bound and market-linked resolution of stressed assets. The
recovery rate for 94 cases resolved by IBC in 2018-19 (FY19) is 43%, relative to
26.5% by other Resolution mechanisms. Those Recovery Channels have recovery
rates lower than expected on account of infrastructure-related constraints and
pendency of legal issues.

Source: RBI, IBBI, Crisil Reports

A comparison has been made of the Insolvency scores Pre and Post IBC and it has
been observed that Insolvency scores have jumped from 32.6 in 2016 to 40.8 in
2019. This indicates that the financial health of the Banking Industry has been
improved post IBC.

Source: Ease of Doing Business-World Bank reports 2015 to 2019

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6.4 IBC REPORT CARD

Source:IBBI

According to the latest data from the IBBI, a total of 3,312 cases were admitted to
insolvency proceedings as of Q3FY20. Approximately 58 per cent of all closed
cases (780 out of 1,351) till date had been settled by liquidation, although just 190
cases (6 per cent) had been settled with an overall haircut of about 57 per cent on
accepted charges up to Q3FY20. The haircut for cases settled at Q3FY20 was
very high at 88%.More than 30% of the cases had crossed 270 days. For the
overall registered cases up to Q3FY20, 39 per cent came from manufacturing and
33 per cent from real estate, building and trading sector. It is important to notice
that defaults in manufacturing firms have risen when the government provides
further policy help to the industry, in addition to growing public spending.

It should be noted that the number of cases admitted to Corporate Insolvency

Resolution Processes over the last 11 quarters has risen substantially and has
progressively risen per quarter, with a substantial proportion of such cases
admitted in the last seven quarters, reflecting the increasing recognition of IBC as
an successful debt settlement tool. Nonetheless, most of them wound up in
liquidation.

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 OBJECTIVE 2: ANALYSING IMPACT OF GNPA ON NET PROFIT

6.5 CORRELATION BETWEEN NPA AND PROFIT-TWO TAIL TEST

Correlation of NPA with Profit (r= -0.943) which means that there is high
negative correlation between NPA and Profit of the Banks. This implies that as
the NPA increases profitability of the banks decreases and vice versa.

6.6 REGRESSION ANALYSIS BETWEEN NPA AND PROFIT

The Model Summary Table shows that Gross NPA has a high significant
relationship with net profit. Thus the R Square value of 85.3% of the variation of
net profit can be explained by Gross NPA.

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 OBJECTIVE 3: ANALYSE THE TOP 10 DEFAULTER STATUS AND
IMPACT OF RESOLUTIONS ON PROFIT

6.7 RESOLUTION STATUS OF TOP 12 DEFAULTERS REPORTED BY

RBI

Expected
Financial
Total haircut
Default Resolved Days
Amount Claim on Date of Resolution
Name of the Company (Lenders) under in
Recovered (in Rs. Financial Admission Expected
(in Rs. NCLT NCLT
Million) lenders
Million)
claim
Essar Steel 508000 86360 549000 17% 02-08-2017 YES 583 FY21
Jaypee Infratech 98000 24500 100000 25% 09-08-2017 YES FY21
Bhushan Steels 561000 207570 572000 37% 26-07-2017 YES 293 FY19
Bhushan Power & Steel 450000 252000 471580 56% 26-07-2017 YES 771 FY20
Jyoti Structure 70100 42761 82000 61% 04-07-2017 YES 631 FY19
Electrosteels Steels 134000 85760 136000 64% 21-07-2017 YES 270 FY19
Amtek Auto 123000 98400 127000 80% 24-07-2017 YES FY21
ABG Shipyard 190000 138700 192000 73% 01-08-2017 YES 632 FY20
Monnet Ispat 104000 78000 114000 75% 18-07-2017 YES 414 FY19
Alok Industries 269000 217890 295230 81% 18-07-2017 YES 599 FY19
Era Infra 65000 58500 130000 90% 21-09-2017 NO
Lanco Infra 82000 73800 453000 90% 07-08-2017 YES 386 FY19
Total 2654100 1364241 3221810 51%
Resolution Amount Expected
FY2019 RESOLVED 705781
FY2020 EXPECTED 390700
FY2021 EXPECTED 209260
NOT EXPECTED BY FY2021 58500
Source: Media Reports

The IBC was a game changer for the creditor lender relationship and
provided a ray of opportunity for the financial sector. Resolution of the 12
big accounts was undertaken by banks under the leadership of RBI, which
together had pending claims of Rs 3221810 million. Only six of these twelve
major defaulters sought a resolution under the National Company Law
Tribunal (NCLT)-driven process. “Bhushan Steel”, with a huge debt of Rs
572000 million, finds a bidder in “Tata Steel”, “Electrosteel Steels" with Rs
136000 million debt was sold to the “Vedanata Group” and “Monnet Ispat”
with Rs 114000 million in debt was purchased by the group “Aion Capital”

24
and “JSW Steels”. ”Jyoti Structures” having debt amounting to Rs 82000
million had its resolution plan approved by NCLT.. The NCLT has also
accepted the single bid of “JM Financial ARC” and “RIL” for “Alok
Industries”, having a debt of Rs 295230 million. “Lanco Infra” has been sent
for liquidation by the NCLT.

FY2020 expects resolution of another two large accounts “ABG Shipyard”

and “Bhushan Power and Steel”. “Bhushan Power and Steel” has got a
potential bidder “JSW Steels” whose bid has been approved by NCLT. “ABG
Shipyard” has been ordered to liquidate by the NCLT. FY2021 expects
resolution of the major defaulters “Essar Steel”, “Jaypee Infratech” and
“Amtek Auto”. “Amtek Auto” has restarted the Resolution Process whereas
“Essar Steel” sale has been put on hold. The NCLT accepted a plan by the
NBCC (India) to purchase the bankrupt "Jaypee Infratech".

25
6.8 IMPACT OF IBC ON BANK’S PROFITABILITY

PARTICULARS FY2020 FY2021

Overall Asset base growth expected as per trend and bank conference calls 4.5% 4.0%
Additional growth in asset from NCLT List 1 390700 209260
Total Assets 157240418 163739294.8
The expected Resolution amount for FY2020 has been added to the total asset and
“balance sheet” data as a proportion of the Total Assets and the Forecasted
“balance sheet” and Profit and Loss Stetements have been prepared.

Balance sheet particulars as a

FY2018 FY2019 FY2020F FY2021F
percentages of Total Assets
Equity 7.16% 7.55% 7.55% 7.55%
Deposits 78.55% 78.99% 80.11% 82.12%
Borrowings 10.84% 10.18% 9.72% 9.32%
Other liabilities 3.44% 3.28% 2.62% 1.01%

Cash 8.41% 7.76% 7.76% 7.76%

Investments 26.60% 25.46% 24.87% 24.37%
Advances 58.25% 59.70% 59.84% 60.51%
Other Assets 6.75% 7.07% 7.53% 7.36%

Some assumptions which were taken while calculating the above figures
were:

 Systemic banking credit growth has seen a slow growth of ~6% in FY20
(including foreign bank) whereas for our sample set of banks, the credit
growth has slowed to 5% due to coranavirus scare in the last quarter of FY20
and first half of FY21. However, RBI policy and improving macroeconomic
condiitons in the later half might provide a boost to the credit growth but
cautionary lending measures by bank might keep the credit growth low at ~5-
5.5% only.
 Deposits is likely to grow in the range of 6-7% in FY20 and FY21 increase as
people park cash in safe haven in wake of NBFC crisis and Coronavirus scare
as people refrain from investments in stocks due to losses. Also with newer
banks offering a higher deposit rate will attract customer to park funds as
deposits.

26
 Commercial borrowing from bond market dried up after NBFC crisis and
banks look forward to raising capital from Equity investments. Also with FII
pulling out money the borrowings is expetced to decrease minutely as well in
FY21
 Investments remained low in FY20 on account of after effects of ILFS default
and NBFC crisis, However in the last quarter of FY20 and first half of FY21,
the investment activity is likely to remain subdude as Coranavirus scare makes
market volatile. Banks look to park their funds in Long term RBI Bills and
bonds
 Overall asset increase is expeted to come from NCLT recoveries and standard
growth as per trend.
Source: Media Reports, Bank call Transcripts

Particulars FY2018 FY2019 FY2020F FY2021F

Liability
Equity 1,00,97,658 1,13,30,669 1,18,70,043 1,23,60,642
Deposits 11,07,43,740 11,85,54,925 12,59,64,608 13,44,67,219
Borrowings 1,52,87,282 1,52,85,008 1,52,87,320 1,52,59,057
Other liabilities 48,48,639 49,24,822 41,18,447 16,52,377
Total liabilities 14,09,77,319 15,00,95,424 15,72,40,418 16,37,39,295

Assets
Cash 1,18,51,781 1,16,52,532 1,22,07,228 1,27,11,762
Investments 3,74,94,958 3,82,18,018 3,91,07,894 3,99,01,166
Advances 8,21,12,387 8,96,10,154 9,40,90,662 9,90,77,467
Other Assets 95,18,193 1,06,14,720 1,18,34,635 1,20,48,900
Total Assets 14,09,77,319 15,00,95,424 15,72,40,418 16,37,39,295
Source: Extract from Excel Model of Forecasted Consolidated “balance sheet”

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Some assumptions which were taken while calculating the below figures
were:

 Banks look to increase income from fee and non-interest income as per Banks
Conference call reports
 As banks have heavily invested in optimising their operations and adoption of
technology, they are likely to reap benefits in terms of reducing operating
expense as customer.
 As banks remain cautious on lending after the yes bank debacle, they are more
likely to take a slightly higher provisioning

Profit and Loss Particulars

FY2018 FY2019 FY2020F FY2021F
Interest yield on Advances 8.0% 8.1% 8.0% 7.8%
Interest yield on Investments 6.9% 7.0% 7.0% 6.8%
Interest Expenses / (Borrowing and Deposit) 4.9% 4.9% 4.8% 4.6%
Other Income on Advances 2.2% 1.8% 1.9% 2.1%
Operating expenses on Assets 1.7% 1.7% 1.5% 1.4%
Provisions on Advances 4.1% 3.5% 3.6% 3.8%

Particulars FY2018 FY2019 FY2020F FY2021F

Interest Income on advances 65,70,567 72,82,644 75,52,686 77,54,823
Interest Income on investments 25,93,910 26,58,453 27,20,353 26,95,731
Interest Income 91,64,477 99,41,097 1,02,73,038 1,04,50,554
Interest Expense 61,82,962 65,39,905 67,60,830 68,66,991
Net Interest Income 29,81,515 34,01,192 35,12,208 35,83,563
Other Income 17,93,563 16,24,612 18,18,751 20,34,038
Total Income 47,75,078 50,25,804 53,30,960 56,17,601
Operating Expenses 24,15,766 26,22,708 24,33,076 23,69,898
Profit before Provisions (PPOP) 23,59,312 24,03,096 28,97,884 32,47,704
Provisions 33,39,269 31,36,253 33,87,156 37,64,831
Profit before Tax (9,79,957) (7,33,157) (4,89,272) (5,17,127)
Assuming Tax @ 30% (2,93,987) (2,19,947) (1,46,782) (1,55,138)
Adjusted Profit After Tax (6,85,970) (5,13,210) (3,42,491) (3,61,989)
Source: Extract from Excel Model of Forecasted Consolidated Profit and Loss Statement

The Forecasted “balance sheet” and Profit and Loss Statement has been prepared
which suggests that the Banking financial health is expected to improve as with
increased time bound resolutions Banks will be able to manage its asset to provide
credit and earn interest as well as non interest income. With decreasing accretion
of NPA provisioning requirement will be less which will again provide a boost to
the Bank’s profitability.

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 Asset Quality FY2018 FY2019 FY2020F FY2021F
ROA (in %) -0.50% -0.35% -0.22% -0.23%
ROE (in %) -7.02% -4.79% -2.95% -2.99%
Source: Calculated as per Extract of Forecasted Consolidated “balance sheet” and P/L Statement

From the above graph it is observed that the Asset quality Ratio ROA and ROE is
expected to get into a better position as compared to the current fiscal year which
indicates that profitability of the Banks are expected to rise. IBC introduction has
thus impacted positively to the Banks profitability and is expected to show
progress in near future.

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CHAPTER 7: CONCLUSION

7.1 CONCLUSION

 India has climbed up the Resolving Insolvency Scores and Ease of Doing
Business Ranking as per World Bank’s Report indicating a healthy impact in
the Industry.
 Non-Performing Assets have been weakening the financial strength and
draining the capital of the Banking industry. After two years of
implementation of the “Insolvency Bankruptcy Code” 2016 the NPA which
was creating financial lethargy in the economy has finally started to decline.
 It was found that the NPA and the Bank’s Profitability have a negative
correlation and as the NPA’s are showing a declining trend Bank’s
profitability is expected to rise.
 Among the Top 12 defaulters that were reported by RBI among the top
defaulters of NCLT List 1 six major cases seeked resolution in FY2019 and
other six cases are expected to resolve in FY2020 and FY2021.
 The resolution of these large ticket defaulters are expected to restore the
Liquidity of the banks and enhance its profitability. Thus, IBC has impacted
positively to cure the financial lethargy of the Banking Sector and is expected
to have fruitful effect in the coming years as well.

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7.2 LIMITATIONS OF THE STUDY

 There are other internal as well as external factors affecting Profitability but
our study covers only impact of NPA.
 There are many performance measurement metrics used for analysing bank’s
profitability but our study only considers two ROA and ROE.
 Future NPA cannot be projected as it depends on credit appraisal of bank and
if any havoc or natural disaster happens NPA can increase.
 To forecast the Expected Profitability some assumptions had to be taken
which are subject to current market scenario and might change in future.

31
CHAPTER 8: BIBLIOGRAPHY

8.1 REPORTS

Annual Reports of Public and Private Banks. (2015-2016 to 2018-2019)

CRISIL. (2019). India Outlook FY20.

EY. (2019). Evolving Landscape of corporate stress resolution.

JAITLEY, A. (2019). Two years of insolvency and Bankruptcy Code(IBC).

pwc. (2018). Decoding the Code: Survey on Twenty One Months Of IBC in India.

RBI. (2015-2016). Annual Reports.

RBI. (2016-2017). Annual Reports.

RBI. (2017-2018). Annual Reports.

RBI. (2018-2019). Annual Reports.

8.2 WEBSITES

Amtek Auto lenders accept 80% haircut on Rs 12,700 crore dues. (13, Feb 2020).
Retrieved from www.economictimes.com:
https://economictimes.indiatimes.com/markets/stocks/news/amtek-auto-
lenders-accept-80-haircut-on-rs-12700-crore-dues/articleshow/74110081.cms

Bhushan Steel. (n.d.). Retrieved from www.zeebiz.com:

https://www.zeebiz.com/topics/bhushan-steel

Tribunal dismisses appeals against Monnet Ispat Resolution plan. (20, August 2019).
Retrieved from www.economictimes.com:
https://economictimes.indiatimes.com/industry/indl-goods/svs/steel/tribunal-
dismisses-appeals-against-monnet-ispat-resolution-
plan/articleshow/70746780.cms?from=mdr

NCLT approves insolvency resolution plea of Era Infra. (2018, May 09). Retrieved from
www.economictimes.com:
https://cfo.economictimes.indiatimes.com/news/nclt-approves-insolvency-
resolution-plea-of-era-infra/64087970

NCLT approves Vedanta's resolution plan for Electrosteel. (2018, April 17). Retrieved
from www.businessstandard.com: https://www.business-

32
 standard.com/article/news-ians/nclt-approves-vedanta-s-resolution-plan-for-
electrosteel-118041700971_1.html

Behind India’s Largest IBC Recovery: The Essar Steel Story. (2019, December 31).
Retrieved from ww.bloomergquint.com:
https://www.bloombergquint.com/business/behind-indias-largest-ibc-recovery-
the-essar-steel-story

Bhushan Power Sale:NCLT allows sale of Bhushan Power to JSW Steel. (2019, September
14). Retrieved from www.economictimes.com:
https://economictimes.indiatimes.com/industry/energy/power/nclt-allows-sale-
of-bhushan-power-to-jsw-steel/articleshow/70992397.cms?from=mdr

NCLT clears Sharad Sanghi's revised resolution proposal for Jyoti Structures. (2019,
March 27). Retrieved from www.economictimes.com:
https://economictimes.indiatimes.com/news/company/corporate-trends/jyoti-
structures-goes-to-netmagics-sanghi-as-nclt-approves-new-
bid/articleshow/68599648.cms?from=mdr

Reliance Industries plea on Alok delisting. (2019, November 14). Retrieved from
www.financialexpress.com:
https://www.financialexpress.com/industry/reliance-industries-plea-on-alok-
delisting-nclat-gives-sebi-last-chance-to-reply/1764066/

(2019). Report of Trend and Progress of Banking in India. Mumbai: Dr. Snehal S.
Herwadkar.

NBCC gets NCLT nod to buy Jaypee Infratech. (2020, March 04). Retrieved from
www.economictimes.com:
https://m.economictimes.com/industry/services/property-/-cstruction/nbcc-
gets-nclt-nod-to-buy-jp-infra/articleshow/74467966.cms

ABG Shipyard Ltd. (n.d.). Retrieved from www.stockinforce.com:

https://stockinforce.com/tweet/abg-shipyard-ltd/3097/btvi-alert-abg-shipyard-
debt-at-rs-19,000-cr,-icicibank-lead-banker-with/1075718912749252609

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CHAPTER 9: ANNEXURE

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