A Study on Insolvency and Bankruptcy Code (2016) for recovery of NPA.

ABSTRACT

Bankers are the keepers and suppliers of liquidity in the economy. Hence most imperative role
of the banks is to mobilize the money of the people by accepting deposits from the public.
The banks act as a trustee of the extra balances of the public. Deposit mobilization enables the
economic wealth by regulating the circulation of money and channelling for growth and
industrious purposes. The deposits combined with other source of funds, for instance, capital,
reserves and borrowings are the source of funds for the banks. Banks depend on this source of
funds for the purpose of lending and investment. Accumulated NPAs in the Indian banking
system, specifically in the Public Sector Banks, have adverse effects on credit disbursement
because Banks face the Twin Balance Sheet problem. The Twin Balance Sheet problem refers
to the stress on balance sheets of banks due to NPAs on the one hand, and heavily indebted
corporates on the other. This in turn results in drying up of the credit channel to the economy
in general and to the industry in particular.The domino effect of the increase in NPAs in the
Banking sector on the economy as a whole cannot be ignored.

INTRODUCTION

The time required for resolution of NPAs in India is very high and recovery rate is very low
mainly due to the multiplicity of laws, inadequate staff and infrastructure for NPA resolution.
Very sound insolvency laws is a must for developing the credit markets. To address the same,
Ministry of Finance set-up the Bankruptcy Law Reform Committee (BLRC) in 2014 under
the chairmanship of Shri T. K. Vishwanathan. The principal goal of the BLRC was to come
up with a new bankruptcy structure that would substitute the prevailing structure. The
Insolvency and Bankruptcy Code was therefore introduced in the year 2016 and is considered
to be a game changer to resolve the NPA issues faced by Indian Banks. It has just been three
years that this code is introduced and it has started to yield results. Out of 1484 cases admitted
for resolution, 586 have been closed till December 2018- a hit rate of 40%.The IBC code is a
single act for resolution of NPA for the retail Borrowers as well as the Corporate Debtors
within a time bound manner of 180 days.

Given below is the snapshot of the various High value cases referred to the Insolvency and
Bankruptcy Code.
 Date Date
on on
which which Amount
Entity Loan referre case Recovere Comments
d to got d.
the resolve
NCLT d
SC delivered its final verdict and
cleared way for Arcelor Mittal India
₹490 ₹42,000 and Nippon Steel Japan to form a
Essar Steel Jun‘17 Dec‘19
billion crore joint venture to complete the takeover
by end of Dec’19.

Tata Steel has acquired 72.65 per cent

controlling stake in Bhushan Steel
Ltd (BSL) for around Rs 36,400 crore
through its wholly owned subsidiary
₹440 26 ₹36,400
Bhushan May‘18 Bamnipal Steel Ltd (BNPL). The
Steel billion Jul‘17 crore
company was chosen as the largest
bidder in March 2018 to buy a
governing stake in Bhushan Steel, as
part of bankruptcy proceedings.

₹130
Electrosteel Jul‘17 Acquired by Vedanta India Ltd.
billion

A bid by US-based hedge fund

Deccan Value Investors LP (DVIL)
₹12,700 ₹2,700 was approved by the NCLT .
Amtek Auto Jul‘17 Jul‘20
crore crore Lenders agreed to a 80% haircut and
the amount is payable over next seven
years.

Bhushan ₹492 Jun‘17 Committee of Creditors (CoC) have

Power &
billion approved for the takeover JSW Steel
Steel
Ltd but the process is ceased after ED
discovered fraud in financial dealings
of the company by previous
 Date Date
on on
which which Amount
Entity Loan referre case Recovere Comments
d to got d.
the resolve
NCLT d
promoters.

NCLT based in Ahmedabad

approved the Joint bid by Reliance
₹290 ₹5,050
Alok Jun‘17 Mar‘19 Industries Limited (RIL) and JM
Industries billion crore
Financial Asset Reconstruction Co
was

₹450
Lanco Infra Aug‘7 Ordered for liquidation.
billion

Synergy Group & Prudent ARC have

₹146 submitted EoI but neither of them
Jet Airways June‘19
billion have submitted bids. It is most likely
that the bidding date will be extended.

Reliance Jio will get the tower and

fiber assets of Reliance Infratel Ltd
for Rs 4,700 crore, UV Asset
Reliance ₹33,000 ₹23,000
Communicati Jun‘19 Jan‘20 Reconstruction Co Ltd (UVARC) will
crore crore
ons get assets of RCom and Reliance
Telecom (spectrum) for Rs 14,000
crore.

Dewan ₹1,000 29 First financial company to be referred

Housing
billion Nov‘19 to NCLT under IBC by RBI.
Finance Ltd

Review of Related Literature

Mishra, AK, Jain, S, Abid, M, R L, M. Macro‐economic determinants of non‐performing

assets in the Indian banking system: A panel data analysis. Int J Fin
Econ. 2020; 1– 16. https://doi.org/10.1002/ijfe.1989
Over the last few years, the Indian banking sector has been ceaselessly adding increasingly
huge piles of non‐performing assets (NPAs), also known as bad loans, to its balance sheet. As
of March 2018, gross NPAs for all scheduled commercial banks (SCBs) stood at over ₹10
trillion, compared to merely 4 years back, that is, March 2014, when they were almost one‐
fourth of this. Aimed at tackling the NPA problem, the Insolvency and Bankruptcy Code
(IBC) was enacted in 2016 by the Parliament of India, which provides for initiation and quick
resolution of bankruptcy proceedings against defaulters. In 2017, the RBI identified 12 M‐
defaulters which accounted for nearly INR 1.75 trillion of the total NPAs of Indian banks.
Targeting the NPA problem at the policy level requires extensive research and analysis in
order to come up with effective action plans. This study tries to analyse NPAs of Indian banks
using panel data regression models and identify their key determinants. It also examines the
relative severity of the NPA problem in case of public banks as compared to private banks.

Jasrotia, SS, Agarwal, T. Consolidation of Indian PSU banks and the way forward. J Public
Affairs. 2020;e 2133. https://doi.org/10.1002/pa.2133

The increasing non‐performing assets (NPAs) and to meet the higher funding needs, India
witnessed the biggest consolidation in public sector banks. In India the surging NPAs is long
witnessed concern and major economic reforms were initiated in Indian banking to curb the
issue. The recent merger has brought in a major policy concern with this consolidation which
is availability of loans to smaller businesses. The paper analyses the impact of banks
consolidation on Indian economy by considering both positive as well as negative aspects of
banks mergers. The paper also presents the history of Indian banking and recommending a
way forward.

Merits and demerits of IBC 2016

To study the merits and demerits of IBC 2016, the following hypothesis is being
developed:
H0(g): There exists no significant relationship between additions to NPA (fresh NPA)
and use of IBC for recovery.
H1(g): There exists a significant relationship between additions to NPA (fresh NPA) and use of
IBC for recovery.
For this purpose, the data is gathered and analyse as under:
Table-5.36: Additions to NPA (fresh NPA) and use of IBC for recovery
Year ADD NPA ALL ADD NPA SBI IBC
2011 70439.85 18145.70 0
 2012 107520.72 24712.22 0
2013 138206.16 31993.35 0
2014 190087.65 41216.67 0
2015 208638.14 29435.02 0
2016 442192.46 64198.49 0
2017 415823.00 39071.38 0
2018 932125.30 160303.65 4926
2019 498473.47 32738.05 70819
2020 566751.63 49826.28 104117
2021 650793.70 28563.45 27311

To analyse the above hypothesis the SPSS software is used, and the outcome is
presented as under:

Table-5.37: Relationship between additions to NPA and use of IBC for recovery.
Correlations
AddNPAAll AddNPASBI IBC
AddNPAAll Pearson Correlation 1 .750** .387
Sig. (2-tailed) .008 .240
N 11 11 11
AddNPASBI Pearson Correlation .750** 1 -.051
Sig. (2-tailed) .008 .881
N 11 11 11
IBC Pearson Correlation .387 -.051 1
Sig. (2-tailed) .240 .881
N 11 11 11
**. Correlation is significant at the 0.01 level (2-tailed).

Correlation helps to determine the strength of the linear relationship between two
variables.Correlation coefficients range from -1(a perfect negative correlation) to positive 1(a
perfect positive correlation).The closer the correlation coefficient gets to 1 or -1,the stronger
the correlation.The closer the correlation coefficient gets to zero, the weaker is the correlation.
The result of the above test is divided into two parts:-
Relationship with Additions to NPA of SBI and IBC:-

The result of the above test revealed that the correlation coefficient between Additions to
NPA of SBI and IBC is -0.051 and p value>0.05.The level of Additions to NPA of SBI is
inversely related to the use of IBC for recovery. So it can be said that there is negative
relationship between Additions to NPA of SBI and use of IBC for recovery.Since p
value>0.05,We accept the null hypothesis that there is no significant relationship between
Additions to NPA of SBI (fresh NPA)and use of IBC for recovery.

Relationship with Additions to NPA of all Scheduled Commercial Banks and IBC:-

The result of the above test revealed that the correlation coefficient between Additions to
NPA of all Scheduled Commercial Banks and IBC is 0.387 and p value>0.05.The level of
Additions to NPA of all Scheduled Commercial Banks is directly related to the use of IBC for
recovery. So it can be said that there is positive relationship between Additions to NPA of all
Scheduled Commercial Banks and use of IBC for recovery.Since p value >0.05, We accept
the null hypothesis that there is no significant relationship between Additions to NPA(fresh
NPA) of all Scheduled Commercial Banks and use of IBC for recovery.
Conclusion
The Insolvency and Bankruptcy Code has demonstrated to be a panacea in the winding up of
defaulting businesses. The IBC has created an environment in which other companies can
take over companies referred to NCLT for expansion of their businesses, while also providing
a faster resolution for the lenders who would spend years in negotiating former methods like
SARFAESI, DRTs, BIFR, etc. While the time bound resolution has certainly changed the
state of affairs for the lenders, but what cost the lenders (mostly the Public Sector Banks) have
been hard-pressed into accepting the enormous haircuts is certainly questionable eventually
supporting corporate loot and loss to the public exchequer. The insolvency proceedings of the
40 companies under the RBI’s 1st and 2nd List has brought to light that barring few
aberrations like Bhushan Steel (and probably Essar Steel, in the future), there is not much
possibility of recovery for the creditors. While asset-heavy firms like steel companies had
more buyers, the EPC firms, which had accumulated heavy debts, had barely any interested
takers. In fact, lenders of many of these businesses got resolution plans only from a single
bidder who quoted a bid value which is slightly more than the liquidation value. This shows
that the Insolvency and Bankruptcy Code, is in favour of the businesses keen to buy these
insolvent companies, rather than helping the lenders who are struggling with the humongous
NPA crisis in Indian economy. The IBC has certainly given more power to the lenders in
terms of dragging the companies to insolvency courts. This has certainly created apprehension
in the minds of delinquent promoters who went on taking loans from the banks for expansion
of their businesses, taking unwarranted risks, and, at times, have been caught up with
diverting funds for other purposes, or causing wilful defaults. The apprehension of losing
control over their companies, or, being dragged into the insolvency court by Financial
Creditors, or, Operational Creditors, will certainly put a lot of pressure on the defaulters
Similarly, the government and insolvency regulator IBBI must warrant that the IBC process is
not distorted by Financial Creditors or Operational Creditors by dragging corporate borrowers
to insolvency courts over trivial matters, or putting false implications on them. The
government has been emphasising the fact the IBC is a major influential aspect in improving
‘India’s Ease of Doing Business’ rankings. The IBC has received an extremely favourable
reaction from a broad array of industry experts. The business landscape has changed
completely due to the presence of the IBC framework.

Easier closure of defaulting companies would aid in construction of a more healthy economy.
The ardent interest of global institutions like the World Bank in promoting the Insolvency and
Bankruptcy Code in India can also be observed from the fact that the World Bank’s private
arm, the International Finance Corporation (IFC), has been providing support to IBBI to
reinforce the insolvency and bankruptcy framework by focusing on capability-building of
insolvency professionals, budding technical know-how and identifying information and data
requirements for Information Utilities. The IBC framework is undergoing an evolution at the
moment. It is apparent from a variety of amendments brought to the IBC during the past few
years, based on suggestions from various stakeholders. In the past few years there have been
quite a few landmark cases in the NCLT with further appeals in NCLAT. They have even
been dragged to the Supreme Court, in certain instances. New examples are being set up and
with certain milestone judgments being delivered. The IBC process would grow more mature
in the near future. Nevertheless, if the government does not improve the infrastructural
capacity of NCLT on a priority, in terms of increasing the number of judges and benches, then
the IBC process might collapse under its own credence. There have been a number of
instances of not following up with the deadlines with extensive litigations in high-profile
cases. It would be essential in the future that more citizens are actively involved in the IBC
process, especially since public money is at stake, and not consider it as the realm of
corporate houses, lawyers and bankers. The techno-legal temperament of NCLT might deter a
lot of people, but this should not become an easy way for the corporate houses to enlarge their
empires and control their businesses. It is very important that the government should
guarantee more transparency and accountability in the entire course of action. It must make
sure that all stakeholders acquire a just deal, including employees, suppliers and contract
workers of the firms referred to NCLT. IBC cannot be a therapy for flawed lending practices
of the banks and other financial institutions who have taken to uncontrolled lending without
due assiduousness and risk-mapping to handle the situations when corporate debtors default
on their loans. Numerous factors have been accountable in the accumulation of the NPA crisis
in the Indian banking system and IBC would mostly be useful for treatment of the symptoms
rather than the cause. Undeniably, it would be a misleading conclusion to think of IBC as a
universal remedy for resolution of the NPA crisis.

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