Troubleshooting the Banking Problems

Efforts to clean up the banking system would be Raghuram Rajan’s greatest legacy when he leaves office on September 4, 2016. In his three years in office, he has not just brought inflation under control but has also made the banks and the government accept the NPA and Bad Debts problem.

The government has become a proactive ally to the RBI. It has taken various measures to help the banks and create an able infrastructure to minimise bad loan problems.

Three important measures in the past few months are:

1. Insolvency and Bankruptcy Code, 2016
2. Rs 70000 crore Capitalisation Plan for Public Sector Banks
3. Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016

Insolvency and Bankruptcy Code, 2016

• What will the code do?

1. Consolidate India’s multiple laws related to insolvency into one institutional framework.
2. Create a class of insolvency professionals to manage takeover and liquidation processes for banks and companies.
3. Enable setting up of Insolvency and Bankruptcy Board of India to regulate insolvency professionals and information companies.

• Important Features

1. In case of liquidation of assets, employees/workers of the company will get first priority and will get 24 months salaries.
2. In case of default, time limit of resolution is 180 days which can be extended by 90 days. It will help India improve World Bank Insolvency Ranking. India current ranks 136 and takes on average 4.3 years to resolve insolvency.
3. There will be two separate tribunals to oversee insolvency resolution process for individuals and companies. 

• Challenges

1. Creating a pool of Insolvency professionals, which could take a few years.

Capitalisation Plan for Public Sector Banks (PSBs)

• Important Features

1. Rs 70000 crore to be given to PSBs over 4 years.

2. Financial Year	Package (Rs)
   FY16	25000
   FY17	25000
   FY18	10000
   FY19	10000

3. Aims to provide liquidity to banks facing high NPA problem
4. Total Capital needed by the banks is 1.8Lac Crores
5. The banks will raise the rest 1.1Lac Crore from the market and by selling non-core assets

Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016

• Passed on 1^st August 2016, this bill amends 4 Acts related to loan recovery and securitisation. The amendments aim at faster recovery and resolution of bad loans, easier functioning of Asset Reconstruction Companies (ARCs) and creating a setup to effectively deal with NPAs in the Indian banking system.
• Asset Reconstruction Company (ARC): In simple terms, an ARC buys the stressed assets (Bad Loans) of a bank at a discounted rate and tries to make profit by recovering a higher amount from the bought assets.
• Bill to amend the following acts:

1. the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002
2. the Recovery of Debts due to Banks and Financial Institutions (RDDBFI) Act of 1993
3. the Indian Stamp Act of 1899
4. the Depositories Act of 1996

• Important Features

1. Possession of Collateral: SARFAESI Act allows secured creditors to take possession of the collateral upon default in repayment. This is done with assistance from the district magistrate and doesn’t require court or tribunal intervention. The bill provides the district magistrate a 30 day time frame to complete this process.
2. Power to RBI: RBI can audit and inspect the ARCs, impose penalties, appoint central bank officials on the board, and regulate the fees charged by ARCs to banks for acquiring stressed assets.
3. Revamping Debt Recovery Tribunal (DRT) Mechanism: The bill amends the RDDBFI Act and proposes electronic filing of applications and documents and makes the process time bound. It gives the District Magistrate 60 days to clear an application from a creditor.
4. The debtor will have to deposit 50% of the amount of debt due before filing an appeal at a DRT.

Significance

These remedial measures by the government show that it wants to not just solve the current NPA problem but also set up an infrastructure that prevents recurrence of such situations in the future.

Flaws in the DRT system have added to the problem of NPAs. Currently, 70000 cases are pending before the DRTs. By introducing time bound processes in Insolvency and Bankruptcy Code, SARFAESI Act, and RDDBFI Act the government has made sure that resolution and recovery processes are expedited. This will also help in identifying and resolving bad loans are an earlier stage and prevent them from growing to gargantuan proportions.