Financial & Insolvency Law

RBI Overhauls its NPA Regime: IBC to Hold the Fort? [Part V: The Impact and Criticism of RBI’s New NPA Regime]

  1. The Impact

The Notification has not done away with the conciliatory means to be employed by the lenders to course correct the stressed account upon default, it has only been rebranded in the wide ambit of a ‘Resolution Plan’ which encompasses, in essence, all of the tools under the previous regime[1]. The major change in the regime however is the stipulation of pursuing the debt in default under the Insolvency and Bankruptcy Code, 2016, where there is failure in the implementation of the Resolution Plan. The notification is only an exercise in the implementation of the statutory power that has been bestowed upon the RBI[2]. The Notification makes the RBI’s fight against NPAs a certain exercise. Banks are left with nearly no other option but to follow the letter of the RBI in pursuing a Resolution Plan and on its failure, to seek insolvency.

[Part IV of this series can be found here]

The Notification effectuates certainty of the process that is paramount in ensuring that the bona fide credit facilities extended by the lenders do not fall prey to abuse by borrowers, destroying the cycle of debt, which has a harsh effect on the economy as a whole.

The fear of losing control over their companies has prompted promoters of 2,100 companies and LLPs, who have defaulted on repayment of loans to banks, to settle their dues of around Rs 83,000 crore before action was initiated under the Code[3]. On last count, data compiled by the ministry of corporate affairs (MCA) showed that over 2,100 companies have cleared their outstanding amounts, a majority of which came after the government amended the IBC to explicitly bar promoters of companies that were classified as a non-performing assets (NPAs) from bidding for these companies where the National Company Law Tribunal, the bankruptcy court, initiated action. A loan is classified as an NPA if dues are unpaid for 90 days[4]. Further, the initiation of the Corporate Insolvency Resolution Process along with various stringent steps being taken against the largest corporate bodies in the country including the JP Group, Essar Group, Amrapali Group, etc., which had grossly violated the system of credit in the economy and used their position as a leverage to stall any recovery, has acted as a huge deterrent to the whole economy.

Other than endeavouring to set the credit market on the right path, the Code has also created a reliable system of takeover and buy-outs of the companies in pursuance of a resolution plan, that had failed to find an effective medium in the past. Illustratively, Tata Steel had completed the acquisition of the controlling stake of 72.65 per cent in Bhushan Steel Ltd. which was marred under an overwhelming debt of Rs. 44,476 Crores, for a consideration of Rs. 35,200. Bhushan Steel Ltd was one of the twelve companies identified by RBI vide its Press Release dated 13thJune, 2017 which, all in all, constituted 25% of the Non-Performing Assets of the country[5].

 

  1. Criticism

The framework that RBI has put forth vide its Notification dated 12thFebruary, 2018 overhauls its regime aimed at the resolution of the Non-Performing Assets. It is possible to characterize this overhaul as an over-enthusiastic and over-bearing attempt by the RBI to take control of what is essentially a right of the lenders that finds relief under the Code. The same may result in over-regulation of the mandate of the banks and other lenders. This Notification not only stipulates whenand by extinguishing what meanscan banks purse insolvency proceedings against whom andhow  but also provides stringent time lines that may just be impractical in their implementation. Banks, as the aggrieved entities, lose the control over the their prerogative to deal with their NPAs in a manner that proves efficacious and is determined through their diligence. The banks may also be subjected to penalties, for any violation of the aforementioned timelines, legitimate be the reason.

     i. Over Regulation

The over-reach previously undertaken by the RBI has been evidenced in the issue of the Press Release dated 13thJune, 2017 where it had affirmed that the matters referred to the NCLT under the Press Release would be accorded priority by NCLT, which is beyond the RBI’s powers and severely encroaching upon the prerogative of the NCLT. RBI has since corrected its mistake[6]after clarifying its position before the Hon’ble High Court of Gujrat[7]. Over-regulation has the risk of dismantling the benefits of the free market, that are elemental for businesses to flourish.

     ii. Challenge to its Vires

The Notification has been challenged before the Hon’ble High Court of Delhi by the All India Bank officer’s Confederation (AIBOC) contending that the Notification has pushed the Public Sector banks deep into the red[8]. AIBOC has claimed that the mandatory requirements under the Notification are arbitrary and impractical as a mere day’s delay can amount to an account being labelled NPA which can result in steep financial loss to the banks[9].

     iii. Diluting the Object of the Code

The Notification dilutes the intent and impact of the Code in so far as it overrides the maximum timeline of 180 (or 270 on application) days for the completion of the insolvency proceedings. The Notification stipulates for a period of 180 days from the default where the lenders are to seek to mend the account by engaging the device of a Resolution Plan and only upon the failure of the same can the lenders pursue insolvency proceedings under the Code. This provision allows for the Corporate Debtor to engage in ploys to abuse the 180 days stipulated under the Notification so as to delay the institution of the application for insolvency by the banks.

     iv. The Cost of Insolvency  

The implementation of the Notification is bound to result in an increase in the cost of litigation in the course of recovery of the debt. That along with the cost of the insolvency proceedings themselves, the recovery of the NPA is reduced. The Challenge brought by the AIBOC as to the validity of Notification is based on this steep increase in the cost of recovery[10].

     v. Limited Application

It is needless to state that where any of the other creditors of the firm (operational or financial) that are not bound by the Notification or the Corporate Debtor itself may make an application for the initiation of insolvency proceedings, procedure under the Code would stand vacated. As the Code inheres a non-obstante clause, the procedure imposed by the RBI cannot take precedence over the due course of the Code[11]. The Hon’ble supreme Court of India has also affirmed this position in its decision in the case of M/s Innoventive Industries Ltd. Vs. ICICI Bank and Anr.[12].  

     vi. Cause of Economic Friction

RBI’s new NPA regime is not only been contended to be a contentious, forced and hurried has faced criticism from India Inc. and the economy as a whole as being a hurried, premature and forced attempt by the financial regulator to guide the process of insolvency within the country, exerting more pressure on the economy as would be healthy or bearable. Though the process of laying to rest the NPAs in the Indian Economy ought to be a welcome move, its application must be an exercise in self-restraint so as to not overload the economy.

     viii. Substituting One Debt for Another

It is necessary to take note of the fact that though an insolvency process when successful, lays the bad debts to rest, the funds procured for such an endeavour by new owners and investors are heavily procured by way of engaging debt instruments like external bridge financing and long term loans. In essence, bad debt is replaced with new debt.

     ix. Perils of a One Size Fits All Approach

Though the quantum and performance of a debt may be thought of as being universal in their implications but the fact remains that the causes of the bad debts and the economic pitfalls that befall industries, vary sharply from one industry to another.  A shortcoming of this one size fits all approach of the RBI behind its new NPA regime is its clear ignorance to the causes of bad debts of certain industries that face challenges like low investor interest, high operational costs, vulnerability of yield or delivery, etc., which cause such bad debts in the first place and exist on an institutional and macro level. A clear example of this is the power sector’s ongoing challenge to RBI’s new NPA Policy where the companies in the power sector are liable for bad debts of over Rs. 1.74 Lakh Crore to banks. Upon the ending of the deadline stipulated under the February 2018 Notification, all these firms face insolvency before various NCLTs[13]. The Hon’ble Supreme Court of India has stayed the operation of the NPA deadline under RBI’s February Notification in favour of the power companies and has transferred all cases on the matter before the High Courts of the country to itself[14].

 

CONCLUSION

Non-Performing Assets have taken a heavy toll on the growth of the economy in the past and at their current rate of growth, they have the potential of dangerously stifling the growth of the economy in the future. The current magnitude of NPAs owe their existence to a multitude of reasons and the best way to deal with them is through a targeted and stern approach that fights the fountain from which they flow both in terms of the account holders and the banks or financial institutions. RBI has materialised this approach in the form of the Notification dated 12thof February, 2018.

According to the BLRC, RBI laws were among one of the legislations that would be hurdles to the implementation of the Code[15].  The Notification dated 12thFebruary, 2018 represents the harmonisation of the regimes that strive towards the same object, to combat NPAs. The Code not only represent the effectuation of its provisions but the synchronised and targeted collaboration of various institutions to create a holistic environment that is conducive of trade, credit and investor confidence where all stakeholders are working towards combatting problems that are faced by the banking sector and the nation.

The Insolvency and Bankruptcy Code has and will continue to serve as a major weapon in the arsenal of the RBI in its fight against NPAs. The framework under the Code has been successful in its implementation since creditors have been able to recover Rs. 49,783 crores amounting to 56% of the admitted claims from 32 stressed companies[16]. The Code has performed overwhelmingly better than the past regime of the country that could only derive recoveries of 20-30%[17].

Despite the merits of the insolvency process, RBI must exercise caution in subjecting the economy as a whole to a one size fits all approach where in any economy the same cannot be true, let along one as diverse as the Indian one.


This Article is a part of an authoritative series of which other parts are available as under – 

Part I: Introduction

Part II: RBI’s Outgoing NPA Regime

Part III: RBI’s First Attempt at an IBC backed NPA Resolution Framework and the 12 Mega-Defaulters

Part IV: Understanding RBI’s New NPA Regime

———-

[1]SupraNote 2, ¶ 4.

[2]The Banking Regulation Act, 1949; Act No. 10 of 1949; § 35AA and 35AB (1949).

[3]Sidhartha, Over 2,100 companies settle Rs. 83,000 crores bank dues, Times of India (23rdMay, 2018; 05:06 PM), https://timesofindia.indiatimes.com/business/india-business/owners-settle-rs-83k-crore-bank-dues/articleshow/64279946.cms.

[4]Id.

[5]Pragya Srivastava, India’s Bad Loans: Here is the list of 12 companies constituting 25% of the total NPAs, Finanacial Express (23rdOctober, 2017; 09:33 PM), https://www.financialexpress.com/industry/banking-finance/indias-bad-loans-here-is-the-list-of-12-companies-constituting-25-of-total-npa/903396/.

[6]Corrigendum, RBI Press Release (08.07.2018).

[7]Essar Steel India Limited and Ors. Vs. Reserve Bank of India and Ors., II (2018) 141 CLA 45 (Guj.) (High Court of Gujrat, 2018).

[8]Sarita C Singh, PSU Banker’s Union Challenges RBI’s February 12 Bankruptcy Circular, India Times (14thJune, 2018; 8:40 AM), https://economictimes.indiatimes.com/industry/banking/finance/banking/psu-bankers-union-challenges-rbis-february-12-bankruptcy-circular/articleshow/64580922.cms.

[9]Moneylife Digital Team, Delhi High Court issues Notice to RBI in a writ filed on bank NPAs, Money Life (1stJune, 2018), https://www.moneylife.in/article/delhi-high-court-issues-notice-to-rbi-in-a-writ-filed-on-bank-npas/54207.html.

[10]Id.

[11]The Insolvency and Bankruptcy Code, Act No. 31 of 2016, § 238 (2016).

[12]AIR 2017 SC 4084 (Supreme Court of India – 2018) (India).

[13]Press Trust of India, New power sector NPAs: Government, banks have only one option, Economic Times, (28 August 2018; 05:40 PM), https://economictimes.indiatimes.com/industry/banking/finance/banking/new-power-sector-npas-government-banks-have-only-one-option/articleshow/65579824.cms.

[14]Ashish Dhamija, Supreme Court stays RBI bankruptcy court deadline, gives relief to firms facing insolvency,(12 September, 2018), https://www.businesstoday.in/sectors/banks/supreme-court-stays-rbi-bankruptcy-court-deadline-insolvency/story/282278.html.

[15]Chapter 7, Report of the Bankruptcy Law Reforms Committee(2015).

[16]FE Bureau, IBC’s Rs. 50,000 crore NPA resolution success! Creditors recover more than half of their money, The Financial Express (August 18, 2018; 11:12 PM), https://www.financialexpress.com/industry/banking-finance/resolution-under-ibc-creditors-recover-rs-5000-crore/1284399/.

[17]Id.

Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com

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