“These NPAs were the biggest scam of UPA government. A bigger scam than Commonwealth, 2G, coal scams… the hue and cry over NPAs these days is the biggest liability transferred by economists of the previous government),” Prime Minister Narendra Modi said on Wednesday while addressing FICCI’s 90th Annual General Meeting. Narendra Modi’s comment comes at a time when India is indeed reeling under Rs 9.5 lakh crore worth of bad loans, and efforts are being taken to resolve the banking crisis arising from it.
How bad India’s bad loans problem is
In India, liquor baron Vijay Mallya became a wilful defaulter of Rs 9,000 crore and Sahara’s Subrata Roy failed to pay Rs 36,000 back to banks, but country’s bad loan story does not end with these high-profile cases; it is far worse — worse than China. In 2016, India’s loan defaults were at 9.2% of the total gross loans, while that of China stood at just 1.7%, according to the World Bank data on nonperforming loans.
To deal with India’s rising bad debts, India introduced Insolvency and Bankruptcy (IBC) Code in May 2016, consolidating the existing framework by creating a single law for insolvency and bankruptcy, which is expected to ensure time-bound settlement.
Just yesterday, Ruchi Soya, a not so popular name, was declared a wilful defaulter by IDBI Bank for loan defaults worth Rs 5,922.79 crore. The company has been transferred to National Company Law Tribunal (NCLT) along with several others under the new Insolvency and Bankruptcy Code (IBC) for bank clean-up. In June, the Reserve Bank of India (RBI) identified 12 accounts for immediate insolvency, while 23-25 accounts have been sent to NCTL in December after they failed in debt restructuring. About five companies including biggies like Jaiprakash Associates and Videocon have not been sent been to NCTL yet as the resolution is expected.
When it was found out that promoters of companies were trying to capitalise on loopholes in the IBC, it last month amended the law through the ordinance route, which has been challenged in the Punjab and Haryana Court. The ordinance barred wilful defaulters, people associated with non-performing assets, or those who are habitually non-compliant from the bidding process during insolvency. The ordinance plugged the loophole in the Insolvency law, which allowed promoters to re-purchase their stressed assets at a discounted price, which was a “moral hazard” for the banking system, former SBI chairman Arundhati Bhattacharya said.
In a major step to bring in reforms to India’s ailing banking system, the government in October announced an unprecedented Rs 2.11 lakh crore for recapitalisation of banks over the next two years in a bid to clean banks’ books and revive investment in a slowing economy. Of the 2.11 lakh crore, 1.35 lakh crore will be from front-loaded recapitalisation bonds and remaining 76,000 crore from budgetary allocations and market raising.
Why India’s bad loans problem is so bad
Viral Acharya recently argued that before the IBC and in the absence of an effective, time-bound statutory resolution framework, various schemes were introduced by the Reserve Bank to facilitate viable resolution of stressed assets were cherry-picked by banks to keep loan-loss provisions low rather than to resolve stressed assets.
India’s bad loans have soared to Rs 9.5 lakh crore and the pile-up happened because defaulters were not dealt strictly in the past. In fact, sometimes, bankers even resort to providing additional funding to defaulters to repay previous loans.
Former RBI chairman Raghuram Rajan had pointed out that there are many sick industries but no corporate honcho is “sick” (sic). We perhaps have the biggest example: Vijay Mallya. Recently, Uday Kotak said what loan defaulters really needed was the fear of losing the company. “For the first time, founders fear losing control of the company if dues are not paid,” Uday Kotak said.