At noon today, the Finance Minister introduced a Bill in Parliament to address the issue of delayed debt recovery. The Bill amends four laws including the SARFAESI Act and the DRT Act, which are primarily used for recovery of outstanding loans. In this context, we examine the rise in NPAs in India and ways in which this may be dealt with.
I. An overview of Non-Performing Assets in India
Banks give loans and advances to borrowers which may be categorised as: (i) standard asset (any loan which has not defaulted in repayment) or (ii) non-performing asset (NPA), based on their performance. NPAs are loans and advances given by banks, on which the borrower has ceased to pay interest and principal repayments. In recent years, the gross NPAs of banks have increased from 2.3% of total loans in 2008 to 4.3% in 2015 (see Figure 1 alongside*). The increase in NPAs may be due to various reasons, including slow growth in domestic market and drop in prices of commodities in the global markets. In addition, exports of products such as steel, textiles, leather and gems have slowed down.[i] The increase in NPAs affects the credit market in the country. This is due to the impact that non-repayment of loans has on the cash flow of banks and the availability of funds with them.[ii] Additionally, a rising trend in NPAs may also make banks unwilling to lend. This could be because there are lesser chances of debt recovery due to prevailing market conditions.[iii] For example, banks may be unwilling to lend to the steel sector if companies in this sector are making losses and defaulting on current loans. There are various legislative mechanisms available with banks for debt recovery. These include: (i) Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act) and (ii) Securitisation and Reconstruction of Financial Assets and Security Interest Act, 2002 (SARFAESI Act). The Debt Recovery Tribunals established under DRT Act allow banks to recover outstanding loans. The SARFAESI Act allows a secured creditor to enforce his security interest without the intervention of courts or tribunals. In addition to these, there are voluntary mechanisms such as Corporate Debt Restructuring and Strategic Debt Restructuring, which These mechanisms allow banks to collectively restructure debt of borrowers (which includes changing repayment schedule of loans) and take over the management of a company.
II. Challenges and recommendations for reform
In recent years, several committees have given recommendations on NPAs. We discuss these below.
Action against defaulters: Wilful default refers to a situation where a borrower defaults on the repayment of a loan, despite having adequate resources. As of December 2015, the public sector banks had 7,686 wilful defaulters, which accounted for Rs 66,000 crore of outstanding loans.[iv] The Standing Committee of Finance, in February 2016, observed that 21% of the total NPAs of banks were from wilful defaulters. It recommended that the names of top 30 wilful defaulters of every bank be made public. It noted that making such information publicly available would act as a deterrent for others.
Asset Reconstruction Companies (ARCs): ARCs purchase stressed assets from banks, and try to recover them. The ARCs buy NPAs from banks at a discount and try to recover the money. The Standing Committee observed that the prolonged slowdown in the economy had made it difficult for ARCs to absorb NPAs. Therefore, it recommended that the RBI should allow banks to absorb their written-off assets in a staggered manner. This would help them in gradually restoring their balance sheets to normal health.
Improved recovery: The process of recovering outstanding loans is time consuming. This includes time taken to resolve insolvency, which is a situation where a borrower is unable to repay his outstanding debt. The inability to resolve insolvency is one of the factors that impacts NPAS, the credit market, and affects the flow of money in the country.[v] As of 2015, it took over four years to resolve insolvency in India. This was higher than other countries such as the UK (1 year) and USA (1.5 years). The Insolvency and Bankruptcy Code seeks to address this situation. The Code, which was passed by Lok Sabha on May 5, 2016, is currently pending in Rajya Sabha. It provides a 180-day period to resolve insolvency (which includes change in repayment schedule of loans to recover outstanding loans.) If insolvency is not resolved within this time period, the company will go in for liquidation of its assets, and the creditors will be repaid from these sale proceeds.
[i] ‘Non-Performing Assets of Financial Institutions’, 27th Report of the Department-related Standing Committee on Finance, http://164.100.47.134/lsscommittee/Finance/16_Finance_27.pdf. [ii] Bankruptcy Law Reforms Committee, November 2015, http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf. [iii] Volume 2, Economic Survey 2015-16, http://indiabudget.nic.in/es2015-16/echapter-vol2.pdf. [iv] Starred Question No. 17, Rajya Sabha, Answered on April 26, Ministry of Finance. [v] Report of the Bankruptcy Law Reforms Committee, Ministry of Finance, November 2015, http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf. *Source: ‘Non-Performing Assets of Financial Institutions’, 27th Report of the Department-related Standing Committee on Finance, http://164.100.47.134/lsscommittee/Finance/16_Finance_27.pdf; PRS.
As of May 22, 2020, there are 1,18,447 confirmed cases of COVID-19 in India, which is 76% higher than the cases on May 11, 2020 (67,152). Out of total confirmed cases, there are 66,330 active cases, 48,354 patients have been cured/discharged and 3,583 have died (Figure 1). As the spread of COVID-19 has increased across India, the central government has continued to announce several policy decisions to contain the spread, and support citizens and businesses who are being affected by the pandemic. In this blog post, we summarise some of the key measures taken by the central government in this regard between May 11 and May 22, 2020.
Figure 1: Number of day wise COVID 19 cases as on May 22, 2020
Aatma Nirbhar Bharat Abhiyaan
On May 12, the Prime Minister, Mr. Narendra Modi, announced a special economic package of Rs 20 lakh crore (equivalent to 10% of India’s GDP) aimed towards making the country ready for the tough competition in the global supply chain and empowering the poor, labourers, migrants who have been adversely affected by COVID-19. Following this announcement, the Finance Minister, Ms. Nirmala Sitharaman, in five press conferences, announced the detailed measures under the economic package. The economic package includes earlier measures taken by the government to support the citizens and businesses of India. A break-up of the package is presented in Table 1.
Table 1: Break-up of stimulus from Aatma Nirbhar Bharat Abhiyaan package
Item |
Key Topics covered |
Amount (in Rs crore) |
Stimulus from earlier measures |
Pradhan Mantri Garib Kalyan Yojana, Tax Concessions, and the Prime Minister's announcement for health sector |
1,92,800 |
Part 1 |
Business including Micro, Small and Medium Enterprises (MSMEs) |
5,94,550 |
Part 2 |
Poor people including migrants and farmers. |
3,10,000 |
Part 3 |
Agriculture and allied sectors. |
1,50,000 |
Part 4 and Part 5 |
Part 4: Coal and mineral sectors, defence sector, civil Aviation, airports and aircraft Maintenance, Repair and Overhaul (MRO), power sector, social infrastructures, space, atomic energy. Part 5: Government reforms and other provisions including public health and education, additional allocation to MGNREGS |
48,100 |
Sub Total |
|
1,295,400 |
RBI Measures (Actual) |
Reduction in Cash Reserve Ratio (CRR), Special Liquidity Facility (SLF) for mutual funds, Special refinance facilities for NABARD, SIDBI and NHB at policy repo rate |
8,01,603 |
Grand Total |
|
20,97,053 |
Note: Part 1, 2, 3, 4, 5 in the table above represents the five press conferences conducted by the Finance Minister to announce the details of the economic package.
Source: Presentation made by Union Finance & Corporate Affairs Minister Smt. Nirmala Sitharaman under Aatmanirbhar Bharat Abhiyaan to support Indian economy in fight against COVID-19, Ministry of Finance, May 13, 2020, PRS.
For more information on the details of the announcements made under Aatma Nirbhar Bharat Abhiyaan, please see here.
Finance
Following the Prime Minister’s and Finance Minister’s announcements, further announcements were also made.
Lockdown 4.0
The Ministry of Home Affairs (MHA) passed an order extending the lockdown till May 31, 2020. This lockdown will have more relaxations compared to earlier lockdowns.
Zoning of areas
The new guidelines have authorised states/union territories (UTs) to define the red, green and orange zones based on the parameters prescribed by the Health Ministry. The states/UTs can define a district, or a municipal corporation/ municipality or even smaller administrative units such as sub-divisions, etc. as a red or green or orange zone.
The prohibition of certain activities or restrictions in various zones within a state will be at the discretion of the state/union territory as deemed necessary.
Prohibited Activities
Some activities will continue to remain prohibited throughout the country. These include:
Online/ distance learning is encouraged and permitted; and, restaurants will be allowed to operate kitchens for home delivery of food items.
National Directives for COVID Management
The Ministry of Home Affairs issued the National Directives for COVID Management, which apply to public places and work places. As per these guidelines:
Guidelines for workplaces include:
Aarogya Setu
The District authorities will ensure installation of the Aarogya Setu application on compatible mobile phones of all individuals and will have to regularly update their health status on the app.
Aarogya Setu Data access and knowledge sharing protocol, 2020
The Ministry of Electronics and Information Technology, Government of India issued a notification on the data access and knowledge sharing protocol, 2020 in reference to the Aarogya Setu mobile application. The protocol will: (i) ensure secure collection of data by the mobile application, (ii) protect the personal data of individuals, and (iii) ensure efficient use and sharing of personal or non-personal data of the application users. The protocol provides principles for: (i) collection and processing of response data, (ii) sharing of response data, (iii) obligations of entities with whom the data will be shared, and (iv) sharing of data for research purpose. A sunset clause is applicable to the protocol subjecting it to a review after 6 months unless there is any extension of sunset clause in wake of the pandemic.
Travel and Movement
Health
The Ministry of Health and Family Welfare issued: (i) updated containment plan on COVID-19, and (ii) updated containment plan for large outbreaks of COVID 19. These plans provide information on various scenarios of COVID-19 and strategies to control the spread of the disease including definitions, action plans and specific details on (i) identification of containment zones and buffer zones; (ii) perimeter control; (iii) support from various stakeholders such as testing laboratories and hospitals; (iv) pharamaceutical and non-pharmaceutical interventions; and (v) risk communication.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.