Insolvency and Bankruptcy code and NPAs

Context

Reserve Bank of India said its internal advisory committee (IAC) had identified 12 accounts, which account for 25% of non-performing assets of the Indian banking system for immediate resolution under the Insolvency and Bankruptcy Code (IBC).

NPA issues in India

• The internal advisory committee (IAC) of the Reserve Bank of India (RBI) had recently identified 12 accounts amounting to 25% of the Indian banking system’s non-performing assets.
• The total amount for gross non-performing assets (NPA) as on March was estimated to 11 Lakh crore
• Any missed instalment not paid to the bank until the due date is a bad loan. If this further extends beyond 90 days, it is termed as Non-performing assetor (NPA).
• Appallingly, the 12 accounts identified by the advisory committee contributed to about 78 Lakh Crore.

How does the process under IBC works?

• Post default, Creditors including banks can go ahead with the bankruptcy proceedings by filing a petition with the National Company Law Tribunal.
• Then an insolvency professional will be appointed to take control of the defaulting company, which will have significant powers.
• To protect the interest of lenders and other parties effected by default, a creditor committee will be formed.
• The committee would come up with a resolution plan which would require the nod of 75% of the creditors on the committee.
• The insolvency professional gets 180 days to come up with a feasible solution on the default issue. The timeline can be extended by another 90 days.
• If no solution is found within 270 days, a liquidator is appointed.
• The company can also opt for voluntary liquidation by a special resolution in a general meeting.

Criticism

Issue of extended time period

• The method of grievance redressal commences with the bank approaching the National Company Law Tribunal (NCLT) which appoints a professional to manage the company.
• This process of appointing a professional who attains the finance of the company to come out with a solution to repay loans often takes a long time and only delays the progression.
• This professional gets 180 days to come up with a feasible solution for the company to repay its credits. But this time limit cannot be said sufficient to understand the working of the company and come up with a feasibility solution.
• This timeline can further be extended by another 90 days.
• Also, it’s often difficult even for an expert to comprehend any company’s inside maneuvers and business in 270 days.

Huge burden:

• It is estimated that the national company law tribunal may take up to seven years to clear the pending cases it has already inherited.
• Despite the fact that the government has announced its intention of setting up e-DRTs and shifting most of the paperwork online to speed up cases, it still seems to be at a development stage and yet to be implemented in all DRTs.
• Debt recovery tribunals or (DRTs) is the quasi-judicial body that oversees the individual insolvency process.

Appointment of quality insolvency professionals:

• The code fails to provide a suitable framework to attract quality professionals to join the discipline of insolvency professionals
• The code provides for invasive involvement by the government in the conduct of the insolvency process and unnecessary involvement in the appointment, removal and supervision of insolvency professionals.
• The role reserved by the government for itself is likely to hamper experienced professionals joining the insolvency profession.

Suggestions

• Banks need to be more conventional in yielding loans to sectors that have a history of being found as contributors in NPAs.
• The loan sanctioning process of banks needs to be harsher and well beyond the conventional practices of analysis of financial statements and history of promoters.
• A suitable agendato attract and reassure quality professionals to join the discipline of insolvency professionals is vital.
• Any plan to alleviate the current scenario especially relating to the Debt recovery tribunals must be given urgency, to ease the burden on NCLT.

Debt Recovery Tribunals

• The Debts Recovery Tribunals have been established by the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions.
• DRTs deal with two different Acts:
  • The Recovery of Debts Due to Banks and Financial Institutions Act, and the Securitisation and
  • Reconstruction of Financial Assets and Enforcement of Security Interests Act
• The original aim of the Debts Recovery Tribunal was to receive claim applications from Banks and Financial Institutions against their defaulting borrowers.