The increasing Non-Performing Assets (NPAs) in the Indian banking sector has recently been the subject of much discussion and scrutiny. Yesterday, the Supreme Court struck down a circular dated February 12, 2018 issued by the Reserve Bank of India (RBI). The RBI circular laid down a revised framework for the resolution of stressed assets. In this blog, we examine the extent of NPAs in India, and recent events leading up to the Supreme Court judgement.
What is the extent and effect of the NPA problem in India?
Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorised as: (i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped making interest or principal repayments for over 90 days.
As of 2018, the total NPAs in the economy stand at Rs 9.6 lakh crore. About 88% of these NPAs are from loans and advances of public sector banks. Banks are required to lend a certain percentage of their loans to priority sectors. These sectors are identified by the RBI and include agriculture, housing, education and small scale industries.[1] In 2018, of the total NPAs, 22% were from priority sector loans, and 78% were from non-priority sector loans.
In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 (see Figure 1). This indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.
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Figure 1: Gross NPAs (% of total loans)
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Source: Reserve Bank of India; PRS |
What has been done to address the problem of growing NPAs?
The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, remedial measures for banks prescribed by the RBI for internal restructuring of stressed assets, and second, legislative means of resolving NPAs under various laws (like the Insolvency and Bankruptcy Code, 2016).
Remedial Measures
Over the years, the RBI has issued various guidelines for banks aimed at the resolution of stressed assets in the economy. These included introduction of certain schemes such as: (i) Strategic Debt Restructuring (which allowed banks to change the management of the defaulting company), and (ii) Joint Lenders’ Forum (where lenders evolved a resolution plan and voted on its implementation). A summary of the various schemes implemented by the RBI is provided in Table 1.
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Table 1: Non-legislative loan recovery framework
Sources: RBI scheme guidelines; Economic Survey 2016-17; PRS. |
Legislative Measures
In June 2017, an internal advisory committee of RBI identified 500 defaulters with the highest value of NPAs.[8] The committee recommended that 12 largest non-performing accounts, each with outstanding amounts greater than Rs 5,000 crore and totalling 25% of the NPAs of the economy, be referred for resolution under the IBC immediately. Proceedings against the 12 largest defaulters have been initiated under the IBC.
What was the February 12 circular issued by the RBI?
Subsequent to the enactment of the IBC, the RBI put in place a framework for restructuring of stressed assets of over Rs 2,000 crore on or after March 1, 2018. The resolution plan for such restructuring must be unanimously approved by all lenders and implemented within 180 days from the date of the first default. If the plan is not implemented within the stipulated time period, the stressed assets are required to be referred to the NCLT under IBC within 15 days. Further, the framework introduced a provision for early identification and categorisation of stressed assets before they are classified as NPAs.
On what grounds was the RBI circular challenged?
Borrowers whose loans were tagged as NPAs before the release of the circular recently crossed the 180-day deadline for internal resolution by banks. Some of these borrowers, including various power producers and sugar mills, had appealed against the RBI circular in various High Courts. A two-judge bench of the Allahabad High Court ruled in favour of the RBI’s powers to issue these guidelines, and refused to grant interim relief to power producers from being taken to the NCLT for bankruptcy. These batch of petitions against the circular were transferred to the Supreme Court, which issued an order in September 2018 to maintain status quo on the same.
What did the Supreme Court order?
The Court held the circular issued by RBI was outside the scope of the power given to it under Article 35AA of the Banking Regulation (Amendment) Act, 2017. The Court reasoned that Section 35AA was proposed by the 2017 Act to authorise the RBI to issues directions only in relation to specific cases of default by specific debtors. It held that the RBI circular issued directions in relation to debtors in general and this was outside their scope of power. The court also held that consequently all IBC proceedings initiated under the RBI circular are quashed.
During the proceedings, various companies argued that the RBI circular applies to all corporate debtors alike, without looking into each individual’s sectors problems and attempting to solve them. For instance, several power companies provided sector specific reasons for delay in payment of bank dues. The reasons included: (i) cancellation of coal blocks by the SC leading to non-availability of fuel, (ii) lack of enough power purchase agreements by states, (iii) non-payment of dues by DISCOMs, and (iv) delays in project implementation leading to cost overruns. Note that, in its 40th report, the Parliamentary Standing Committee on Energy analysed the impact of the RBI circular on the power sector and noted that the ‘one size fits all’ approach of the RBI is erroneous.
[1] ‘Priority Sector Lending – Targets and Classification’ Reserve Bank of India, July 2012, https://rbi.org.in/scripts/NotificationUser.aspx?Id=7460&Mode=0.
[2] Revised Guidelines on Corporate Debt Restructuring Mechanism, Reserve Bank of India, https://www.rbi.org.in/upload/notification/pdfs/67158.pdf.
[3] ‘Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)’, Reserve Bank of India, February 26, 2016, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8754&Mode=0.
[4] Timelines for Stressed Assets, Press Release, Reserve Bank of India, May 5, 2017, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10957&Mode=0.
[5] Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries, RBI, July 15, 2014, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9101&Mode=0.
[6] Chapter 4, The Economic Survey 2016-17, http://unionbudget.nic.in/es2016-17/echap04.pdf.
[7] ‘RBI introduces a ‘Scheme for Sustainable Structuring of Stressed Assets’’ Press Release, Reserve Bank of India, June 13, 2016, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=37210.
[8] RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC), Reserve Bank of India, June 13, 2017, https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40743
On March 19, Gujarat reported its first two cases of COVID-19. Since then, the number of cases have risen steadily. As of May 2, Gujarat has 4,721 confirmed cases (second highest in the country, after Maharashtra) of COVID-19. Of this 3,750 are active cases and 236 have died. The state government has responded with various actions to contain the spread and impact of COVID-19. In this blog, we look at the key measures taken by the Gujarat Government till May 1, 2020.
Initial phase
As COVID-19 cases were rising in other parts of the country, the Gujarat government notified the Gujarat Epidemic Diseases, COVID-19 Regulations, 2020 on March 14,. These regulations detail the responsibilities of hospitals and individuals, and the powers of officials with regards to COVID-19. These include: (i) flu corners in all hospitals for screening purposes, (ii) mandatory collection of travel history of people during screenings in all hospitals, (iii) mandating people with travel history to COVID-affected countries to be isolated /quarantined based on symptoms, (iv) forced detention and isolation of suspected patients who refuse voluntary isolation, and (v) containment measures in an area once positive cases are detected. Some of the other early measures are summarised below:
Health measures
The COVID-19 regulations were immediately supplemented with the n-COVID-19 Guidelines. These guidelines cover: (i) case definitions, (ii) basic infection prevention control measures, and (iii) standard precautions to be followed during the care and treatment of suspected patients.
On March 15, the government instructed all higher education institutions and other educational institutions including schools, polytechnics, anganwadis, to shut down till March 29. However, examinations of class X, XII, and universities were permitted to continue. Further, spitting in public was made a punishable offence.
On March 19, the government ordered the closure of gyms, amusement parks, wedding halls, till March 31. Additionally, all private doctors, practising modern as well as traditional systems of medicine, were instructed to report suspect cases to the government.
A Fever Helpline 104 was launched on March 20 for reporting of suspect cases of COVID-19. Further, guidelines were also issued on the reporting of cases of Severe Acute Respiratory Illnesses (SARI) to the government. These include: (i) preparation of travel history and contact lists of reported suspect cases, (ii) nodal officer to decide on steps and treatment protocol for such cases, (iii) relevant authorities to initiate follow up and contact tracing for the patient for last 14 days, and (iv) initiating cluster management guidelines when new cases emerge.
Essential goods and services
On March 20, a committee was formed by the government for daily monitoring of the availability, supplies, and manufacturing of medicines, masks, and sanitisers. On March 21, a Khas Kharid Committee was set up to ensure procurement of necessary medicines, equipments, and human resources during emergencies, bypassing existing purchase guidelines, if necessary.
Between March 21 and March 22, the government announced a partial lockdown and released a list of essential services and businesses that were allowed to operate till March 25 in the cities of Ahmedabad, Surat, Vadodara,Rajkot, Kutch and Gandhinagar. These include: (i) government and municipal departments, (ii) shops selling essential goods, (iii) various medical facilities such as hospitals, clinics, and pharmacies, (iv) public utilities, (v) railways and transportation facilities, (vi) media, telecom, IT services, and (vii) banks and insurance firms.
The government also invited NGOs to collaborate in the fight against COVID-19, by arranging for the supply of masks, sanitisers, and infrared thermometers, and running awareness campaigns.
Administrative measures
On March 18, the government issued guidelines specifying preventive measures to be taken in all government offices and employees. Recommendations inlcude: (i) avoiding face-to-face meetings and non-essential travel, (ii) closure of gyms and yoga centres in the Secretariat, (iii) home quarantine for officials exhibiting any symptoms, and (iv) mandatory leave to be given to such persons going on quarantine.
On March 21, the government released the terms of reference of Regional Nodal Officers appointed to work towards preventing the spread of COVID-19.
On March 23, the Gujarat Legislative Assembly decided to indefinitely postpone the Rajya Sabha elections that were originally to be held on March 26.
Other measures
An advisory was issued requesting private firms to not lay off workers (even if they fall sick to COVID-19) or reduce their salaries.
During the lockdown
On March 23, the state government extended and expanded the partial lockdown announced in select cities to the entire state. The lockdown was to be in place from March 23 to March 31. In addition to the exemptions announced in the partial lockdown orders, services such as (i) cattle feeding and veterinary services, (ii) stock broking, (iii) postal and courier services, and (iv) operation of industries where workers are available on site, were permitted. The state-wide lockdown has been followed by a nation-wide lockdown since March 25 . This has been further extended until May 17. Some of the key measures undertaken during the lockdown period are:
Health measures
On March 27, all private clinics and hospitals in the state were directed to utilise the Dr. TeCHO mobile app developed by the government. The app can be used for uploading information related to: (i) sample collection and (ii) reporting and surveillance of all SARI cases. Another app was launched to keep track of home quarantined people.
On March 30, COVID-19 was included as a notified disaster under the State Disaster Response Fund (SDRF). Thus, all expenditure related to relief measures for displaced / homeless people, migrant labour or other stranded persons due to the lockdown, will be made out of the SDRF.
On March 31, the government released new guidelines for the clinical management of COVID-19. These cover: (i) triage activities, (ii) case definitions and classification, (iii) infection and prevention control measures, (iii) specimen collection and handling, (iv) management and prevention of medical complications, (v) clinical management for COVID-19, (vi) discharge policy for patients, and (vii) dead body management.
To exclusively cater to COVID-19 cases, four government hospitals and three private hospitals were declared as designated COVID-19 treatment facilities. Further, the government instructed all COVID-19 hospitals to provide treatment to the people free of cost. On May 1, 26 hospitals were additionally designated as COVID-19 facilities.
Resource Management: Between March 31 and April 7, the government initiated multiple measures to address the shortage of medical practitioners in government hospitals. These include: (i) extending tenures of retiring medical personnel, (ii) ad-hoc recruitment of teachers in medical colleges, (iii) contract-based appointments of class-1 specialist and class-2 medical officers from private sector, (iv) additional responsibilities to select class-1 doctors from the epidemiologist department, and (v) temporary shifting of Ayurvedic medical officers to various locations.
On March 28, the state released guidelines for Human Resource management (HRM) in COVID-19 facilities. These include: (i) creation of district level task forces, (ii) patient flow algorithm, (iii) deployment and rotation of HR, including residents and nursing staff, and (iv) pooling of HR from various institutes and cadres.
The state has also allowed the use of AYUSH remedies and medicines, particularly for persons quarantined through contact tracing and to frontline personnel. Teams of corona warriors have been formed to assist people with preventive care. In addition, local officials have been asked to utilise the services of important stakeholders such as teachers, priests, and others, who can influence the social behaviour of people to deal with COVID-19.
A new State Health System Resource Centre has been established as the nodal agency in the state for all COVID-19 related research. Further, a COVID-19 research activity committee has been set up to lead this endeavour.
Welfare measures
On March 25, the state government decided to provide ration to 60 lakh poor families who live on daily wages. Further, on March 28, to minimise the adverse effects of lockdown on casual labour, autorickshaw drivers, and street vendors, the government announced free wheat, rice, pulses, sugar, and iodised salt for the month of April 2020.
A Vadil Vandana scheme was launched to provide free of cost meals to the elderly and the aged living alone in various cities of the state.
The state also announced that electricity bills from March 1 to April 30, can be paid by May 15.
The government announced compensatory packages worth Rs 25 lakh for each frontline worker who may lose life on COVID-19 duty. Such workers include: (i) police personnel and (ii) other government employees under the state government, panchayats, and nagar palikas .
Other measures
Industry: Relaxations from the lockdown were announced for factories and IT/ITES firms, from April 20 onwards. For factories, the conditions specified that adult workers shall be allowed to work for not more than 12 hours per day (six hours at a time) or 72 hours per week. Female workers are not allowed to work between 7 pm and 6 am. Wages are to be proportional to the existing wage structure. IT/ITES firms are allowed operate in non-containment zones at 50% strength and social distancing norms will be required to be followed.
Administrative: On March 30, the government issued an order to continue paying full wages to all fixed-pay government employees who are on leave or working from home during the lockdown. However, the employees are required to report to work whenever required by the government during the lockdown.
On April 15, nodal officers were appointed and given additional financial powers to take control of infectious disease control hospitals.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.
