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.

Figure 1: Gross NPAs (% of total loans)

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. 

Table 1: Non-legislative loan recovery framework

Loan restructuring

  • Banks internally undertake restructuring of loans, if the borrower is unable to repay the amount.  This involves changing the terms of repayment, which includes altering the payment schedule of loans or interest rates.

Corporate Debt Restructuring

  • Allows for restructuring of a borrower’s outstanding loans from more than one bank.  This mechanism is available if the borrower’s outstanding loans are more than Rs 10 crore.[2]

Joint Lender's Forum

  • Lenders evolve an action plan to resolve the NPA of a defaulter.[3]  If 60% of the creditors by value, and 50% of the creditors by number agree, a recovery plan will be implemented.[4]

5:25 Scheme

  • Banks can extend loan term to 25 years based on cash flow of projects for which the loan was given.  Interest rates and other terms of the loans may be readjusted every five years.[5]

Strategic Debt Restructuring

  • Banks convert their debt into equity to hold a majority of shares in a company.  This allows banks to change the management of the defaulting company.[6]

Sustainable Structuring of Stressed Assets

  • Allows for conversion of a part of the outstanding debt to equity or preference shares if: (i) project for which loan was taken has commenced operations, and (ii) borrower can repay over 50% of the loan.[7]

Sources: RBI scheme guidelines; Economic Survey 2016-17; PRS.

Legislative Measures

  • The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts. When a default occurs, the creditors or debtor may apply to the National Company Law Tribunal for initiating the resolution process. Once the application is approved, the resolution process will have to be completed within 180 days (extendable by 90 days) from the date of approval.  The resolution process will be presided over by an insolvency professional to decide whether to restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount.  If a timely decision is not arrived at, the defaulter’s assets are liquidated.
  • The Banking Regulation (Amendment) Act, 2017: The amendment allows RBI to direct banks to initiate recovery proceedings against defaulting accounts under the IBC.  Further, under Section 35AA of the Act, RBI may also issue directions to banks for resolution of specific stressed assets. 

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 January 17, 2020, the Ministry of Health and Family Welfare acknowledged the emergence of COVID-19 that was spreading across China. On January 30, 2020, the country’s first COVID-19 positive case was reported in Kerala.  By March 11, 2020, the World Health Organisation declared COVID-19 as a global pandemic.  This blog summarises the key policy measures taken by government of Kerala to respond to the pandemic.  

As on April 22, Kerala has had 427 confirmed cases of COVID-19, of which 307 have recovered (highest rate of recovery in the country). Only three deaths have been recorded in the state so far.

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Pre-lockdown period: Early measures for containment

Following the first confirmed case involving a returnee from Wuhan, China, the initial responses by the state were aimed at surveilling, identifying, and conducting risk-based categorisation of all passenger arrivals from China and others who had come in close contact with these travellers. As two more cases were confirmed on February 2 and 3, the state government declared a health emergency in the state. 

Subsequently, a health advisory was issued to track, identify, and test all travellers with a travel history to Wuhan since January 15, 2020.  Such passengers and their close contacts were to be kept in isolation for 28 days.  The advisory also directed all lodging establishments to maintain a register of travellers with travel histories to corona-affected countries. A similar advisory was issued for student returnees as well. With no further confirmed cases being reported immediately, on February 12, the state withdrew the health emergency.  However, a high state of response and surveillance continued to be applied.

Second wave of infections

When a second wave of infections began spreading in early March, the government took several multi-pronged measures to address the threat. The following measures were taken in this regard:

  • Health measures: Revised guidelines for the clinical management of COVID19 patients, covering testing, quarantine, hospital admission, and discharge, were issued.  
     
  • Instructions were issued regarding airport safety protocols as well as testing of foreign nationals entering and exiting the state. All foreign arrivals, even if asymptomatic, were to be kept in isolation until their test reports were available. 
     
  • Further guidelines and precautions on social distancing and various hygiene norms, such as, use of sanitsers, were also issued to malls, shopping centres, and salons
     
  • Movement restrictions: All non-medical educational institutions, including anganwadis and madrassas were immediately shut down till March 31 and exams of classes 1-7 were postponed. Exams for classes 8 and above were to be held as scheduled. University exams were also postponed till March 31.
     
  • Government departments were asked to make temporary arrangements regarding working hours of their employees. Officials were also instructed to look into welfare measures for migrant workers.
     
  • Guidelines were also issued to private establishments regarding working time, safety measures, and leave for employees.
     
  • Administrative Measures: On March 17, COVID19 was declared a notified disaster, thus becoming eligible for funds from the State Disaster Response Fund (SDRF). SDRF is the primary fund available with state governments for responses to notified disasters. Notifying a disaster enables states to spend more from the SDRF to fight the said disaster.
     
  • In order to better coordinate the state’s response, the government issued instructions to constitute COVID-19 cells in all departments. Meetings and inspections by government officials were also to be avoided. 
     
  • Local Self Government institutions were assigned various roles and responsibilities. These include: (i) running awareness programs, such as, ‘Break the Chain’ initiative, (ii) conducting sanitation and cleanliness drives, (iii) regular outreach to home isolated/quarantined persons, (iv) activating committee system to manage responsibilities, (v) ensuring availability of essential commodities, (vi) categorising and ensuring available response mechanisms, such as, material resources, volunteers, medical resources etc, and (vii) ensuring special attention to vulnerable populations, such as senior citizens, and persons with co-morbidities or undergoing special treatments. 

The lockdown period

On March 23, Kerala announced a state-wide lockdown till March 31.  A day later, the central government announced a nation-wide 21-day lockdown.  

Restrictions imposed under the state’s order included: (i) stoppage of all forms of passenger transport services, (ii) prohibition of a gathering of more than five persons, and (iii) closure of all commercial establishments, officers, and factories, except those exempted.  Use of taxis, autos or private vehicles was permitted only for procurement of essential commodities or for medical emergencies. Establishments providing essential goods and services such as banks, media, telecom services, petrol bunks, and hospitals were permitted to operate.  

On April 15, the central government extended the lockdown till May 3.  Some of the key measures undertaken during the lockdown period are: 

Administrative Measures

  • A round-the-clock war room, comprising members of different departments, was set up to monitor and supervise all COVID-19 containment activities. 
     
  • Corona media cell was set up to monitor and tackle the threat of fake news surrounding COVID19.  
     
  • With the legislature not in session, the Kerala Epidemic Diseases Ordinance, 2020 was promulgated by the Governor of Kerala on March 26. The Ordinance empowers the state government to undertake necessary measures and specify regulations to counter the threat of an epidemic disease.  It also specifies a penalty for those who violate orders made under this Ordinance. 

Healthcare Measures

Essential Goods and Services

  • On March 25, the state declared a list of essential services under the Kerala Essential Services Maintenance Act, 1994. 
     
  • Various exemptions from lockdown were issued to services that were later deemed essential. These include: (i) shops and bakeries, including departmental stores, (ii) online food deliveries, (iii) parcel services, for delivery of essential goods, (iv) automobile service workshops, (v) shops and service centres for mobile phones, computers etc, only on Sundays, and (vi) plumbers and electricians to undertake maintenance work in houses and flats. 
     
  • On April 3, orders were issued to set up community kitchens under the aegis of Kudumbasree and Local Self Governments (LSGs). Kudumbasree is the poverty eradication and women empowerment programme implemented by the Kerala government. As on April 20, a total of 339 Community Kitchens have been functioning in 249 panchayats across 14 districts of the state. They have served a total of 5,91,687 meals since April 4, 2020. The government has also instructed LSGs to hire volunteers for the kitchen and pay them an honorarium of Rs. 400 (for one-time service) or Rs. 650 (for the whole-day).

Welfare Measures

  • Under SDRF norms, funds were released to the Health Department for relief and response activities for COVID-19. 
     
  • Each District Collector has been allocated Rs. 50 lakh for carrying out various COVID-19 outbreak-related control and prevention activities.
     
  • Financial assistance has been sanctioned to (i) fishermen, (ii) artists, (iii) lottery agents and sellers, and (iii) elephants and other such animals being looked after. 
     
  • A 2000-crore worth Chief Minister’s Helping Hand Loan Scheme was announced for people facing lockdown-related unemployment and hardships. The scheme will be operationalised through neighbourhood groups under the aegis of Kudumbasree. 

Post-lockdown strategies – Strategies easing lockdown relaxations

  • Expert Committee: On April 4, an Expert Committee was constituted by the government and on April 6, the Committee submitted its Report on the guidelines for post-lockdown regulations. It recommended a conditional, three-phase strategy, with districts being the unit of implementation. Relaxations would be progressively eased in each phase depending on criteria, such as, (i) number of new confirmed cases, (ii) percentage increase/decrease in number of persons under home surveillance, and (iii) no emergence of hotspots.. 
     
  • Containment Guidelines: After the lockdown was extended till May 3, the state released revised guidelines for containment, that recommended classification of districts into four zones, based on number of cases and disease threat. The zones – Red, Orange A, Orange B, and Green – would have different, graded restrictions, with Red having stringent restrictions in the form of a lockdown till May 3. The Orange A and B zones would have a lockdown till April 24 and 20 respectively, followed by a partial relaxation thereafter. Green zone would have a lockdown till April 20 and relaxation in restrictions thereafter.
     
  • Based on the above order, the state issued an advisory for industrial units to follow while resuming operations. Some of the Standard Operating Procedures to be followed include: (i) conducting disinfectation of premises, machinery, and vehicles, (ii) arranging exclusive transportation facilities with vehicles operating at 30-40% capacity, (iii) mandatory thermal scanning of people, (iv) following hygiene and social distancing norms, including a cap on elevator capacities and size of meetings (v) mandatory corona-related insurance cover for workers, (vi) mandatory use of CCTVs, and (vii) preparing a list of nearby COVID-19 hospitals .

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.