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The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much discussion and scrutiny. The Standing Committee on Finance recently released a report on the banking sector in India, where it observed that banks’ capacity to lend has been severely affected because of mounting NPAs. The Estimates Committee of Lok Sabha is also currently examining the performance of public sector banks with respect to their burgeoning problem of NPAs, and loan recovery mechanisms available.
Additionally, guidelines for banks released by the Reserve Bank of India (RBI) in February 2018 regarding timely resolution of stressed assets have come under scrutiny, with multiple cases being filed in courts against the same. In this context, we examine the recent rise of NPAs in the country, some of their underlying causes, and steps taken so far to address the issue.
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 categorized 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 March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.
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 (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.
Escalating NPAs require a bank to make higher provisions for losses in their books. The banks set aside more funds to pay for anticipated future losses; and this, along with several structural issues, leads to low profitability. Profitability of a bank is measured by its Return on Assets (RoA), which is the ratio of the bank’s net profits to its net assets. Banks have witnessed a decline in their profitability in the last few years (Figure 2), making them vulnerable to adverse economic shocks and consequently putting consumer deposits at risk.
What led to the rise in NPAs?
Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector.
A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the economy was booming and business outlook was very positive. Large corporations were granted loans for projects based on extrapolation of their recent growth and performance. With loans being available more easily than before, corporations grew highly leveraged, implying that most financing was through external borrowings rather than internal promoter equity. But as economic growth stagnated following the global financial crisis of 2008, the repayment capability of these corporations decreased. This contributed to what is now known as India’s Twin Balance Sheet problem, where both the banking sector (that gives loans) and the corporate sector (that takes and has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their capability of paying back the bank. The banks at this time took to the practice of ‘evergreening’, where fresh loans were given to some promoters to enable them to pay off their interest. This effectively pushed the recognition of these loans as non-performing to a later date, but did not address the root causes of their unprofitability.
Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although the size of frauds relative to the total volume of NPAs is relatively small, these frauds have been increasing, and there have been no instances of high profile fraudsters being penalised.
What is being done to address the problem of growing NPAs?
The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, regulatory means of resolving NPAs per various laws (like the Insolvency and Bankruptcy Code), and second, remedial measures for banks prescribed and regulated by the RBI for internal restructuring of stressed assets.
The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts (where the borrowers are unable to pay their dues). Under the IBC, the creditors of these insolvent accounts, presided over by an insolvency professional, 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. Proceedings under the IBC are adjudicated by the Debt Recovery Tribunal for personal insolvencies, and the National Company Law Tribunal (NCLT) for corporate insolvencies. 701 cases have been registered and 176 cases have been resolved as of March 2018 under the IBC.
What changed recently in the RBI’s guidelines to banks?
Over the years, the RBI has issued various guidelines aimed at the resolution of stressed assets of banks. 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). In line with the enactment of the IBC, the RBI, through a circular in February 2018, substituted all the specific pre-existing guidelines with a simplified, generic, time-bound framework for the resolution of stressed assets.
In the revised framework which replaced the earlier schemes, the RBI put in place a strict deadline of 180 days during which a resolution plan must be implemented, failing which stressed assets must be referred to the NCLT under IBC within 15 days. The framework also introduced a provision for monitoring of one-day defaults, where incipient stress is identified and flagged immediately when repayments are overdue by a day.
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 guidelines in various High Courts. A two-judge bench of the Allahabad High Court had recently 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. All lawsuits against the circular have currently been transferred to the Supreme Court, which has now issued an order to maintain status quo on the same. This means that these cases cannot be referred to the NCLT until the Supreme Court’s decision on the circular, although the RBI’s 180-day deadline has passed. This effectively provides interim relief to the errant borrowers who had moved to court till the next hearing of the apex court on this matter, which is scheduled for November 2018.
Mr. Ramnath Kovind completes his tenure as President in July. With the Election Commission of India expected to notify the election dates this week, we look at how India will elect its next President.
As the Head of the State, the President is a key part of Parliament. The President calls the two Houses of Parliament into session on the advice of the Council of Ministers. A Bill passed by the Lok Sabha and Rajya Sabha does not become a law unless assented to by the President. Further, when Parliament is not in session, the President holds the power to sign a law with immediate effect through an Ordinance.
Who elects the President?
The manner of election of the President is provided in Article 55 of the Constitution. Members of Parliament and Members of Legislative Assemblies (MPs and MLAs) including elected representatives from the Union Territories (UTs) of Delhi and Puducherry form the electoral college, which elects the President. At least 50 elected representatives must propose a candidate, who must then be seconded by 50 other electors to run for the President's office. Members of Legislative Councils and the 12 nominated members of Rajya Sabha do not participate in the voting process.
The history behind having proposers and seconders To discourage the practice, candidates had to secure at least 10 proposers and seconders each to contest the elections from the 1974 election onwards. A compulsory security deposit of Rs 2,500 was also introduced. The changes were brought in through an amendment to the Presidential and Vice-Presidential Act, 1952. In 1997, the Act was further amended to increase the security deposit to Rs 15,000 and the minimum number of proposers and seconders to 50 each. |
How are the votes calculated?
The Presidential election uses a special voting to tally the votes. A different voting weightage is assigned to an MP and an MLA. The value of each MLA's vote is determined based on the population of their state and the number of MLAs. For instance, an MLA from UP has a value of 208 while an MLA from Sikkim has 7 (see Table 1). Due to a Constitutional Amendment passed in 2002, the population of the state as per the 1971 census is taken for the calculation.
The value of an MP's vote is the sum of all votes of MLAs across the country divided by the number of elected MPs.
How will the numbers look in 2022?
In the 2017 Presidential elections, electors from 31 states and the UTs of Delhi and Puducherry participated. However, in 2019, with the Jammu and Kashmir (J&K) Reorganization Act, the number of states were reduced to 30. The J&K Assembly was dissolved as per the Act and a new legislature for the UT of J&K is yet to be reconstituted. UTs with legislatures were not originally part of the electoral college for the election of the President. The Constitution was amended in 1992 to specifically include the UTs of Delhi and Puducherry. Note that for MLAs from J&K to participate in future Presidential elections, a similar Constitutional amendment would be required to be passed by Parliament.
Based on the assumption that J&K is not included in the 2022 Presidential election, the total number of votes of MLAs in 2022 elections will have to be adjusted. The 87 Jammu and Kashmir MLAs must be removed from the total number of MLAs of 4,120. Jammu and Kashmir’s contributing vote share of 6,264 must also be reduced from the total vote share of 549,495. Adjusting for these changes, 4,033 MLAs will participate in the 2022 elections and the combined vote share of all MLAs will add up to 543,231.
Table 1: The value of votes of elected MLAs of different states at the 2017 Presidential Election
Name of State |
Number of Assembly seats |
Population (1971 Census) |
Value of vote of each MLA |
Total value of votes for the state (B x D) |
A |
B |
C |
D |
E |
Andhra Pradesh |
175 |
2,78,00,586 |
159 |
27,825 |
Arunachal Pradesh |
60 |
4,67,511 |
8 |
480 |
Assam |
126 |
1,46,25,152 |
116 |
14,616 |
Bihar |
243 |
4,21,26,236 |
173 |
42,039 |
Chhattisgarh |
90 |
1,16,37,494 |
129 |
11,610 |
Goa |
40 |
7,95,120 |
20 |
800 |
Gujarat |
182 |
2,66,97,475 |
147 |
26,754 |
Haryana |
90 |
1,00,36,808 |
112 |
10,080 |
Himachal Pradesh |
68 |
34,60,434 |
51 |
3,468 |
Jammu and Kashmir |
87 |
63,00,000 |
72 |
6,264 |
Jharkhand |
81 |
1,42,27,133 |
176 |
14,256 |
Karnataka |
224 |
2,92,99,014 |
131 |
29,344 |
Kerala |
140 |
2,13,47,375 |
152 |
21,280 |
Madhya Pradesh |
230 |
3,00,16,625 |
131 |
30,130 |
Maharashtra |
288 |
5,04,12,235 |
175 |
50,400 |
Manipur |
60 |
10,72,753 |
18 |
1,080 |
Meghalaya |
60 |
10,11,699 |
17 |
1,020 |
Mizoram |
40 |
3,32,390 |
8 |
320 |
Nagaland |
60 |
5,16,449 |
9 |
540 |
Odisha |
147 |
2,19,44,615 |
149 |
21,903 |
Punjab |
117 |
1,35,51,060 |
116 |
13,572 |
Rajasthan |
200 |
2,57,65,806 |
129 |
25,800 |
Sikkim |
32 |
2,09,843 |
7 |
224 |
Tamil Nadu |
234 |
4,11,99,168 |
176 |
41,184 |
Telangana |
119 |
1,57,02,122 |
132 |
15,708 |
Tripura |
60 |
15,56,342 |
26 |
1,560 |
Uttarakhand |
70 |
44,91,239 |
64 |
4,480 |
Uttar Pradesh |
403 |
8,38,49,905 |
208 |
83,824 |
West Bengal |
294 |
4,43,12,011 |
151 |
44,394 |
NCT of Delhi |
70 |
40,65,698 |
58 |
4,060 |
Puducherry |
30 |
4,71,707 |
16 |
480 |
Total |
4,120 |
54,93,02,005 |
|
5,49,495 |
Source: Election Commission of India (2017); PRS.
The value of an MP’s vote correspondingly will change from 708 in 2017 to 700 in 2022.
Value of one MP's vote = Total value of all votes of MLAs = 543231 = 700
Total number of elected MPs 776
Note that the value of an MP’s vote is rounded off to the closest whole number. This brings the combined value of the votes of all MPs to 543,200 (700 x 776).
What is the number of votes required to win?
The voting for the Presidential elections is done through the system of single transferable vote. In this system, electors rank the candidates in the order of their preference. The winning candidate must secure more than half of the total value of valid votes to win the election. This is known as the quota.
Assuming that each elector casts his vote and that each vote is valid:
Quota = Total value of MP’s votes + Total value of MLA’s votes + 1
2
= 543200 + 543231 +1 = 1086431 +1 = 543,216
2 2
The anti-defection law which disallows MPs from crossing the party line does not apply to the Presidential election. This means that the MPs and MLAs can keep their ballot secret.
The counting of votes takes place in rounds. In Round 1, only the first preference marked on each ballot is counted. If any of the candidates secures the quota at this stage, he or she is declared the winner. If no candidate secures the quota in the first round, then another round of counting takes place. In this round, the votes cast to the candidate who secures the least number of votes in Round 1 are transferred. This means that these votes are now added to the second preference candidate marked on each ballot. This process is repeated till only one candidate remains. Note that it is not compulsory for an elector to mark his preference for all candidates. If no second preference is marked, then the ballots are treated as exhausted ballots in Round 2 and are not counted further.
The fifth Presidential election which elected Mr. VV Giri is the only instance when a candidate did not secure the quota in the first round. The second preference votes were then evaluated and Mr. Giri secured 4,20,077 of the 8,36,337 votes and was declared the President.
The only President of India to win unopposed |