In April last year the government had notified the Information Technology (Intermediary Guidelines) Rules, 2011 (IT Rules) under the Information Technology Act, 2000. The IT Rules are listed for discussion in Rajya Sabha today in pursuance of a motion moved by Mr. P. Rajeeve [CPI(M)]. The motion seeks to annul these Rules and recommends that Lok Sabha also concur with the motion. The IT Rules require intermediaries (internet service providers, blogging sites like Blogger and Wordpress, and cyber cafés) to take certain action. Intermediaries are required to enter into agreements with their users prohibiting publication of certain content. Content that cannot be published includes anything that is ‘harmful to minors in any way’, ‘blasphemous’, ‘encouraging money laundering’ etc. This raises three issues. Some of the categories of content prohibited for publication are ambiguous and undefined. For instance, ‘grossly harmful’ and ‘blasphemous’ content are not defined. Publication of certain content prohibited under the IT Rules, is currently not an offences under other laws. Their publication is in fact allowed in other forms of media, such as newspapers. Newspapers are bound by Press Council Norms. These Norms do not prohibit publication of all the content specified under the IT Rules. For instance, while these Norms require newspapers to show respect to all religions and their gods, they do not prohibit publication of blasphemy. However, under the IT Rules blasphemy is prohibited. This might lead to a situation, where articles that may be published in newspapers legally, may not be reproduced on the internet for example in the e-paper or on the newspaper’s website. Prohibition of publication of certain content under the IT Rules may also violate the right to freedom of speech. Under Article 19(2) of the Constitution restrictions on the right to freedom of speech may be imposed in the interest of the State’s sovereignty, integrity, security and friendly relations with other States, public order, morality, decency, contempt of court, and for protection against defamation. The content prohibited under the IT Rules may not meet the requirement of Article 19(2). This may impinge on the right to freedom of speech and expression. Further, anyone can complain against such content to the intermediary. The intermediary is required to remove content if it falls within the description specified in the IT Rules. In the event the intermediary decides not to remove the content, it may be held liable. This could lead to a situation where, in order to minimise the risk of liability, the intermediary may block more content than it is required. This may imply adverse consequences for freedom of expression on the internet. PRS’s detailed analysis of the IT Rules may be accessed here.
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.