The trust vote drama in Karnataka has hit the national headlines. The incumbent chief minister, B.S. Yeddyurappa appears to have won the first round. It remains to be seen how the BJP responds to the governor’s direction that a second trust vote be held by the 14th of this month. In the 225-member Karnataka assembly, the ruling BJP had a wafer-thin majority since the 2008 assembly elections. And it was not surprising to find that some political forces in the state felt that there was an opportunity to unseat the government. But what has transpired over the past few days has once again reminded citizens of the ugly side of politics. Leading up to the trust vote, the governor of Karnataka wrote a letter to the speaker of the Karnataka assembly asking that no MLAs be disqualified before the trust vote was conducted on the floor of the assembly. Subsequently, there have been a number of allegations about the conduct of the trust vote itself. The governor openly called the trust vote “farcical”, and wrote to the Centre asking that President’s Rule be imposed in the state, before he directed the government to prove its majority again. This phenomenon of trust votes is not uncommon in our dynamic political culture. Just before the 2009 general elections, the BJD and the BJP had differences over seat-sharing in Orissa. The BJP decided to withdraw support to the Naveen Patnaik government. The BJD passed the floor test by a voice vote. While the opposition claims that the process was not fair, the BJD leadership has maintained that there was no request for a division, which would have required recorded voting. The relatively small Goa assembly has seen a number of similar occurrences in the recent past, with governments changing as a result. But there are some critical issues that merit examination. In some recent trust votes, there have been allegations that large amounts of money have been exchanged. Of course, following the 2008 trust vote in the Lok Sabha on the India-US nuclear agreement, the infamous cash-for-votes scam broke out, with wads of cash being shown on the floor of the House. In the Karnataka trust vote, too, there have been allegations that large amounts of money have changed hands. The second issue is how some of these trust votes are managed on the floor of the House. Both the recent Orissa episode and the ongoing Karnataka one have been very contentious about the procedure that has been used to prove the majority. In both cases, the opposition alleged that they asked for a division, which would require a physical count of votes rather than just a voice vote, and in both cases a division was not held. A parallel issue which needs to be kept in mind is the governor’s power to ensure compliance with procedure in the state legislatures. The third issue that needs some discussion is whether the decision on defections should be judged by the speaker, usually a member of the ruling party or coalition, or by a neutral external body, such as the Election Commission. In the latest episode in Karnataka, the speaker has disqualified MLAs on the ground that they have voluntarily exited the party under which they were elected. In a 1994 case (Ravi S. Naik v. Union of India), the Supreme Court ruled that the words “voluntarily giving up membership” have a wider meaning. An inference can also be drawn from the conduct of the member that he has voluntarily given up the membership of his party. There is a huge paradox in the anti-defection law that was passed 25 years ago. While MLAs and MPs vote along party lines on ordinary legislation, they do not appear to be daunted by the consequences in the case of trust votes. So, in effect, the anti-defection law appears to be effective in controlling members of all parties on policy-making — which could in fact benefit from more open input from across party lines — but ineffective in several cases with regard to trust votes. Clearly, there is much more at stake for all concerned in trust votes, and therefore the scope for greater negotiation. Politics in our large and complex democracy is fiercely competitive. Dissidence is to be expected because there are too many people vying for too few of the top positions. While there are no perfect solutions, the only sustainable and meaningful approach is to encourage inner-party democracy so as to enable a selection process for positions of responsibility that is accepted as free and fair by all concerned. While the political uncertainty continues, the only certainty for India’s citizens is a very unhealthy politics for some time to come. - CV Madhukar This article was published in Indian Express on October 13, 2010
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
