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Most legislative assemblies make Parliament look like a paragon of virtue A COUPLE of days ago, an MLA from Orissa made news for climbing on to the speaker's table in the assembly. Not so long ago, television screens beamed images of Karnataka MLAs snacking and sleeping all night in the assembly. But these are only indicative of the incidents of the raucous behaviour of several MLAs in the recent past across the country. And the poor behaviour of some MLAs is only one aspect of the pitiable state of several of our state legislatures. The other aspect of our state legislatures that goes largely unnoticed is how poorly the secretariats of legislatures are equipped and how several systems that are seen as essential in Parliament are nonexistent in states. Even to know the complete picture of how our legislatures function, you need data. And several state assemblies are notoriously poor at putting out data on the functioning of the institution or the MLAs. After one gets used to the quality of Parliament websites and the regularity of their updates, it would be shocking to see that there are some state legislatures that do not even have functional websites. It has been observed that some state legislatures are lagging behind by a couple of years in compiling the "resume of work" which summarises the work done in a session of the legislature. So the first bottleneck in several instances is the inability to access data of the assembly. From the data we have managed to access, it is obvious that state assemblies meet for very few days a year. A case in point is the Punjab assembly which has met for an average of 19 days per year for a 10-year period between 1997 and 2007. Delhi was only marginally better averaging 21 days per year during the same period. Kerala has averaged some 50 days a year for several years now. Some states like Karnataka have legislated that they should meet for at least 60 days a year, but since passing that legislation in 2005, they have not managed to do so for even one year. I am not even accounting for the time lost due to disruptions. Bills are passed with little or no discussion in many state legislatures. While in Parliament, referring bills to the standing committees is the norm, most state legislatures do not have standing committees. The only examination of a bill, if any, happens on the floor of the House. And if data from the Delhi assembly is anything to go by, the average debate on a bill before is passed is a little over half hour. There are any number of instances where bills are introduced and passed in state assemblies on the same day -so there is not even a pretence of the need for MLAs to read, understand and deliberate on the provisions of legislation they are supposedly passing. MLAs are often far more narrowly constituency-focused than MPs are. On average, MLAs have lower education levels than members of Parliament. There is no formal definition of a role of an MLA, and they mostly have no exposure to ideas such as the separation of powers between the executive and the legislature. In one particularly revealing conversation with an MLA, he said, "At the time of elections, each of the contestants represents his party. But after the elections, the chiefministerbecomestheleader of all MLAs in the House. If an MLAneedssomeadditionalprojects/ favours for his constituency he needs to be in the good books of the chief minister and his cabinet ministers. So where is the question of taking on the chief minister on the floor of the House on any issue?" There are many aspects of state legislatures that point to a steady and visible decline of these important institutions. But beyond the frequent highlighting of theatrics by some MLAs, there is almost no public discourse on this issue. It is necessary to ensure that the legislatures run smoothly, and the speaker, as first among equals, has the biggest responsibility to ensure this. If there are rules and everyone knows that those rules will never be used to enforce discipline, then the rules will be broken, and repeatedly so. This practice needs to be urgently reviewed. The larger question is whether our legislatures are the highest deliberating and policymaking bodies or whether they are being reduced to platforms for political theatrics. Policy can almost never be devoid of politics and public posturing. But if this means poor deliberation of critical policy issues and the woefully inadequate functioning of our legislatures, then we may need to come up with creative ways in which this problem can be addressed. This article appeared in the Indian Express on December 20, 2010.
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.