NPAs(Non Performing Assets) in India: Supreme Court intervention and its possible solutions

• The Supreme court asked the Reserve Bank of India to furnish a list of the companies which are in default of loans by the banks and financial institutions in access of Rs 500 crore or whose loans have been restructured under corporate debts restructuring scheme.
• This is suo moto action by the Supreme Court, prompted by the public outrage about the costs to the public imposed by the Indian banking system.
• Total bad loans written off between 2004 and 2015 amounted to more than Rs 2.11 lakh crore.

Analysis:

• The Supreme Court order for defaulter disclosure appears to be a case of overreach. The original dispute made no demand for defaulter information from the RBI.
• The job of a court is to adjudicate disputes: hear both sides, weigh the evidence, deliver a judgement, in an efficient and timely manner. If there is no clear link between the disclosure order and the case at hand, the disclosure order has only added costs and delays, and thus diminished the performance of the court.
• The court does not have the power to address the root cause of the non-performing asset (NPA) problem, which lies in faulty economic policy. For example, the court will not be able to resolve bottlenecks that have caused defaults and rising debt, such as environmental approvals and land acquisition that cause project delays. Such powers rest with the executive and the legislature.
• To solve this issue there is a need of comprehensive and effective solution and requirement of technical expertise.
• Bad debts at Indian banks are a combination of poor bankruptcy laws, weak regulations and a dominance of public sector ownership of banks.
• Recently the government tabled the Insolvency and Bankruptcy Code, 2015, a consolidated law with provisions that cover all debtors and all creditors. This is an example of the sort of change that is required..
• Banking regulation must write down rules about recognising bad loans and have enough equity capital to pay for losses. This must be accompanied by capable supervision to ensure that banks live by these rules. These functions were carried out by the RBI, and there were many shortcomings in what kinds of rules were made and how they were enforced. The RBI may have collaborated with banks in hiding bad news through initiatives like Corporate Debt Restructuring (CDR).
• The next aspect for reform is processes to deal with bank failure. Generally in India, when banks in India get into trouble, there is a cover-up with costs forced on taxpayers; banks are not allowed to fail. A transparent framework to deal with bank failure is an integral part of a transparent framework to deal with systemic crisis. These issues have been addressed by the draft law proposed by Justice Srikrishna's Financial Sector Legislative Reforms Commission. Along with the draft Insolvency and Bankruptcy Code, this draft Indian Financial Code must also be tabled and implemented, in order to address the banking crisis at its root cause.
• Finally, we must recognise the failures of government ownership. Just as the government resolved the problems of UTI in the late 1990s, a full work plan must be developed for the government exiting as the dominant shareholder of banks. In the Indian experience, we have seen that private banks work better. A wider shareholding will demand better accountability from RBI, as shareholders stand to lose money when banks are poorly regulated. Cohesive executive action is also needed to de-bottleneck projects and reduce the financial distress in the corporate sector.
• The Supreme Court can accept the role that judicial delays and mounting pendency plays in causing poor bankruptcy outcomes. These in fact, have become the safety mechanism for wilful defaulters. Winding up a company can take four to 10 years, BIFR proceedings can run for four to five years. Civil court proceedings on issuing or enforcing orders for recovery have gone on for 20 years. Better bankruptcy outcomes require that a mechanism is implemented to separate court administration and the judicial function. This is the only matter in India's banking crisis where the Court has jurisdiction and expertise to bring corrective interventions. Such intervention will have a higher impact in reducing NPAs in the Indian banking sector than demanding the names of the defaulters.
   

By: Vishal