Impact of Insolvency and Bankruptcy Code 2016 on Non-Performing Assets
There are lot of hurdle being faced by the businessman while doing a business. The hardest obstacle which come their way is financial need. To help them in ease of doing business every country try to establish various institution which can reduce their hurdles. One of the institution is banks which is a financial institution and provide money to the one who need against a security. Security play a vital importance as sometimes the borrower fail to repay the money and bank land up having huge bad loan and stressed asset which become non-performing asset. To recover that due amount bank under various laws such as SARFAESI Act has various power. In this paper we will try to analyze the power of bank to recover the NPAs under various laws. This paper will try to find out the reason for enactment of the Insolvency and bankruptcy code 2016 and how it has impacted the banks NPAs recovery mechanism.
1. To study about the concept of Non-performing assets and the laws governing them;
2. To analyze the problem with the DRT; SARFAESI ACTS and various other laws;
3. To evaluate the need for introduction of the Insolvency and Bankruptcy Code 2016;
4. To evaluate the impact of the IBC code on the banks NPAs recovery
5. To analyze the current position of India and Banks NPAs recovery.
The Insolvency and Bankruptcy code has impacted the bank in a positive way. The cases solved by the NCLT under the bank have given banks a good amount of recovery as compared to the SARFAESI and the time taken to solve the case is also very less. ‘
i. Usage of Scientific method and descriptive method for analysis
ii. Usage of Secondary data.
Chapter. 1: Introduction
The growth and development of any country depend on the economy of the country. Various sector contribute to it. One of the major contribution and economy of country grow through banking sector. Without an effective banking system, no country can have a healthy economy. it helps channels savings to investment and encourage economic growth by allocating saving to investment that have potential to yield higher returns. The Indian banking system are classified in to i.e. commercial bank and co-operative bank. Commercial bank includes schedule Commercial bank; non-schedule commercial bank; schedule bank are further divided into private bank; public bank; foreign bank and regional rural bank. The function this bank is to accept deposit and lend money in case of need. Keeping deposit doesn’t involve any risk as it is the public money and bank is under obligation to repay the deposit when it is demanded by them. On the other hand, while lending money to public, bank is usually at great risk as there is always an uncertainty of getting back that money and if they do not repay then bank will end up having non-performing asset or stressed asset. Non-performing asset affects the profitability and the financial health of the bank. any asset, which fails to generate income to the bank, is a Non-performing Asset.
1.1. History of Non Performing Assets classification:
There was no system of classification of assets in to loans and advances before 1985 in the Indian banking system. The recommendation of the Ghosh Committee on final accounting system led to this classification of assets which was known as ‘Health Code System’. Under this the loan accounts were further divided into different eight categories. But later on it was recommended by the Narsimham Committee on financial system that this classification of asset, as compared to their health system is not at par with the international standards. So they suggested that the banks should classify their advances as standard assets; sub-standard assets; doubtful assets; and loss assets.
The asset of the loan of bank are classified into two:
a. Performing assets: an assets which are performing and paying regularly. It means the borrowers are repaying the loan given by the bank.
b. Non- performing assets: an assets or leased asset, which is becoming non- performing asset because the borrower is not repaying the principle or the interest amount and it ceases to generate income for the bank.
Non-performing assets are further classified into:
i. Sub-standard assets: Assets or loan account which remain Non-performing for year or less than a year. And in such cases the current market value of security charged are not sufficient to ensure recovery of debt and the account will fall under loss if deficiencies are not corrected in time.
ii. Doubtful asset: where the asset or the loan given remain Non-performing beyond one year and the recovery is highly questionable and seems impossible.
iii. Loss assets: here the asset is considered to be uncollectable and unrecoverable. But it is not wholly written off by the bank. it remains to be bank asset though it seems very less chance of recovery.
Chapter. 2. Recovery of Non-Performing Assets: regulation mechanism
The bank and the financial institution are duly registered with the apex regulatory body Reserve bank of India. The main function of bank is to accept deposit and lend money to any corporate body or to an individual. But not all the corporation or an individual repay the full amount or even a part payment which after pilling up take the form of a non-performing asset. The bank try to recover this amount from the borrowers but when even despite several follow ups and notices the borrower deny to repay or not repay then bank use to approach the Civil Court for its recovery. But as there are already pending litigations in the Civil Court it was bit difficult to recover the non-performing assets in a time bound manner. It use to take several years. Then government appointed a committee which was headed by Mr. T. Tiwari which recommended to establish a quasi-judicial body which should exclusively deal with the NPA’s recovery matter of the banks and the financial institutions. Accordingly in the year 1993, The Recovery of Debts due to banks and financial Institution act 1993 came. DRT had the exclusive jurisdiction and to file a case under this the due amount should be more than Rs. 10 lakh. The unique part under this act was that any type of loan be it secured, unsecured or assigned be triable before DRT. But this also did not prove to be of much help as these got overburdened gradually by the huge number of cases referred to them. All along, the bank were feeling greatly handicapped in the absence of any power for seizure of assets charged to them. All these issue gave the passage for evolution of the securitization and reconstruction of financial assets and enforcement of security interest act, 2002. This act enables the bank and financial institution to realize long-term assets, solve liquidity problem and allowed them to take possession of securities, sell them and reduce non-performing assets and these way they adopted the measure for recovery or reconstruction. This further provide for setting up of asset reconstruction companies which had power to take possession of secured assets , plus the transferable right and realize the secured assets and take over the management of the business of the borrower. Under this the sixty day notice has to be served to the debtor to pay the amount if he does not pay then the bank can take possession, sale, transfer or reconstruct it. Thus, the recovery mechanism which is there are:
1. LOK ADALAT: under this all the NPA’s which are within limitation period and cases which are pre-litigative stage can be referred to lok adalat. And the decree granted by lok adalat were binding and cannot be challenge. The amount recoverable under this was around 10-20% and remaining amount use to be recoverable within or upto three years. Also, lok adalat deals with small amount dues i.e amount less than 10 lakh rupees. The lok adalat does not decide the matter by its own rather it decide the matter on the basis of compromise or settlement between the parties.
2. RDDBFI (DRT): it had exclusive jurisdiction and there was no intervention civil courts. The cases which were eligible to file under DRT were due amount more than 10 lakh. It deals with claim of bank and financial institutions. It also has the power to decide upon the application filed against the secured creditors by the borrower or mortgager for action action taken by them under the securitization act. But the cases use to take long time to solve and led to delays because the DRTs was already overburdened. And the adjudicatory authorities were lacking business and financial expertise due to which the proper justice were not served.
3. SARFAESI ACT: Under this a bank or financial institution had the right to issue notice to the borrower, asking them to pay the outstanding debt within a period of 60 days from the date of notice. And if the borrower fail to repay the same within the stipulated time frame then the bank or the financial Institution, generally takes the possession of the secured asset of the borrower and also had the right to transfer by way of lease, assignment or sale over which the security interest is created by the borrower. While applying this provision it also had to comply with the rules given under the Security Interest Rule 2002 and to realize the due amount banks can go for auctioning. It had exclusive jurisdiction. It does not deal with unsecured creditors. It provide the bank and financial institution to take possession of securities and sell them for recovery and to reduce the burden of the Non-performing asset.
As we can see that there were multi fold issues including having multiple legal forum and overlapping rules and conflicting resolutions due to all this issue the performance of the NPA recovery has severly affected and delayed. Also due to lack of strong backup there was very little legal binding on borrowers. Even after having the SARAESI Act, BIFR, DRT, SICA still it found that it was inadequate to address the resolution of stressed asset in the system. There was strong need for one single law rather than multiple laws, there was a need to have less confusion and more coordination and the most important requirement was the speedy recovery process. To overcome all this hurdles the government introduced the Insolvency and bankruptcy code bill in the year 2015 which then passed in the 2016 and came into force. The introduction of the IBC was seen to be the best possible option to overcome the poor recovery in one go. The enactment aim at improving the credit and compliance culture in the economy and also create the environment for time adhered resolution. It has consolidated, revised and re-established the insolvency- related laws. It made amendments in SARFAESI ACT, SICA, RDDBFI Act and the Companies Act 2013.
Chapter. 3: The Insolvency and Bankruptcy Code 2016:
In India there have been different statutes being active for bad debts resolution including Individual, partner and the companies. The multiplicity of various statutes made execution of any law very much complex. To get over this complexity and to streamline the entire process of debt resolution, India introduced the Insolvency and bankruptcy code as that of America. This code supersedes all other laws and deals business structures including individual, partnership and the companies. The purpose of this code is to strike a balance between the interests of various stakeholders and to reduce the loss they are suffering from. Also it aim to revive the business entity which contribute most to the growth of the economy.
There are four pillars of IBC are:
i. Insolvency and Bankruptcy Board of India (IBBI)
The regulator of this code is The Insolvency and Bankruptcy Board of India. This board look after the work and conduct of the Insolvency professional, Insolvency professional Agencies and Information Utilities which are the other pillars of the IBC. This board has the perpetual succession and having a common seal. It has the power to hold, dispose of property both movable and immovable , it can contract. All will be done subject to the provision of the IBC code. It can sue and be sued. The function of this body is to register, withdraw, suspend or cancel the registration of the IPA, IP, IU and tell minimum eligibility requirement for registration of this institutions, levy fees or charges for the same and lay down the regulation for examination of the insolvency professional.
ii. Insolvency Professional
Insolvency Professional means a person enrolled with an insolvency agency as a member and register itself with the board as an insolvency professional. Earlier the control and the running of the business use to be in the hand of the owner of the business now it has been given to the independent professional appointed by the committee of the creditor. The function of the Insolvency professional is to take action whenever there has been a bankruptcy, insolvency, liquidation, or fresh start process has been initiated against the corporate debtor. He has to submit a record copy of every proceeding before the adjudicating body. He has to manage the current day to day affairs of the business and handhold the entire resolution plan as per the rules laid down by the board.
iii. Information Utility: A person who is registered with the board as an information utility under section 210 of the IBC. The function of the IU is to create and store financial information of such debt and default of business which are undergoing resolution in such manner that can be accessed universally. It has to accept electronic submission of financial information of the person who are under the obligation to submit the same as specified under the section 215 of the code. Accept such submission, before storing it as information he has to check the authenticity by various authority. It can also share the information to such person who need it in a manner specified in the code. This is done for easy availability of information and for authentic availability of financial data so that the smooth process can take place for insolvency resolution.
IV. Adjudicatory Authority: There are different adjudicatory body for an individual, company and entity having unlimited liability and limited liability. So The Debt Recovery tribunal shall be the adjudicating authority for the individual and unlimited liability partnership firm. They can appeal to the Debt Recovery Appellate Tribunal if the party is not satisfied with the order of DRT. And the National Company Law Tribunal will be the adjudicatory body for companies and the limited liability companies. They may appeal to the National Company Law Appellate Tribunal. If the parties are not satisfied with the order of the NCLAT and DRAT they may appeal to the Supreme Court.
3.1. The effective mechanism under this code:
i. Time bound: the best part of this code is that it is time bound. It has been specified under the code that the entire resolution process has to be completed within 330 days. And additional 90 days can be given if the process is not completed within the specified period. Also the reason has to be given in writing by the resolution professional for such delay. This has been done to speed up the mechanism. As it has been stated in the World bank’s Doing Business Report 2016 that earlier when IBC was not there the whole process of debt recovery use to take about 4.3 year to conclude. So to get rid of this situation such time frame has been provided under the IBC code.
ii. Default Amount: under this code default means the non-payment of the debt either wholly or in part, any installment which has to be paid by the debtor or corporate debtor but has not been paid. The amount of default for initiation of process under IBC code should be Rs. 1 crore. Earlier it was 1 lakh now it has been raised to 1 crore in the 2020 amendment.
Chapter. 4. Impact of IBC on Bank Non-Performing Assets:
As we already know before the enactment of the IBC there were different statutes for recovery of the due amount. There were the Recovery of Dents due to bank and financial institution act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Under these two act the banks use to initiate the case against the debtor for recovery of dues. And there were other acts like the Sick Industrial Companies Act 1985 and the companies Act 1956 ( winding up provision) where under bank, non- bank lenders or even a corporate debtor use to sought for legal action for collective resolution of insolvency. And there were other mechanism also for restructuring of corporate debtor.
After the introduction of the IBC Code, under the Eight Schedule of IBC it has been explicitly provided that if the cases which are already before BIFR and AAIFR but if the same case is re-initiated before the NCLT under IBC then the cases before the BIFR and AAIFR will be abated. The case under IBC has to be initiated with a period of 180 Days from the commencement of the IBC 2016.
Also for other cases which were before the DRT or winding up cases which were before the High Court admitted under the Companies Act 2013 are eligible to be initiated as fresh under the IBC.
Section 6 of the IBC empower all kinds of creditors, financial and operational, bank or non- bank to initiate a corporate insolvency case. Also as there is specific time period mention i.e. the process has to be resolve within 330 days. So even the non-banker who are facing long pendency can initiate a case before the NCLT and then bank will have no choice but to participate in the process. Hence IBC can take place on a large scale for existing NPAs.
Once an Insolvency Resolution plan for a corporate debtor is admitted by the NCLT, there will an automatic moratorium period starts for the duration of the IRP which is 180 days. During this period all the pending cases against the corporate debtor before DRT, Civil, Court or High court are stayed.
There will be formation of committee of creditors which will comprise of all the financial creditors of the company. The COC then approve the resolution plan for the company by a 75% super majority vote by value. If the plan approve by the COC and the NCLT, all the cases pending before different forum will have to abate and the resolution plan will get implemented. If its vice versa like the COC do not approve it within 180 days then NCLT will pass a liquidation order under the section 33 (1) of the IBC. So once the liquidation began all the recovery will be possible just through liquidation process only as other mechanism and proceeding of recovery before different forum will abate.
4.1. RBI guidelines for application of IBC on NPAs:
There was much debate in the past where in the year 2018 the RBI had issued one circular. In that circular the RBI mandated for all the banks and the financial Institution to initiate corporate Insolvency Resolution plan against the borrower (the defaulting company) having a loan exposure of more than Rs. 2000 Cr., if the bank unable to implement a resolution plan within 180 days of the default.
The circular made it mandatory for the bank to identify and classify the stressed asset as special mention account immediately and even on a single day default of repayment the banks had to report to the RBI and implement the resolution plan.
This circular has withdrawn the existing mechanism such corporate debt restructuring, Strategic DR etc.
4.2. Petition filed against the RBI 2018 circular
There was the issue with regard to the one day default norm which was there in the circular. So petition were filed by the textile industry, power industry etc stating that it is arbitrary and discriminatory as it did not complied with few requirements such as framed a timeline of 180 days without taking considering the issues faced by several sectors. Also it had not taken the prior authorization by the central government which was mandatory under the Section 35AA of the Banking Regulation Act. Section 35AA of BR Act empowered the RBI to issue direction to any banking companies to initiate IRP against any default. But it had to take prior permission with the central government to pass circular under section 35AA. So The Supreme court held this circular as ultra-virus to section 35AA of the BR Act.
4.3. RBI New Circular:
After two month after the Supreme Court quashed the RBI 2018 Circular which mandated the Bank to start the IRP even in case of one day default, the RBI issued a revised circular in the year 2019 for resolving stressed asset by offering banks or lenders a thirty days period to label an account to be an Non performing asset. Under the new circular the lenders will have complete discretion to design, implement resolution plan. It can start the IBC process with 30 days of the default. The lenders has to sign the inter-creditor agreement as that will provide for a majority decision making criteria. RBI also changed its 100% Approval requirement from creditor. The ICA shall provide any decision agreed by the lender representing 75% by value of total outstanding credit facility and 60 % of lender by number shall be binding upon all the lenders.
Chapter. 5. NPA cases solved through NCLT under the Insolvency and Bankruptcy Code 2016
There have been so many Non-performing assets cases solved through NCLT under the IBC. Some of them are:
1. BHUSHAN STEEL CASE
It was one of the large non-performing case referred to National company law tribunal by the reserve bank of India for resolution under the insolvency law. In the year 2017, Bhushan steel were brought to the bankruptcy courtroom by the bank due to non-repayment of thousands of crore rupees loans. Bhushan steel then acquired by Tata Steel. In these case the total amount claimed was 56,022 cr. And the amount realized was 35,571 cr. There was 63.5 % recovery.
2. ESSAR STEEL CASE
The verdict of the Supreme Court has not only came as a belief to frustrated banks, but it also boost recovery of money through the ever-evolving Insolvency and Bankruptcy Code. Esser steel asset was acquired by the Arcelor Mittal. The amount claimed was Rs. 49473 Cr. And the amount recovered was Rs. 42000. There was 84.89 % recovery.
There have been so many cases of where banks have recovered quite a good number of amount in different cases like other cases were in Jyoti structure ltd, this was acquired by group of HNIs and the recovery percentage was 50.12. In Monnet Ispat & Energy, this was acquired by Consortium of JSW and AION Investment pvt ltd, here also banks recovered 26.26. The lowest recovery was from Alok Industries Ltd. There banks could recovered only 17.11 % out of total amount claimed.
Chapter. 6. Findings:
1. As per the Economic survey report 2020, Insolvency and bankruptcy code has improved the resolution process in India as compared to the other earlier mechanisms. The recovery rate of NPA cases under the IBC is 42.5% of the amount involved as compared to 14.5% under the SARFAESI Act.
2. The Economic Survey Report 2020, Also says that within 340 days the cases are being resolved under the IBC and earlier it use to take 4.3 years to resolve the case under different mechanism.
3. The world Bank’s ‘ Ease of Doing Business’2020 report says India has moved up 14 positions to 63rd position as compared to 77th position in 2018. In the resolving insolvency index, India rank jumped 56th place to 52 in 2019 from 108 in 2018.
5. India is also among the Top 10 Improvers.
Chapter. 7. Conclusion and Recommendation:
By looking into the number of cases resolved, the time taken to resolve such dues and the percentage of recovery made, the report shows that IBC has impacted the Indian economy as well as Banks in a positive way. As the time taken is also very less and the amount which have been recovered by the banks is quite good as compared to the time when IBC was not there. The implementation of the code is good and proper. If this will be continued in future as well then than the Insolvency code will be the boon for the Indian Economy and will increase the investments in India. This will further improve the ease of doing business.
Review of Literature:
Dr. MAJOY PANDEY, CA MANAV VIGG, CA CHHAVI AGARWAL AND DR. PACHA MALYADRI, IMPACT OF THE INSOLVENCY AND BANKRUTCY CODE ON NPA RESOLUTION, JOURNAL OF XIAN UNIVERSITY OF ARCHITECTURE AND TECHNOLOGY, In this paper it has analyzed the Insolvency and bankruptcy code in brief and impact on NPA’s with the statistics of various cases solver by the NCLT and Supreme Court cases.
SUNITA CHAKI, KSHAMATA CHAUHAN AND ANITA DARYAL, JOURNEY TOWARDS RECOVERY: INSOLVENCY AND BANKRUPTCY CODE IN INDIA- A MIRAGE OR A MILESTONE, INTERNATIONAL JOURNAL OF RECENT TECHNOLOGY AND ENGINEERING, OCTOBER 2019, this analyzes various earlier recovery mechanisms, DRT Act, SARFAESI ACT, Lok Adalat frame work overview, and finally looked into the impact of IBC on the NPA cases.
RECOVERY MECHANISM OF NON-PERFORMING ASSETS IN INDIAN COMMERCIAL BANKS: AN EMPIRICAL STUDY, A MULTIDISCIPLINARY ONLINE JOURNAL OF NETAJI SUBHAS OPEN UNIVERSITY, INDIA, JULY 2018, it has explained the SARFAESI ACT, DRT ACT, IBC PROCESS and analyzed the NPA recovery from 2003 to 2017.
DAVE AND HITESH N., STUDY ON RISING LEVEL OF NON PERFORMING ASSETS NEED TO REVISIT DEBTS RECOVERY LAWS WITH SPECIAL REFERENCE TO PUBLIC SECTOR BANKS OF INDIA, Sodhganag@INFLIBNET, 2020, It has explained the concept of non-performing assets and its various other classifications and various other recovery mechanism.
RAJEEV KASHIV, NON PERFORMING ASSETS, Sodhganga@INFLIBNET, it talks about the concept of NPA and banks regulations.
CS DIYESH GOYAL,PILLARS OF INSOLVENCY AND BANKRUPTCY CODE, TAX GURU, It talks about the various institutions under this code like the authorities under it and functions they perform.
ADITYA SHINDEY, NON-PERFORMING ASSETS AND RECOVERY MECHANISM, LEGAL SERVICE INDIA E-JOURNAL, It explains about the Lok Adalat its function, DRT and SARFAESI its functions.
THE WORLD EASE OF DOING BUSINESS REPORT 2020, Ranked India in recovery of dues.
THE ECONOMIC SURVEY REPORT 2020, analyzed the impact of IBC in NPAs.
KEYWORDS: NON-PERFORMING ASSET; RECOVERY; INSOLVENCY AND BANKRUPTCY CODE 2016; BANKS; SARFAESI;
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