A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. NPAs can also be called bad loans, or non-performing loans. An asset which has remained as a NPA for more than 12 months is called a Doubtful Asset.
NPAs in India
- Gross NPAs in India’s banks were around 10% of the gross advances in financial year 2018-19, according to a CRISIL report. In absolute terms, it amounts to around 10 lakh crore rupees. This figure is expected to reduce considerably by March 2020 on account of lesser slippages by banks.
- Most of the NPAs are in infrastructure sectors like power, steel and road projects, because of the long gestation period and cost over-runs.
- India is among the major economies having worst non-performing loan ratio, along with Italy, Greece, Portugal and Ireland.
Why NPAs grew?
- Overleveraged companies during economic boom followed by global economic crisis 2008 and its after-effects.
- Evergreening and underreporting of non-performing assets led to asset quality deterioration of banks, which are now coming to surface as NPAs.
The SARFAESI Act, or Securitisation Act, 2002 –
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- The act provides for setting up of asset reconstruction companies for acquiring financial assets including NPAs which help in clearing balance sheet of banks. The first asset reconstruction company of India – ARCIL was set up under this act.
- The provisions of the SARFAESI Act enable secured creditors to sell, or take possession, control or management of the secured assets of a defaulting borrower. The borrower’s account must have been classified as NPA and he must be given at least two months notice to discharge his liabilities, before any proceedings under the act can be initiated against him.
Insolvency and Bankruptcy Code (IBC), 2016
- The law was enacted through an ordinance. Insolvency Bill is in the Parliament.
- The IBC consolidates existing framework by creating a single law for insolvency and bankruptcy. It provides a mechanism for resolution of credit liabilities of insolvent companies so that capital can be reallocated to enterprises that are more likely to make better use of it.
- Insolvency regulator – Insolvency and Bankruptcy Board of India (IBBI).
- Bankruptcy and Insolvency Adjudicator:
- National Company Law Tribunal (NCLT)
- for companies and limited liability partnership firms (insolvency).
- Debt Recovery Tribunal
- for individuals and partnerships (bankruptcy).
- National Company Law Tribunal (NCLT)
Process of Insolvency proceedings under the IBC
A plea for insolvency is submitted to the adjudicating authority by creditor or the debtor. If the plea is accepted (14 days limit), the tribunal has to appoint an Insolvency Resolution Professional (IRP) to draft a resolution plan within 180 days (extendable). For this period, the board of directors of the company stands suspended and management of the company remains with the IRP, i.e. the licensed insolvency professionals will control the assets of the debtor during the insolvency process.
The Insolvency and Bankruptcy Code 2016 is a landmark economic reform. It provides a mechanism for resolution of credit liabilities of insolvent companies so that funds can made available to enterprises that can make better use of it.
Insolvency Law Committee was constituted by the Ministry of Corporate Affairs (MCA) in 2017 under Injeti Srinivas, to review the implementation of Insolvency and Bankruptcy Code. By an order in March 2019, the MCA reconstituted the Insolvency Law Committee as Standing Committee, giving it permanence. The committee is chaired by Secretary to the Ministry of Corporate Affairs, and gives recommendations over IBC as and when required.
RBI’s February 12 circular
On February 12, 2019, the Reserve Bank of India issued a circular on resolution of stressed assets that mandated lenders to start resolution even if there was a one day default in payment of a loan. In April 2019, the Supreme Court declared this circular as unconstitutional. Following this, in June 2019, the RBI issued a fresh circular which mandates that defaults should be recognised within 30 days. The new circular also contains guidelines that have relaxed several other provisions and have provided more freedom to lenders in resolution of stressed assets.
Credit information companies and credit rating agencies – how they brought the NPA woes?
RBI’s Prompt Corrective Action (PCA).