1 year of RBI’s ‘Dirty Dozen’: How Modi’s IBC crusade on massive NPA began and created history! – The Financial Express–30.05.2018

Modi’s IBC crusade: Last June, the Reserve Bank of India (RBI) released a list of 12 companies constituting 25% of India’s total NPAs (Non-Performing Assets)under thename ‘Dirty Dozen’ after being vested with new legislative powers to initiate proceedings under the newly adopted Insolvency and Bankruptcy Code. It not only tasted its first success recently but also created history when Tata Steel bought bankrupt Bhushan Steel for around Rs 36,400 crore, which was called a “historic breakthrough” by interim Finance Minister Piyush Goyal.

Even as some of the accounts are stuck in legal battles and may take some more time, experts say that the track record is still better than previous schemes that usually took at least three to four years for bad loan resolution. Besides Tata Steel’s acquisition of Bhushan Steel, Anil Agrawal’s Vedanta also got the final nod from National Company Law Tribunal (NCLT) last month.

How the crusade on NPA started:

The noose on loan defaults was tightened way back in 2015 when the banks were asked to classify some of its ‘standard assets’ as NPA, which led to the recognition of bad loans amounting to about 11% of total advance until December 2017. In the same year, the Narendra Modi government introduced the IBC, a tailor-made code for the resolution of bad loans in the winter session of the Parliament. The code was passed by Lok Sabha and got President’s nod in May 2016.

A year later, in May 2017, the RBI was vested with legislative powers to initiate proceedings to recover bad loans for an effective use of IBC. The central bank soon swung into action and released the ‘Dirty Dozen‘ list including the names of biggies such as Bhushan Steel and Essar Steel for immediate resolution and gave 488 others six months time to resolve their debt. Insolvency proceedings were initiated in most cases in following months. About 28 more companies were identified for the IBC resolution in December 2017.

RBI’s Dirty Dozen

The IBC Ordinance:

As insolvency proceedings against some of the biggest loans defaulters began, the government upon finding a leakage in the IBC law in November, moved fast and plugged it by taking the Ordinance route. The government found that the parent company of Essar Steel Ltd were trying to bid for the company’s stressed assets because IBC “allowed promoters” to bid for their company. Days later, in a Cabinet meeting, the government passed an Ordinance barring not only wilful defaulters but defaulter promoters and related persons too. The Ordinance was later passed by the Parliament in the winter session 2017-18.

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1 year of RBI’s ‘Dirty Dozen’: How Modi’s IBC crusade on massive NPA began and created history!

The Section 29 A of the IBC initially received mixed reactions from experts. Some said it would mean higher haircuts for banks as too many people or companies would deem ineligible under the clause, others hailed it as a smart move needed to curb the moral hazard of defaulting and yet gaining back the control of companies. So far, evidence suggest that the Section 29 A has worked as it made at least 2,100 companies and Lakshmi Mittal’s ArcelorMittal clear their dues.

RBI’s late night diktat:

What followed the IBC was an immediate and complete overhaul of the existing RBI debt-restructuring schemes into a single streamlined and timely framework in accordance with the IBC. The RBI also warned banks against ‘evergreening’ or concealing the actual status of any account, and for transparency, has asked for weekly disclosures till March 31 and monthly from April 1 on the status of defaults to the RBI credit registry —  CRILC. This made more NPA monster to come out in public, showing a clearer picture of bad loans in the banking system.

A Crisil report last month said that even as India’s total NPA may surge up to Rs 11.5 lakh crore or 14% of the of bank advances due to RBI’s new framework, the corporate credit quality improved in last four years, or in the Narendra Modi era.

What’s next?

The biggest challenge is that even as Rs 1 lakh crore is in the pipeline for resolution, the NPA of 26 banks as on March 31 stood at whopping Rs 7.31 lakh crore. Moreover, other 10 accounts on the RBI’s Dirty Dozen list have breached their respective deadlines due to legal hurdles or lack of bids. However, as new as the IBC law is, the start is encouraging enough. Not only Indian analysts but international agencies have lauded the IBC. The recent surge in the NPAs is a short-term pain.

“Banks books are getting cleaned up and NPAs are also being recognised in a transparent manner. In the process, even if there is a (higher) provisioning requirement or even if there is a loss for one or two quarters, it is okay…,” Financial services secretary Rajiv Kumar said.

In October last year, the government announced massive Rs 2.11 lakh crore bank recapitalisation plan, which may not be enough especially after the detection of Rs 13,000 Nirav Modi-PNB fraud, but can still give the much-needed support to public sector banks now making higher provisions to clean-up books. The government infused PSU banks with Rs 88,000 crore in January with riders. The next batch of infusion is likely to happen this fiscal year.

via 1 year of RBI’s ‘Dirty Dozen’: How Modi’s IBC crusade on massive NPA began and created history! – The Financial Express

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