A Two-section Ordinance, holding the key to India’s NPA crisis By Vinod Kothari

The much-awaited ordinance, expected to make a tangible impact on India’s crisis of piling non-performing loans, was signed into a law by the President on 5^th May 2017. The Ordinance, consisting of barely two sections, makes amendments to the regulatory framework of banking in India, viz., the Banking Regulation Act. After reading the law, one is forced to think – if this is what was holding up the resolution of NPA crisis in the country, did it actually have to take all this time?

Preamble to the Ordinance

The Preamble to the Ordinance, which is supposed to set the backdrop and refer to the objectives of passing the law, makes several sweeping statements. For example, it starts by saying that the stressed assets in the country have reached unacceptably high levels and urgent measures are required for their resolution.

It thereafter refers to the Insolvency and Bankrutpcy Code, 2016 (IBC) as the law that is intended to ensure timely resolution of defaults under the adjudicatory supervision of the National Company Law Tribunal. Now the crux of the Ordinance lies in the third para of the Preamble, which seems to suggest that effective use of the process of the IBC can be done by empowring the RBI to give instructions to banks with regard to using the IBC process. Therefore, it seems that the primary focus of the Ordinance is that the RBI will be authorised to give directions, either generally by way of a structured direction, or specifically in case of particular borrowers, or particular class of borrowers, to direct banks to do filings under the IBC.

Provisions of the Ordinance

The tiny-sized Ordinance has only one operating section, making amendments by inserting two sections in the Banking Regulation Act. Section 35AA authorizes the Central Govt., to authorize the RBI, to give directions to the banks to make use of the IBC process.

The second provision, inserted by way of sec. 35AB, authorizes the RBI to give directions from time to time for resolution of stressed assets of banks. Another provision in the same section empowers RBI to specify one or more committees to give advice to banking companies, in the matter of resolution of NPAs.

Critically assessing the need for either of these two provisions, one wonders whether these purely intuitive provisions were actually required, and was it the absence of such generalized powers, which, as a matter of fact, no would have actually questioned, was the root cause of the country’s  NPA crisis. For example, section 35AA seems to suggest that it was necessary for the Central Govt to authorize the RBI to give directions to particular banks for initiating the process of insolvency resolution under the IBC. As a matter of fact, several banks have already initiated IBC process for several borrowers.  If the RBI had to give any directions, whether by way of a generalized guidance or specific directions for particular borrowers or categories of borrowers, the existing general power under section 35A of the Banking Regulation Act is wide enough to empower the RBI. In fact, it is in pursuance of this generalized power that the RBI has been coming out, from time to time, directions for resolution of NPAs. There have been several such directions already – such as the corporate debt restructuring norms (CDR), strategic debt restructuring (SDR) or the scheme for sustainable structuring of stressed assets (S4A), etc.

In fact, looking at the language of section 35AA, in fact, the Central Govt has assumed a sort of trigger power, because the section seems to say that the Central Govt will authorize the RBI to make use of the powers under this section.

Same goes with section 35AB. The power to give directions with respect to resolution of stressed assets has been inherent in the generalized power under section 35A – which is how directions have been given over the years.

Experience with IBC process

The Ordinance seems to give a new relevance to the IBC process for resolution of NPAs. IBC process was initiated barely 4 months back. While there are over 100 references already, there is not even one case of a successful resolution so far. Experience with similar process in other countries (creditors ‘voluntary arrangement in the UK or Chapter 11 in the USA) have worked mostly as pre-packs, that is, a pre-arrangement between a potential acquirer and the lenders, whereby the acquirer puts in money needed for resolution for stake in the target company.

The process of resolution under the IBC needs 75% creditors’ consent. That is also the consent required under the Joint Lenders’ Forums of banks. The only difference between JLFs and the IBC process is that the latter works under a statutory platform, and is time bound.  However, there are no success stories so far under the IBC. Therefore, the Ordinance pinning hopes of revival on the IBC mechanism is perhaps overly optimistic.

Conclusion

The Ordinance may just create the right mix of legal powers and the power of direction. The actual resolution lies in aggressive implementation of resolution cases. While IBC may potentially be an effective tool, but the 75% voting threshold may simply make decision-making in creditors’ committees difficult, and may, therefore, willy-nilly put companies on to the liquidation path. It would be necessary to wait for some experience of the IBC resolution process before leaning on it too much.

________________________________________________________________________________

By Vinod Kothari :- vinod@vinodkothari.com