PolicyContext to the Supreme Court Order on stressed assets of banksGayatri Mann,Roshni Sinha- April 3, 2019The increasing Non-Performing Assets (NPAs) in the Indian banking sector has recently been the subject of much discussion and scrutiny.  Yesterday, the Supreme Court struck down a circular dated February 12, 2018 issued by the Reserve Bank of India (RBI).  The RBI circular laid down a revised framework for the resolution of stressed assets.  In this blog, we examine the extent of NPAs in India, and recent events leading up to the Supreme Court judgement.What is the extent and effect of the NPA problem in India?Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorised as: (i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped making interest or principal repayments for over 90 days.As of2018, the total NPAs in the economy stand at Rs 9.6 lakh crore.  About 88% of these NPAs are from loans and advances of public sector banks.  Banks are required to lend a certain percentage of their loans to priority sectors.  These sectors are identified by the RBI and include agriculture, housing, education and small scale industries.[1]In 2018, of the total NPAs, 22% were from priority sector loans, and 78% were from non-priority sector loans.In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 (see Figure 1). This indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.Figure 1: Gross NPAs (% of total loans)Source: Reserve Bank of India; PRSWhat has been done to address the problem of growing NPAs?The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, remedial measures for banks prescribed by the RBI for internal restructuring of stressed assets, and second, legislative means of resolving NPAs under various laws (like the Insolvency and Bankruptcy Code, 2016).Remedial MeasuresOver the years, the RBI has issued various guidelines for banks aimed at the resolution of stressed assets in the economy. These included introduction of certain schemes such as: (i) Strategic Debt Restructuring (which allowed banks to change the management of the defaulting company), and (ii) Joint Lenders’ Forum (where lenders evolved a resolution plan and voted on its implementation).   A summary of the various schemes implemented by the RBI is provided in Table 1.Table 1: Non-legislative loan recovery frameworkLoan restructuringBanks internally undertake restructuring of loans, if the borrower is unable to repay the amount.  This involves changing the terms of repayment, which includes altering the payment schedule of loans or interest rates.Corporate Debt RestructuringAllows for restructuring of a borrower’s outstanding loans from more than one bank.  This mechanism is available if the borrower’s outstanding loans are more than Rs 10 crore.[2]Joint Lender's ForumLenders evolve an action plan to resolve the NPA of a defaulter.[3]If 60% of the creditors by value, and 50% of the creditors by number agree, a recovery plan will be implemented.[4]5:25 SchemeBanks can extend loan term to 25 years based on cash flow of projects for which the loan was given.  Interest rates and other terms of the loans may be readjusted every five years.[5]Strategic Debt RestructuringBanks convert their debt into equity to hold a majority of shares in a company.  This allows banks to change the management of the defaulting company.[6]Sustainable Structuring of Stressed AssetsAllows for conversion of a part of the outstanding debt to equity or preference shares if: (i) project for which loan was taken has commenced operations, and (ii) borrower can repay over 50% of the loan.[7]Sources: RBI scheme guidelines; Economic Survey 2016-17; PRS.Legislative MeasuresThe Insolvency and Bankruptcy Code (IBC)was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts. When a default occurs, the creditors or debtor may apply to the National Company Law Tribunal for initiating the resolution process. Once the application is approved, the resolution process will have to be completed within 180 days (extendable by 90 days) from the date of approval.  The resolution process will be presided over by an insolvency professional to decide whether to restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount.  If a timely decision is not arrived at, the defaulter’s assets are liquidated.The Banking Regulation (Amendment) Act, 2017:The amendment allows RBI to direct banks to initiate recovery proceedings against defaulting accounts under the IBC.  Further, under Section 35AA of the Act, RBI may also issue directions to banks for resolution of specific stressed assets.In June 2017, an internal advisory committee of RBI identified 500 defaulters with the highest value of NPAs.[8]The committee recommended that 12 largest non-performing accounts, each with outstanding amounts greater than Rs 5,000 crore and totalling 25% of the NPAs of the economy, be referred for resolution under the IBC immediately.  Proceedings against the 12 largest defaulters have been initiated under the IBC.What was the February 12 circular issued by the RBI?Subsequent to the enactment of the IBC, the RBI put in place aframeworkfor restructuring of stressed assets of over Rs 2,000 crore on or after March 1, 2018.  The resolution plan for such restructuring must be unanimously approved by all lenders and implemented within 180 days from the date of the first default.  If the plan is not implemented within the stipulated time period, the stressed assets are required to be referred to the NCLT under IBC within 15 days.  Further, the framework introduced a provision for early identification and categorisation of stressed assets before they are classified as NPAs.On what grounds was the RBI circular challenged?Borrowers whose loans were tagged as NPAs before the release of the circular recently crossed the 180-day deadline for internal resolution by banks. Some of these borrowers, including various power producers and sugar mills, had appealed against the RBI circular in various High Courts. A two-judge bench of the Allahabad High Courtruled in favourof the RBI’s powers to issue these guidelines, and refused to grant interim relief to power producers from being taken to the NCLT for bankruptcy. These batch of petitions against the circular weretransferred to the Supreme Court, which issued an order in September 2018 to maintain status quo on the same.What did the Supreme Court order?The Courtheldthe circular issued by RBI was outside the scope of the power given to it under Article 35AA of the Banking Regulation (Amendment) Act, 2017.  The Court reasoned that Section 35AA was proposed by the 2017 Act to authorise the RBI to issues directions only in relation to specific cases of default by specific debtors.  It held that the RBI circular issued directions in relation to debtors in general and this was outside their scope of power.  The court also held that consequently all IBC proceedings initiated under the RBI circular are quashed.During the proceedings, various companies argued that the RBI circular applies to all corporate debtors alike, without looking into each individual’s sectors problems and attempting to solve them.  For instance, several power companies provided sector specific reasons for delay in payment of bank dues.  The reasons included: (i) cancellation of coal blocks by the SC leading to non-availability of fuel, (ii) lack of enough power purchase agreements by states, (iii) non-payment of dues by DISCOMs, and (iv) delays in project implementation leading to cost overruns.  Note that, in its40threport, the Parliamentary Standing Committee on Energy analysed the impact of the RBI circular on the power sector and noted that the ‘one size fits all’ approach of the RBI is erroneous.[1]‘Priority Sector Lending – Targets and Classification’ Reserve Bank of India, July 2012,https://rbi.org.in/scripts/NotificationUser.aspx?Id=7460&Mode=0.[2]Revised Guidelines on Corporate Debt Restructuring Mechanism, Reserve Bank of India,https://www.rbi.org.in/upload/notification/pdfs/67158.pdf.[3]‘Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)’, Reserve Bank of India, February 26, 2016,https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8754&Mode=0.[4]Timelines for Stressed Assets, Press Release, Reserve Bank of India, May 5, 2017,https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10957&Mode=0.[5]Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries, RBI, July 15, 2014,https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9101&Mode=0.[6]Chapter 4, The Economic Survey 2016-17,http://unionbudget.nic.in/es2016-17/echap04.pdf.[7]‘RBI introduces a ‘Scheme for Sustainable Structuring of Stressed Assets’’ Press Release, Reserve Bank of India, June 13, 2016,https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=37210.[8]RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC), Reserve Bank of India, June 13, 2017,https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40743ParliamentFirst no-confidence motion of the 17th Lok Sabha discussed todayNiranjana Menon- August 8, 2023Discussion on the first no-confidence motion of the 17thLok Sabha began today.  No-confidence motions and confidence motions are trust votes, used to test or demonstrate the support of Lok Sabha for the government in power.  Article 75(3) of the Constitution states that the government is collectively responsible to Lok Sabha.  This means that the government must always enjoy the support of a majority of the members of Lok Sabha.  Trust votes are used to examine this support.  The government resigns if a majority of members support a no-confidence motion, or reject a confidence motion.So far, 28 no-confidence motions (including the one being discussed today) and 11 confidence motions have beendiscussed.  Over the years, the number of such motions has reduced.  The mid-1960s and mid-1970s saw more no-confidence motions, whereas the 1990s saw more confidence motions.Figure1: Trust votes in ParliamentNote: *Term shorter than 5 years; **6-year term.Source: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.The no-confidence motion being discussed today wasmovedon July 26, 2023.  A motion of no-confidence is moved with the support of at least 50 members.   The Speaker has the discretion to allot time for discussion of the motion.  TheRules of Procedurestate that the motion must be discussed within 10 days of being introduced.  This year, the no-confidence motion wasdiscussed13 calendar days after introduction.  Since the introduction of the no-confidence motion on July 26, 12 Bills have been introduced and 18 Bills have been passed by Lok Sabha.  In the past, on four occasions, the discussion on no-confidence motions began seven days after their introduction.  On these occasions, Bills and other important issues were debated before the discussion on the no-confidence motion began.Figure2: Members rise in support of the motion of no-confidence in Lok SabhaSource: Sansad TV, Lok Sabha, July 26, 2023; PRS.Figure3: Number of days from introduction to discussion on no-confidence motionsNote: Number of days implies calendar days.Source: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.On average, no-confidence motions (excluding the one being discussed today) have been discussed for 13 hours over three days.  Discussions have lasted longer than 20 hours on four instances, most recently in 2003.  Today’s no-confidence motion was allotted 12 hours discussion time by theBusiness Advisory Committee.Following the discussion, the motion is put to vote.  26 out of 27 no-confidence motions (excluding the one being discussed today) have been voted upon and rejected.  This means that no government has ever had to resign following a vote of no-confidence.   On one occasion, in 1979, the discussion on a no-confidence motion against the Morarji Desai government remained inconclusive.  He resigned before the motion was put to vote.  50% of all no-confidence motions (14 out of 28) were discussed between 1965 and 1975.  Of these, 12 were against governments headed by Indira Gandhi.Figure4: Duration of discussion on no-confidence motionsNote: This graph excludes the no confidence motion moved on July 26, 2023.Source: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.In comparison, confidence motions have a more varied history.  The first motion, brought in 1979 to demonstrate confidence in Charan Singh’s government, was not discussed at all.  The Prime Minister resigned before the discussion could take place.  Since then, 11 confidence motions have been discussed in Lok Sabha, with nine occurring in the 1990s.  During this period, several coalition governments were formed, and Prime Ministers sought to prove their majority throughconfidence motions.   These motions have been discussed, on average, for 12 hours over two days.Figure5: Duration of discussion of confidence motionsSource: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.Of the 11 confidence motions discussed in Lok Sabha, seven were accepted.  On three instances, governments had to resign as they could not prove that they had the support of the majority.  On one instance in 1996, the motion was not put to vote.  Following an eleven-hour discussion on this confidence motion, Prime Minister Atal Bihari Vajpayee announced his intention to resign on the floor of the House.  He resigned 16 days into his term.Vajpayee became Prime Minister again in 1999, and faced another confidence motion.   This time, it was put to vote.   The motion was defeated by a margin of one vote.  This has been the closest result on a trust vote in the history of Lok Sabha.  The next closest result was when a motion of no-confidence against P V Narasimha Rao’s government was defeated by 14 votes in 1993.  In most cases, results have been in favour of the government by a large margin.«12345678910»
PolicyContext to the Supreme Court Order on stressed assets of banksGayatri Mann,Roshni Sinha- April 3, 2019