Insights (2)
Insights – Banks to NPA’s: “Back-off… We are Stressed!”
The President of India recently promulgated an ordinance for amendment to the Banking Regulation Act, 1949. This ordinance that was notified on 5th May, 2017 is considered an important step towards directly addressing the issue of stressed loans that are choking the Banks.
Fact
Rs. 9.64 trillion = Total NPAs or bad loans
All banks are governed by the Banking Regulation Act, 1949. The Ordinance will empower the Reserve Bank of India (RBI) to work as a banking regulator. Further, the ordinance will involve amending section 35 of the Act. Presently, the section contains provisions relating to the inspection by the RBI.
The amendment to section 35 has been proposed by way of introduction of sections 35AA and 35AB. These sections will specifically and expressly empower the RBI to issue directions to banks in relation to stressed assets.
Why the ordinance now?
It has been observed that since 2012 the borrowers who borrow funds amounting to Rs. 5 crores and above has steadily increased. Simultaneously, their ability to repay has sharply decreased. Therefore from 2012 the gross non-performing assets increased gradually from Rs. 1.3 trillion to Rs. 9.64 trillion as of May 2017. This is an alarming rise in the nonperforming asset ratio. As a result, banks are struggling to cope with recovery of the same.
The ratio of NPA
Total advances given by Banks determines the financial stability of the Banks. Large borrowers (who borrow Rs. 5 crores and above) form a chunk of such nonperforming debts. They account for almost 90% of Banks NPAs.
WHEN DOES GOOD BECOME BAD?
Advances given by Banks are called assets. They generate income for banks by way of instalments and interest. If the instalment is not paid within due date, it becomes a bad loan. When default goes beyond 90 days after due date, it becomes an NPA.
Government data published in June 2016 shows that power, steel, metal and metal products sectors are the worst performing industries as far as repaying debt is concerned. More than one third of the metal industry’s outstanding advances from banks became NPAs.
Nationalised banks and public sector banks have gotten crushed under this debt pile. This could be attributed to the statutory regulations and the economic crisis on and after 2008. It also seemed to have dented the debt servicing capability of the corporate houses. Many big corporate houses were declared wilful defaulters and action initiated. It is a fact that around 50 large corporate borrowers contribute to maximum NPAs and tackling them would be sufficient to solve this crisis quickly. The arrest of top officials of a bank has further heightened tension in the banking circles further made them deal with NPAs and corporate houses in a cautious manner. This is more so the case where consortium lending is involved here a group of banks are involved.
He holds a Bachelor’s and Master’s Degree in Corporate Secretaryship and a Degree in Law. He is a Fellow member of the Institute of Company Secretaries of India and an Associate Member of the Corporate Governance Institute, UK and Ireland. He has also completed a program from ISB on ‘Value Creation through Mergers and Acquisitions.
Mr P Muthusamy is an Indian Revenue Service (IRS) officer with an outstanding career of 30+ years of experience and expertise in all niche areas of Indirect Taxes covering a wide spectrum including GST, Customs, GATT Valuation, Central Excise and Foreign Trade.
During his judicial role, he heard and decided a large number of cases, including some of the most sensitive, complicated, and high-stake matters on insolvency and bankruptcy, including many cases on resolution plans, shareholder disputes and Schemes of Amalgamation, De-mergers, restructuring etc.,
Ms. Sarah Abraham has been enrolled with the Bar Council of Tamil Nadu since 1998. Her areas of practice include Shareholder Disputes, Corporate Compliances, Mergers and Acquisitions, Private Equity/ Venture Capital Agreements and allied disputes, Information Technology Contracts, Intellectual Property, General Commercial Agreements, Litigation, Arbitration and Mediation.
A K Mylsamy is the Founder, Managing Partner and the anchor of the firm. He holds a Degree in law and a Degree in Literature. He is enrolled with the Bar Council of Tamil Nadu.
M Subathra holds a Degree in law and a Master’s Degree in International Business Law from the University of Manchester, United Kingdom. She is enrolled with the Bar Council of Tamil Nadu.
Mr. K Rajendran is a former Indian Revenue Service (IRS) officer with a distinguished service of 35 years in the Indirect Taxation Department with rich experience and expertise in the fields of Customs, Central Excise, Service Tax and GST. He possesses Master’s Degree in English literature. Prior to joining the Department, he served for the All India Radio, Coimbatore for a period of about 4 years.
An MBA from the Indian Institute of Management, Calcutta, and an M.Sc. in Tourism Management from the Scottish Hotel School, UK, Ashok Anantram was one fo the earliest IIM graduates to enter the Indian hospitality industry. He joined India Tourism Development Corporation (ITDC) in 1970 and after a brief stint proceeded to the UK on a scholarship. On his return to India, he joined ITC Hotels Limited in 1975. Over the 30 years in this Organisation, he held senior leadership positions in Sales & Marketing and was its Vice President – Sales & Marketing. He was closely involved in decision making at the corporate level and saw the chain grow from a single hotel in 1975 to a very large multi-brand professional hospitality group.
Mani holds a Bachelor Degree in Science and P.G. Diploma in Journalism and Public Relations. He has a rich and varied experience of over 4 decades in Banking, Finance, Hospitality and freelance Journalism. He began his career with Andhra Bank and had the benefit of several training programs in Banking.
Mr. Kailash Chandra Kala joined the Department of Revenue, Ministry of Finance as ‘Customs Appraiser’ at Mumbai in the year 1993.
S Ramanujam, is a Chartered Accountant with over 40 years of experience and specialization in areas of Corporate Tax, Mergers or Demergers, Restructuring and Acquisitions. He worked as the Executive Vice-President, Group Taxation of the UB Group, Bangalore.
K K Balu holds a degree in B.A and B.L and is a Corporate Lawyer having over 50 years of Legal, Teaching and Judicial experience.
Justice M. Jaichandren hails from an illustrious family of lawyers, academics and politicians. Justice Jaichandren majored in criminology and then qualified as a lawyer by securing a gold medal. He successfully practiced in the Madras High Court and appeared in several civil, criminal, consumer, labour, administrative and debt recovery tribunals. He held office as an Advocate for the Government (Writs Side) in Chennai and was on the panel of several government organizations as senior counsel. His true passion lay in practicing Constitutional laws with focus on writs in the Madras High Court. He was appointed Judge, High Court of Madras in December 2005 and retired in February 2017.
S Balasubramanian is a Commerce and Law Graduate. He is a member of the Delhi Bar Council, an associate Member of the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India and Management Accountants of India.