India had ‘socialism without entry’ before economic liberalization in the early 1990s. This had a negative impact on the economy and gave the ‘Hindu rate of growth’ to the country. The problem was solved in the early 1990s as the country moved towards a capitalist economy with the advent of economic liberalization. However, the larger framework of the political economy of the country remained ‘capitalism without exit’. The lack of a proper framework for insolvency amassed huge Non-Performing Assets (NPAs) which hampered the health of the banking sector as well as the growth of the economy. Modi government brought path-breaking policy as an Insolvency and Bankruptcy Code (IBC) to solve capitalism without exit problem.
In FY 19, the public sector banks (PSBs) recovered 1.2 lakh crore rupees through IBC resolutions. In the first of the last financial year, 60,713 crore rupees have been recovered while almost the same amount was recovered in the second term. “Due to non-resolution of some big accounts referred under NCLT (National Company Law Tribunal), PSBs could not achieve the resolution target of Rs 1.80 lakh crore. But, these accounts should be resolved in the current financial year,” said an official. The amount nearly doubled as only 74,562 crore rupees was recovered in FY 2017-18. Two large pending cases of Essar Steel and Bhushan Power & Steel Ltd are expected to bring 50,000 crore rupees in PSBs coffer in the ongoing fiscal year and therefore and much bigger recovery is expected in FY 20.
Since the implementation of IBC, 378 companies with 2, 57,642 crore rupees creditor claim has been sent to resolution body. Out this 88 cases had been resolved successfully with 45 percent recovery by lenders.
The gross NPA of the country is INR 10 trillion rupees which is equal to 6 percent of the economy of the country or equal to the GDP of West Bengal. India has the second largest share of bad debts in the world with 9.6% NPAs of total loans. Only Italy is ahead of us with 16.4 % of NPAs, while other major countries like the US, China, and Japan have 1.1, 1.7, and 1.3% of NPAs respectively. The huge NPAs hurt the lending capacity of banks and credit crunch took a toll on economic growth. The government has to put 2.11 trillion rupees in public sector banks to revive the credit and push capital adequacy to Basel III norms.
According to corporate affairs secretary Injeti Srinivas, 3 trillion rupees has been recovered so far in two years due to implementation IBC. 3500 cases with default around INR 1.2 trillion rupees was withdrawn from NCLT because creditors recovered money by threatening the debtors about going through IBC. However, the pace of resolution under IBC is still slow despite the fact that law has put time constraint. “The two major challenges facing the NCLT process are clogged pipelines and the unsuitability of the method for some classes of stressed assets, especially power and small and medium enterprises (SMEs). At current clearance rates, resolving the whole NPA problem could take another six years or so,” wrote former chief economic advisor Arvind Subramanian in his book ‘Of Counsel’: The Challenges of Modi-Jaitley Economy.
The Insolvency and Bankruptcy Code (IBC) is proving to be the most powerful weapon against the NPA problem, even the Economic Survey 2018 mentioned that the new Insolvency and Bankruptcy code (IBC) was helping to improve the health of banking sector.