For all the good opportunities the new government gets to serve people, it has one big disadvantage. The new government is just a new government and not a new political party in power. That means that even if previous governments have done blunders after blunders, a lot of times intentionally, you are the one who has to clean all that mess. The BJP government also faced this issue. Apart from dilapidated national security, they inherited another bad legacy called the NPA crisis. It took 8 years to sort this out, but the illegitimate (and I am using this term literally) kid of UPA is now no longer a hurdle.
Bad bank in action
The Modi government’s flagship Bad Bank has started its operations. Its first project involves buying stressed assets of Mittal Corp., a steel making company. National Asset Reconstruction Company (NARCL), the government-promoted bad bank has communicated that it is willing to pay Rs 228 crore for Mittal Corp debt held by public sector banks.
Mittal Corp. is legally required to pay Rs 1414.5 crore to PSBs, out of which 16 per cent will be paid by NARCL. The bad bank has also offered to pay 16 per cent of Rs 173 crore of private debt on Mittal Corp. It means that NARCL will pay Rs 256 crore for the debt. The bad bank will pay 15 per cent in cash and the rest 85 per cent in Security deposits.
NARCL has to fight with other bidders as well in a process termed as Swiss challenge auction. Swiss Challenge method is a process of bidding or public procurement where the bidder makes a bid on its own to the auctioneer. Compared to NARCL’s offer of Rs 256 crore, Rimjhim Ispat has offered to pay 26 crore more for the same deal. Shyam SEL has offered Rs 257 crore while Jindal Stainless Steel, offered Rs 251 crore.
Also read: How Modi govt. turned the fortunes of NPA laden PSBs
Bigger mandate for Bad Bank
Mittal Corp. is just a humble beginning for Bad Bank. There are the bigger fish in the pond to grab. The bank is assisted by the Finance Ministry itself. Ministry has asked banks to sell at least 2 more stressed assets to NARCL by the end of October 2022. The companies in the phase 1 of the hit list include Rainbow Papers, and Consolidated Construction.
In phase 1, NARCL will pick eight accounts with debt of Rs 16,744. In phase 2, NARCL will clear debt held by 10 accounts worth Rs 18,177. Jaypee Infrastructure, Coastal Energen, Rolta, McNally Bharat Engineering and Meenakshi Energy are other big names in the list. Cumulatively, in 2 phases, debt worth nearly Rs 39,921 crore will be cleared.
Also read: Best news of 2021: Indian Banks have finally weeded out the NPA mess
The genesis of NPA
Kicking off the operation by the bad bank is being considered as the final frontier in the fight against the NPA crisis in the country. Non-Performing assets in India were a result of bad luck coupled with poor policy decisions of the UPA government.
In 2004, the Manmohan Singh government inherited a solid foundation on which it could build India’s economic future. At that time, the global economy was also emerging from the tech bubble, whose lower base effect resulted in burgeoning global economic growth. In UPA1, commercial credit had more than doubled between 2004-05 and 2008-09.
Indian firms operating in telecom, power, roads, aviation, steel borrowed ferociously. But at the same time, another bubble named the housing bubble burst in the USA. Lehman Brothers crashed and with itself it took down the whole western economy.
It created two problems for the financial sector. Firstly, banks got conservative in their approach towards lending and secondly, those who had borrowed found it difficult to pay.
Also read: Congress had given India the NPA cancer. PM Modi has cured it
NPAs in numbers
But borrowing had to continue because increase in policy rates due to the financial crisis had left industries with no other options. Poor state of affairs in Public Sector Banks meant that they became the worst culprits. Their loan portfolio, in fact, almost tripled from Rs 18,19,074 crore as on 31 March 2008 to Rs. 52,15,920 crores on 31 March 2014.
On the other hand, Private Sector banks were a bit sceptical about lending. Between the same time period, their loan portfolio saw nearly only 130 per cent increase from 7 lakh crore to 15 lakh crore.
Mind you, a very high percentage of these assets were not giving results as well. Despite that, banks’ methodologies did not require to be shown as NPAs in books. According to the 2014 Financial Stability report of RBI, only 4 per cent of total gross advances of the banking system were marked as NPAs. The Modi government was aware that there is something systematically wrong with the process.
AQR exposed the dirt
That is why, as soon as the Modi government came to power, an ASSET QUALITY REVIEW (AQR) was initiated. Press information Bureau described its impact in following words, “As a result of AQR and subsequent transparent recognition by banks, stressed accounts were reclassified as NPAs and expected losses on stressed loans, not provided for earlier under flexibility given to restructured loans, were provided for. Further, all such schemes for restructuring stressed loans were withdrawn.”
The impact of these steps brought the full truth to the public domain. NPAs in 2015-16 almost doubled as compared to that of the previous financial year. By the end of FY 2017, it was clear that the problem was grimmer. Stricter norms of classification had resulted in classification of loans worth Rs 10,36,187 crore as NPAs, a stark change over Rs 3,23,464 crore in 2014. The percentage under NPAs increased from 4.28 in FY 2014 to 11.8 by the end of FY 2017.
Solutions to the problem
Side by side, government had started a war on NPAs as well. Various initiatives such as Insolvency and Bankruptcy Code, Establishment of NCLTs and GSTs were introduced. Consisting of 255 sections and 11 schedules, IBC simplifies the process and protects the interest of small investors.
Under IBC, an insolvency process has to be completed within 180 days of initiation of proceedings. IBC made it easier for businesses to get out of the unprofitable venture before the loss becomes too large.
It also ensured that the lender (Banks) do not get dragged into an infinite loop of judicial solution. In the last few years, the banks made a very good recovery on the NPAs by using IBC. Assets of many defaulters including people like Vijay Mallya, Nirav Modi were sold by the consortium of lenders.
According to a report by The Business Standard, SCBs have recovered Rs 8,19,892 crore during the last seven financial years.
Also read: An NPA-ridden Indian banking sector has been “stabilised” by PM Modi, Moody’s says
Massive recovery resulted in positive sentiments
While IBC helped banks improve on their performances, GST eased the business environment in the country by instilling a sentiment of certainty around the tax structure. The result is shown in numbers as well.
Last year, SBI published a report which documented how people are eager to participate in the formal economy. It highlighted that the share of informal economy in India’s gross economy had dropped to 15-20 per cent from 52 per cent in 2018.
The positive sentiments have a domino effect on the economy. No wonder, NPAs were at lowest in March this year. In its Financial Stability Report, RBI pointed out that the NPAs of the banks had fallen to 5.9 per cent in March 2022. The only problem which required a solution was what to do with stressed assets. Bad Banks are coming to rescue.
However, it is not that the problem has been permanently solved. Due to covid, the percentage of stressed assets will witness an uptick this year. Though it is a minor blip, still the Government needs to be alert about it as everything can’t be left to whims and fancies of Banks. Hopefully IBC 2.0 will take care of the new but minor damage.
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