202 226

679

915

1,320

440

-

-

200

400

600

800

1,000

1,200

1,400

Exposure of cases referred to CDR Cell

CDR exposure (INR bn) per Financial Year

Credit was on rampant growth in India

during 2008 to 2013 with total advances of

the banking system surging from ~INR 25

trillion to ~INR 60 trillion, i.e. an increase of

140% in 5 years. (Refer Chart 1). When

credit grows at that heady pace, like in life,

excesses tend to happen as witnessed in

the Indian banking system. When as

individuals, we are �red and unwell we

undergo detoxifica�on for removal of the

toxic substances from the human body and

be transformed and be rejuvenated. The

rot in the Indian banking system is deep but

can be treated. The Government and the

Reserve Bank of India (RBI), as an analogy

to detox, are pu�ng the lenders through

their paces to cleanse the lenders of the

toxic loans accumulated over a period of

�me. Like an unhealthy mind and body, the

banking system laden with bad loans

cannot fulfil their role of fuelling the growth

of Indian Economy and of financial

inclusion of the masses. The banking

system must be cleanse, the earlier the

be�er.

The figures of bad loans are astronomical

and staggering. Gross Non-Performing

Loans (GNPA) are es�mated anywhere

around INR 10.50 trillion. As Mr. Raghuram

Rajan, Former RBI governor pointed out in

his note to Parliamentary Es�mates

Commi�ee on bank NPAs, a large part of

the bad loans were originated in the period

2006 – 2008 on the back of strong

op�mism in the economy and on the back

of successful project implementa�ons in

the infrastructure space. Larger projects in

infrastructure space were undertaken

during the period 2008 to 2013 which

the banking system enthusias�cally

funded many a �mes overlooking basic

pi�alls. The whole thing ended up as

credit distribu�on rather than credit

underwri�ng & monitoring and with

severe consequences. Refer Chart 2 which

depicts exorbitant increase in exposure of

cases referred to CDR Cell.

Source: CDR Cell

Chart 2

Source: RBI and Bank Annual Reports

Chart 1

Pile up of bad loans

etc. which combined with li�le real equity

funding in the first place and exuberant &

overtly leveraged sponsors resul�ng in

li�le ability to fund cost overruns during

liquidity crisis.

On ini�al signs of stress, the first a�empt of

both the corporate borrower and of the

lenders was to ignore the problem. None

There are several reasons, well known to

all of us, due to which these large projects

funded by the banks faltered viz. delays in

Government approvals, environment

issues, delay in project execu�on, grossly

wrong demand es�ma�on, unforeseen

circumstances like cancella�on of coal

mines & telecom licenses, policy paralysis

2

Withdrawal of special regulatory forbearance by RBI w.e.f. 31-03-15

””

The resolu�on of the NPA problem

also requires greater accountability on the

part of corporates, �mely disclosures in

the case of defaults and an efficient credit

informa�on system. With the help of

stricter accoun�ng and pruden�al standards, the problem of NPAs could be effec�vely

contained in the future.

- Mr. Bimal JalanFormer RBI Governor

5.0 5.3 5.1 4.7

6.4

13.2

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Increase in Gross Advances (Y-o-Y)

Increase (In INR trillion)

Detox1

3NPA gaining momentum

RBI w.e.f. March 31, 2015, withdrew the

special regulatory forbearance of the asset

classifica�on upon restructuring debt

which le� bankers with no incen�ve to

restructure loan the way it used to happen.

Notably, the restructuring under CDR

which peaked in FY 2014 with aggregate

debt of INR 1,320 bn referred to the CDR

forum, declined to INR 440 bn in FY 2015

(with tapering of forbearance) and post FY

2015, no case was referred as a result of

withdrawal of the forbearance.

This resulted in moun�ng pile of toxic

assets (bad loans) in the banking system.

The Regulator forced the banks to make

provisioning for such NPA. Provisioning in

the right earnest began in September 2015

with the Asset Quality Review (AQR),

Prompt Correc�ve Ac�on for Banks

followed by many other stress assets

revitaliza�on measures like Flexible

Structuring (5/25), Strategic Debt

Re st r u c t u r i n g ( S D R ) , S c h e m e fo r

Sustainable Structuring of Stressed Assets

(S4A) to name a few. The effec�veness of

these slew of measures remained subtle as

(i) the magnitude of the problem in the

banking system achieved g igan�c

propor�ons and dwarfing the reliefs

envisaged in these schemes and (ii) the

economic turnaround never arrived, it

always remained around the corner.

Under AQR, RBI audited the banks’ loan

books and iden�fied bad assets. The first

tranche of exercise was completed in

October 2015 and the banks were directed

to come clean in six quarters between

December 2015 and March 2017. Notably,

the GNPA of India’s public and private

banks were ~INR 10 trillion in June 2018.

wanted to ‘bell the cat’, everyone wanted

to dodge the problem. Incremental

funding flowed to address the issues at

hand. Then there were several unrealis�c

and unsustainable rounds of debt

restructuring asked by the corporate

borrowers and granted by the lenders in

the hope that one fine day the economy

will turn around and all will be fine. It is

during these stages credit expansion went

unrestrained with more and more

advances just to plug the gaps and to

recover the interest and principal dues.

The banking system went on to fund the

zombie assets.

Regulators and supervisors across have

taken significant steps to clean and

strengthen the banking sector since the

onset of the NPA crisis. Reducing the level

of NPAs in an effec�ve and �mely manner

must be a key focus for banks with elevated

levels of distress. In principle, this can be

achieved by quickly iden�fying troubled

debt, calcula�ng adequate provisions,

deciding upon a realis�c resolu�on path

and by pursuing that path �mely and

effec�vely.

I see what we have undertaken for cleaning up

the credit culture of the country – in par�cular, the comprehensive regulatory

overhaul announced by the Reserve Bank on

thFebruary 12 for prompt recogni�on and resolu�on of NPAs at banks – as the

Mandara Mount or the churning rod in

the Amrit Manthan or the Samudra Manthan of

the modern day Indian economy. Un�l the churn is complete and the nectar of stability safely secured for

the country’s future, someone must consume

the poison that emanates along the way. If we need to

face the brickbats and be the Neelakantha consuming this poison, we will do so as

our duty; we will persist with our endeavours and get be�er with each trial

and tribula�on along the way...

- Mr. Urjit Patel Governor, RBI

””

Source: RBI and Bank Annual Reports

Chart 3

7.3%

9.5%10.5% 10.8% 11.2% 11.2%

12.8% 12.6% 13.0%

14.6% 14.6%

4.4%

5.9%6.5% 6.7% 6.8% 6.5%

7.7% 7.2% 7.4%8.0% 7.7%

4.0%

8.0%

12.0%

16.0%GNPA & NNPA increase

Gross NPA% Net NPA %

Skeletons out of closets

in the notes to accounts to their annual

financial statements.

RBI found the divergence when it took a

close look at the loan books of all banks

while carrying out the AQR in 2015. While

conduc�ng the AQR, RBI inspectors had

found many instances of the same loan

exposure being classified as bad by one

bank but good by another bank.

In April 2017, RBI no�fica�on stated,

“There have been instances of material

divergences in banks' asset classifica�on

and provisioning from the RBI norms,

thereby leading to the published financial

statements not depic�ng a true and fair

view of the financial posi�on of the bank.”

The regulator advised the banks to make

adequate disclosures of such divergences

4

Table-1: Top 5 Bank - Divergence in reported GNPA – FY16

Source: Bank Annual Reports

Bank Name Divergence in Reported Divergence as a % of Gross NPA (INR bn) reported Gross NPA

Axis Bank 94.78 156%

IDBI Bank 68.17 27%

ICICI Bank 51.05 19%

Yes Bank 41.77 558%

Bank of Maharashtra 30.34 29%

68 bn (27%) and for ICICI at INR 51 bn

(19%). Yes bank reported a staggering

divergence of 558% at INR 42 bn.

Ax is Bank, in FY 2016 reported a

divergence to INR 95 bn which is a

divergence of 156% over the reported

GNPA, while the same for IDBI was at INR

NPA seems to have taken centre stage

at banks. To ensure efficient management

of high risk clients and workout of

non-performing debt, the bankers have

setup dedicated management units

( so me�mes ca l led “St ress Assets

Management Groups”) at banks, which

exclusively deal with high risk clients and

bad debt resolu�on issues and are

separated from the banks’ rela�onship

managers / credit underwri�ng teams.

INR 232 bn in FY 2017, a divergence of 21%

over the reported nos. as per their audited

accounts. Other large divergence were

reported by BOI at INR 140 bn (27%), IDBI

INR 102 bn (23%). Yes Bank again reported

the highest divergence in % terms at 315%

divergence.

Again in FY17, RBI inspectors inspected the

bank and forced the banks to report the

under reported NPA in the books. In fact

the divergences only increased with many

banks repor�ng large divergence. The

largest bank in the country, SBI reported a

humungous under repor�ng of GNPA of

Table-2: Top 5 Bank - Divergence in reported GNPA – FY17

Source: Bank Annual Reports

Bank Name Divergence in Reported Divergence as a % of Gross NPA (INR bn) reported Gross NPA

State Bank of India 232.39 21%

Bank of India 140.57 27%

IDBI Bank 102.82 23%

Yes Bank 63.55 315%

Corpora�on Bank 51.87 30%

”

Increasingly, we are turning towards taking ac�on over such

divergences. It's not that these things get done with

impunity.

- Mr. Raghuram Rajan

Former RBI Governor”

5 Transforma�onal changes - How to deal bad loans

For the first �me in India, with the

introduc�on of IBC, the regime has shi�ed

from the 'Debtor in Possession' to 'Creditor

in Possession'. The Board of the Corporate

Debtor is suspended and the creditors, in

the interim, through their appointed

I n t e r i m Re s o l u � o n P ro fe s s i o n a l /

Resolu�on Professional (IRP/RP), takes

control of the Corporate Debtor under the

Insolvency Process.

With a strict �meline of 180 days with a

maximum extension of another 90 days

'resolve-or-liquidate' diktat, the Code has

received commenda�on, not only from the

Indian industry, but from the global

fraternity at large, including the World

Bank and the IMF. This has materially

contributed to India's 30 places jump in

2018's 'Ease of Doing Business' ranking.

D e b t re s o l u � o n i nv o l v e s s e v e ra l

concessions of varying magnitude from

the lenders and other stakeholders in the

Corporate Debtor's debt resolu�on plan.

There is always a moral hazard of the debt

holders taking a haircut / remission in debt

while the equity stakeholders crea�ng

their value at the expense of the lenders,

as in India, the sponsors con�nued to be at

the helms of affairs of the Corporate

debtor. With sec�on 29A of the IBC, the

defaul�ng promoters and their rela�ves

and connected persons and defaul�ng

companies cannot par�cipate in the IBC

process to retain / take over a company.

The fulcrum of a robust and resilient

banking sector is a comprehensive

bankruptcy regime. It enables a sound

debtor-creditor rela�onship by protec�ng

the r ights o f both , by promo�ng

predictability and by ensuring efficient

resolu�on of indebtedness. A watershed

development in India in this context is the

enactment of the Inso lvency and

Bankruptcy Code (IBC) in May 2016.

Befi�ng a large and a growing economy

of the size of India, Insolvency and

Bankruptcy Code (IBC) is one of the biggest

reforms carried out by India. IBC,

consolidates the numerous erstwhile

recovery laws and their conflic�ng

situa�ons which had made it difficult for

the banks to recover their dues. The

various complex laws used to complicate

t h e m a � e r b y c a u s i n g o b v i o u s

inefficiencies and inordinate delays in

recoveries resul�ng in huge erosion in

values.

Assented by the President in May 2016, the

IBC Act was rolled out by December 2016.

Rules were framed, Resolu�on eco-system

was built, Resolu�on Professional (RP)

standards were made, RP enrolled. The

Code gained momentum in June 2017

when RBI directed the banks to refer 12

very large NPA accounts, aggrega�ng to

almost 25% of the overall bad loans with

the Indian banking system, to be taken to

the insolvency route.

A. Insolvency & Bankruptcy Code

IBC Journey so far -

• Parliament passed Insolvency and Bankruptcy Code in May 2016

• Func�oning of Insolvency and Bankruptcy Board of India from October 2016

• Star�ng December end, cases filed at NCLT

• First case resolved under IBC was of Synergies Dooray, with a 94% haircut

• In June 2017, IBC got momentum when RBI recommended 12 large NPA cases

• First case from RBI’s first list to see takeover is Bhushan Steel; Tata Steel bought it in the CIRP for INR 356 bn and the financial creditors recovered ~64% of their dues

• Government introduced Sec�on 29A & subsequently redefined en��es disqualified from bidding for corporate debtor – Restric�ng defaul�ng promoters/promoter group and defaulters from bidding for companies undergoing resolu�on

IBC has put

an end to crony

capitalism

- Mr. Amitabh Kant

CEO, NITI Aayog

IBC Journey so far - (Cont’d)

• Government set up a commi�ee under corporate affairs secretary Mr. Inje� Srinivas to review IBC

• Homebuyers to be treated as a part of financial creditors

• Lenders to decide turnaround or liquida�on by 66% vote, down from 75%— decision-making made easier

• Withdrawal of applica�on admi�ed under IBC by approval of 90% lenders before publica�on of EOI —exit opportunity to corporate debtors for be�er se�lement outside IBC purview

• MSME promoters can bid for their enterprises, which are undergoing CIRP provided they are not wilful defaulters—big relief to MSMEs

• Securi�es Market regulator SEBI exempted companies under the IBC from adhering to prescribed delis�ng norms with certain riders.

IBC has a lso dr iven massive M&A

momentum in the country; several

domes�c and interna�onal investors

(including private equity firms) have

been ac�vely par�cipa�ng, given the

opportunity to acquire valuable assets

at a�rac�ve prices, with the prospect

of turning around these assets and

g e n e r a � n g h i g h e r r e t u r n s . T h e

apprehension of losing control over their

companies has also prompted many

promoters to come forward and se�le or

resolve their dues with their bankers;

resul�ng in compara�vely be�er recovery

for the banks.

IBC has significantly changed the dynamics

of resolu�on of stressed assets in India and

the outcome of first dozen cases as well as

improvement in recovery due to fear of

losing control over the company, itself is

tes�mony of the first successful step.

Biggest contribu�on of the IBC is that it will

ins�l huge credit discipline amongst the

borrowers and also the lenders would have

far greater credit underwri�ng and credit

monitoring processes and systems in

place.

IBC, s�ll a long way to go…

• IBC has been widely acknowledged as a beacon of hope for creditors who have, for

years, been wai�ng for jus�ce. However, in most of the cases the threshold of 270

days has been breached because of procedural inefficiencies, lack of infrastructure

and other frivolous ma�ers. Though this period has been mired by quite a few

li�ga�ons, which were expected being a new legisla�on, the message has been

conveyed aptly to the corporate world.

• Of the 170 cases resolved �ll June 2018, in 136 cases (80%) NCLT has ordered

companies to be liquidated. Agreed, most of these companies in liquida�on are

either erstwhile BIFR or DRT cases dragging along for long or are small borrowers.

But, it is true while there is compe��ve interest for large and trophy assets, fear of

lack of interest looms over smaller assets. In some cases, companies have received

only a single bidder’s interest, but lenders have been unable to approve resolu�on

plans as the bid values are much lower than the liquida�on value. Here again,

lenders have preferred the liquida�on route—however, it is quite probable that

the liquida�on process will extend for months and the value realised at the end

maybe further eroded from current es�mates. Hence, there should be a

framework to enable conclusive decision-making where at least there is one bid on

the table, even if the perceived value maybe higher.

Focus on

cases coming under

Insolvency and Bankruptcy

Code (IBC) should be on

resolu�on and

not liquida�on to

maximise the value of

corporate debtors.

- Dr. M.S. Sahoo

Chairperson, IBBI

RBI's

Stressed Assets Resolu�on

Framework would

improve the credit culture

and the trust between

counter par�es in

a transac�on. This will

be cri�cal in ensuring

sufficient incen�ves for

the banks to effec�vely

carry out their role as

delegated monitors

of loans

- RBI

IBC, s�ll a long way to go… (Cont’d)

• A typical corporate debtor has mul�ple lenders with asymmetrical security charges spread across various assets of the Corporate Debtor and as collateral. IBC disregards differen�al rights of the security holders across the same asset class that lenders having funded differen�ally. This results in conflicts amongst lenders o�en delaying the process and many a �me with different levels of risk and hamper liquidity in the debt market.

Promoter’s “Skin in the Game”

• Minimum requisite RP 4 ra�ng score

in Independent Credit Evalua�on

by external credit ra�ng agency is

achieved as per the Circular

• There is realis�c changes of the

corporate turning around which the

debt resolu�on plan is evolved.

RBI further directed the lenders, for debt

resolu�on in all cases with exposures of

above INR 20 bn within 6 months, failing

which reference to CIRP shall be ini�ated.

According to market es�mates there are

close to 70-80 companies with aggregate

debt of ~INR 3 trillion which have been /

are being referred to IBC.

Prac�cally in the market place, the lenders

maybe are more inclined towards either

assignment of debt to ARCs (preferably

now on 100% cash basis) or for resolu�on

under IBC than debt restructuring. This is

also a fallout of the fear of inves�ga�ve

agencies for the banking officials who

prefer to opt for op�cally transparent path

even at the cost of recovery maximisa�on

for the banks.

RBI, to align the resolu�on mechanism

with IBC, in February 2018, withdrew all

debt resolu�on frameworks such as the

CDR, the Flexible Structuring of Exis�ng

Long Term Project Loans, SDR, Change in

Ownership outside SDR, 5 by 25 scheme

and S4A. The Joint Lenders Forum—as an

ins�tu�onal mechanism for resolu�on of

stressed assets was also discon�nued.

These guidelines have similar implica�ons

as that of IBC, i.e., to drive a be�er

corporate credit culture in the country,

primarily by giving more powers to the

lenders and disallowing defaul�ng

promoters (as defined in Sec�on 29A of the

IBC) from ge�ng their business back in

change in control situa�ons. However, as

against the IBC, promoters can be

stakeholders in a resolu�on plan.

With regard to resolu�ons of stressed

assets under Revised Framework, lenders

would undertake“Typical Restructuring”

only when -

• Criteria of minimum repayment of 20%

of O/s principal debt under Resolu�on

Plan required for asset classifica�on up

grada�on is achieved - Ensures

B. RBI's Stressed Assets Resolu�on Framework – February 2018

Despite being a rela�vely new legisla�on, IBC has undergone several amendments within a short span of �me in a bid to eradicate any loopholes and/or remove ambigui�es that may hamper the smooth and efficient func�oning of the Code. The Regulators and the NCLT have been quick to bring the requisite changes for smooth func�oning and implementa�on of IBC process.

The IBC 2016 has completely changed the en�re architecture of insolvency and bankruptcy laws and proved to be a milestone in the Indian legal framework. In

the long run, IBC will bring a good structural change that could strengthen the banking system. It will create a sense of transparency and spur investor confidence in the financials of banks while changing the way banks do business. Increased prudence is expected in lending and it is likely to improve diligence and appraisal while funding large projects. At the same �me, the corporate debtors too will maintain greater credit discipline, and shall be judicious and prudent in taking leverage and will be more cau�ous with loan covenants as the tolerance for defaults is lowered considerably.

6 Tough �mes calls for tough measures

Presently, there are twelve banks, eleven

in the public sector and one in the private

sector, under the Reserve Bank’s Revised

PCA Framework, with PCA having been

imposed on them between February 2014

and January 2018.Impairment in the asset

quality of these banks remains high,

necessita�ng sizeable provisioning and

deleveraging, thereby constraining not

only their capacity to lend but also the

d e s i ra b i l i t y o f t h e i r l e n d i n g a n d

acceptance of public deposits. Profitability

and capital posi�on of these banks have

seen erosion.

RBI in i�ated a Scheme of Prompt

Correc�ve Ac�on (PCA) in 2002 in respect

of banks which hit certain regulatory

trigger points in terms of Capital to Risk

Weighted Assets Ra�o (CRAR), Net Non-

Performing Assets (NNPA), and Return on

Assets (RoA). PCA framework was revised

in April 2017, wherein, apart from the

capital, asset quality and profitability,

leverage is being monitored addi�onally.

The en�re thrust of the current PCA

framework is to prevent further capital

erosion and more important ly, to

strengthen them to the point of resilience

so that they can, as soon as possible restart

their normal opera�ons.

A. Prompt Correc�ve Ac�on

Chart 4

Source: RBI and Bank Annual Reports

From above table, it may be noted the

GNPA of the PCA PSBs has alarming

increased from 12% of the advances in FY

2016, in 3 years, to 21% of the advances in

FY 2018 as against 12% GNPA for non PCA

PSBs in FY 2018. Notably the gap in the

reported GNPA between the PCA PSBs and

Non PCA PSBs has increased to > 8% in FY

2018 from 4% in FY 2016.Macro-stress

tests on PCA PSBs suggests worsening of

their GNPA ra�o from 20.6% in March 2018

to 22.3% by March 2019, with 6 PCA PSBs

likely experiencing capital shor�all.

An analysis of the NNPA ra�os of PCA PSBs

vis-à-vis non-PCA PSBs revealed that the

NNPA ra�o of PSBs under PCA was around

12 per cent in March 2018 (Chart 5). The

gap between the CRAR of PCA PSBs and

non-PCA PSBs has widened over the years

(Chart 6). Although non-PCA PSBs are also

loss-making currently, the extent of losses

made by PCA PSBs has increased further

over the years (Chart 7). Leverage ra�o of

PCA PSBs has been deteriora�ng steadily

since September 2016 (Chart 8).

12.09%

16.03%

20.56%

8.20% 8.90%

12.28%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Gross NPA % of PCA PSBs vis-a-vis Non PCA PSBs

PCA PSBs Non PCA PSBs”

Imposi�on of Prompt Correc�ve Ac�on

(PCA) was essen�al for the revival of financially weak

banks and deepening reforms in the banking

space

- Mr. Viral V AcharyaDeputy Governor, RBI”

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IBC Progress in numbers so far

Cases admi�ed into NCLT

Overall, 977 cases has been admi�ed up to June

2018. Of these, opera�onal creditors have filed

maximum cases (447 cases) followed by financial

creditors (381 cases) while 149 cases has been filed

by the Corporate debtor itself. (Refer Chart I)

Chart I

Source: IBBI

Q1 FY 19 has seen the highest number of cases

admi�ed into NCLT. It is seen that there is steady

state quarter on quarter flow of Corporate Debtors

being admi�ed into NCLT. A snapshot of quarter

wise cases admi�ed is provided in the chart II:

Cases Resolved by NCLT

Of these cases, a total of 170 cases have been

concluded �ll June 2018, while the rest 807 cases

are under various stages of either resolu�on or in

appeal in the courts. In the cases concluded, 34

cases have been closed by way of resolu�on (Refer

Chart III and Table I) while the balance 136 cases

have gone into liquida�on.

Chart III

Source: IBBI

Chart II

Source: IBBI

Analysis of Resolved Cases

Sector wise key indicators for CIRP yielding resolu�on cases as on June 30, 2018.

Auto Ancillary 2 1.1% 9.9 0.7 7.3% 0.3 2.9%

Real Estate 1 2.9% 25.3 22.5 88.8% 3.3 13.0%

Infra 2 1.8% 15.8 16.5 104.5% 3.2 20.1%

Cement 1 0.2% 1.3 1.0 75.2% 1.2 91.4%

Hospitality 2 0.1% 0.7 0.4 62.7% 0.4 51.3%

Metals 8 90.0% 775.5 424.6 54.7% 188.7 24.3%

Sector No. of % FC FC Recovery Recovery Liquida�on Liquida�on cases Claim claims Amt. % Value Value %

Miscellaneous 18 3.8% 33.1 12.4 37.4% 13.0 39.2%

Total 34 100.0% 861.6 478.1 55.5% 210.0 24.4%

Of the 34 resolved cases, metals sector comprising

of 8 cases accounted for 90% of the overall

financial creditor claims. Sector wise snapshot of

cases resolved is provided in Chart IV.

Chart IV

Source: IBBI

Table I

Of these cases resolved, financial creditors have

recovered ~55% of their claims as against the

es�mated liquida�on value of ~24%. Though early

days and with just a few cases being concluded, s�ll

the recovery in Real Estate, Cement and Hospitality

space has been good. Most notably, with the

revival witnessed in the steel sector there were

compe��ve bidding for the large steel assets which

went under the hammer. Metal accounts (mostly

steel) overall registered healthy recoveries of 55%

and the banks were able to overall reverse

provisions held by them.

Source: IBBI

Source: IBBI

*Data is skewed for Infra sector on account of full se�lement between lenders & exis�ng promoter of MBL Infra.

Chart V

*

Auto

Ancilla

ry

So, far liquida�on orders has been passed in 136

cases out of 170 cases concluded by the NCLT,

which makes it 80% of the cases went into

liquida�on. It is per�nent to note that most of

these cases are those which were registered for

long with the erstwhile BIFR and under the various

DRTs. A snapshot of quarter-wise liquida�on cases

is provided in Chart VI:

Cases under Liquida�on Chart VI

Source: IBBI

Voluntary Liquida�on- Non Defaulters

The provisions of voluntary liquida�on earlier

covered by the Companies Act, 2013 is now

governed by the provisions of IBC. The provisions

provide for exit op�on for a non-defaul�ng solvent

company to close down. So far 214 cases have gone

into voluntary liquida�on.

Progress on the Top 40 cases

The analysis is based on the progress of country's top 40 largest bankruptcy cases, culled from the RBI's

ini�al list of 12 large corporate defaulters and second list of 28 corporate defaulters. The 40 Companies

owed an aggregate amount of at least INR ~5.5 trillion, based on financial creditor claims and debtwire

report comprising of approximately 50% of the overall distressed debt pile in the Indian Banking system.

Only 6 companies with financial debt of ~INR 1.25 trillion have got resolved (at least to the extent of ge�ng

approval of the commi�ee of creditors) with a recovery of ~43% to financial creditors. Average resolu�on

period for 6 resolved cases has been 366 days. (Refer Table – II)

Table II: Resolved cases from Top 40 cases����� (In INR bn)

*Pending NCLT approval as on cut-off date i.e. 15-10-2018Source: IBBI

Chart VII

Source: IBBI

Total 366 1,247 538 43.1%

Orchid Pharma Ltd Ingen Capital Others 17-08-17 17-09-18 396 34 10 29.5%

Monnet Ispat & Energy Ltd Aion-JSW Metals 22-07-17 24-07-18 367 102 25 24.0%

Amtek Auto Ltd Liberty Auto 24-07-17 25-07-18 366 123 44 35.7% House Ancillary

Electrosteel Steels Ltd Vedanta Metals 21-07-17 04-06-18 318 132 53 40.4%

Alok Industries Ltd RIL-JM Tex�le 18-07-17 15-10-18* 454 295 50 16.9%

Bhushan Steel Ltd Tata Steel Metals 26-07-17 15-05-18 293 560 356 63.5%

Corporate Resolu�on Sector Admission Plan approval No of FC-Claims Recovery Recovery Debtor Applicant date date days admi�ed (%)

Jyo� Structures Ltd EPC 04-07-2017 82 Liquida�on order stayed by NCLAT

Corporate Debtor Sector Admission FC-Claims Current Date admi�ed Status

Era Infra & Engg Ltd EPC 08-05-2018 122 Ongoing

ABG Shipyard Ltd Others 22-08-2017 181 Ongoing

Jaypee Infratech Ltd Construc�on 09-08-2017 234 Ongoing

Essar Steel Ltd Metals 02-08-2017 494 Ongoing

Bhushan Power & Steel Ltd Metals 26-07-2017 472 Ongoing

Lanco Infratech Ltd EPC 07-08-2017 453 Headed for Liquida�on

Videocon Industries ltd Consumer 06-06-2018 572 Ongoing

IVRCL Ltd EPC 23-04-2018 92 Ongoing

Ruchi soya industries ltd Consumer 15-12-2017 91 Ongoing

Nagarjuna Oil Corpora�on Ltd. Others 25-07-2017 80 Ongoing

Castex technologies Ltd Auto Ancillary 20-12-2017 73 Ongoing

SEL manufacturing Company Ltd Tex�le 14-05-2018 72 Ongoing

Coastal Projects Ltd EPC 05-01-2017 72 Ongoing

EPC Construc�on India Ltd EPC 20-04-2018 70 Ongoing

Monnet Power Company Ltd Power 23-02-2018 59 Ongoing

East Coast Energy Private Ltd Power 03-04-2018 40 Ongoing

Asian Colour Coated Ispat Ltd Metals 20-07-2017 39 Ongoing

Metalyst forgings Auto Ancillary 15-12-2017 38 Ongoing

Wind World (India) Ltd Power 20-02-2018 38 Ongoing

Unity Infraprojects Ltd EPC 20-06-2017 34 Headed for Liquida�on

U�am Galva Metallics Ltd. Metals 11-07-2018 32 Ongoing

Ushdev Interna�onal Ltd. Others 14-05-2018 32 Ongoing

ARGL Ltd Auto Ancillary 16-03-2018 12 Ongoing

Total 3,483

Of the cases admi�ed, 24 cases with a debt of ~INR 3.5 trillion are undergoing resolu�on or headed for liquida�on. Of these cases, 13 cases have exceeded the 270 days prescribed �melines with an average �meline of 429 days (as on cut-off date i.e. 15-10-2018) and s�ll ongoing.

Table III: Cases Admi�ed – Ongoing/Under Appeal/Under Liquida�on ��(In INR bn)

Balance 10 Corporate Debtors with aggregate Financial Claims of ~INR 0.8 trillion have either not been referred yet or are

pending admission in NCLT as on October 15, 2018.

Source: IBBI

PSBs as a group posted net losses because

of high provisions to take care of their bad

assets. Provision and con�ngencies which

were INR 0.42 trillion in December 2015,

has been increasing and peaked at

INR 6.09 trillion in June 2018 (of course

Mar quarter generally register higher

provisions). It is per�nent to note that

provisions had reached INR 3.51 trillion in

September 2017. (Refer chart 9)

Most of the Public Sector Banks (PSBs)

have large NPA on their balance sheets. As

of September 2017, gross NPA ra�o of all

banks was as high as 10.2% of the total

loans advanced by the banks then. The

volume of bad debt had hit nearly INR 9.46

trillion at the end of September 2017. Out

of this the share of public sector banks was

pegged at INR 8.25 trillion in the pile of bad

loans. Further, in 8 of the last 11 quarters,

B. Bank Recapitaliza�on

Chart 9

Source: RBI

trillion in October 2017 to be injected over

two years i.e. FY 17-18 and FY 18-19 so as

to par�ally improve the balance sheets of

PSBs and put them on path of recovery.

Under the said Package, Government has

already infused INR 0.88 trillion in January

2018 and the balance is likely to happen

this fiscal year.

To put it in perspec�ve the current Bank

Recapitaliza�on Plan at INR 2.11 trillion

i s more than the ag gregate PBSs

capitaliza�on put together in the last

31 years (between 1985-86 and 2016-17),

at close to INR 1.5 trillion. This is massive

bank recapitaliza�on plan and we never

know if this is adequate enough.

Deteriora�ng health of PSBs along with

balance sheets saddled with high NPA and

profitability decline / losses has limited

their ability to extend new credit, and that

has affected the bank credit growth

resul�ng in economic slowdown. Bank

credit growth in FY 2016-17 was 5.1 %,

which was the lowest since 1951.

Recapitalisa�on of banks has been a

deliberate policy response the world over

to repair banks’ balance sheets and

poten�ally increase their ability to expand

their credit, including in periods of stress.

To cleanse the bank balance sheet and to

address the concerns of capital starva�on

faced by PSBs, Government of India

announced a decisive package of INR 2.11

Recapitalisa�on

will restore the

health of banking system,

It bodes us well that

this step has been

taken in a �me of

sound macroeconomic

condi�ons for the

economy on other

fronts

- Mr. Urjit Patel

Governor, RBI

lunch, the management has to be made

accountable and has to undergo changes,

credit underwri�ng and credit monitoring

be strengthened to plug the gaps,

inefficient PSBs be consolidated, etc. etc.

While bank recapitaliza�on will almost

certainly impact the fiscal deficit, this

needs to be accompanied by an aggressive

recovery of loans so that moral hazard

doesn't set in. Further, there cannot be free

State Bank of India (SBI) with itself along

with the merger of Bhar�ya Mahila Bank

Ltd. In the next leg of consolida�on in the

PSBs, recently the government announced

the mergerof Bank of Baroda, Vijaya Bank

and Dena Bank. The approach of the

Government has been to tuck a weak Dena

Bank with a rela�vely strong Bank of

Baroda and offer Vijaya Bank as a

transac�on sweetener.

The Raghuram Rajan Commi�ee, in

general, has recommended encouraging,

but not forcing, consolida�on amongst

PSBs. The Commi�ee has observed that

given the fragmented nature of the Indian

banking system and small size of the typical

bank, some consolida�on may be in order

for banks that aim to effec�vely compete in

the market place.

The Union Cabinet on June 15, 2016

approved the merger of 5 subsidiaries of

C. Bank Consolida�on

Our role

really is not only to

find a solu�on but

also to create

an ins�tu�onal mechanism

to make sure that

what happened in

the past is not

repeated

- Mr. Arun Jaitley

Finance Minister

Chart 10

Source: Union Budget documents, RBI and CAG

FY Recap Amount (INR in Bn)

FY 94 57

FY 95 44

FY 96 9

FY 97 15

FY 98 27

FY 99 4

FY 00 -

FY 01 -

FY 02 13

FY 03 8

FY 04 -

FY 05 -

FY 06 5

FY 07 -

FY 08 100

FY 09 19

FY 10 12

FY 11 201

FY 12 120

FY 13 125

FY 14 140

FY 15 70

FY 16 250

FY 17 250

FY 18 2110

Is merger by itself a solu�on?W h i l e m e r g e r i n P S B s , r e d u c e s compe��on amongst the banks having a common owner with largest stake and benefits from best culture, prac�ces and systems from the stronger and larger bank into which the weak bank is ge�ng merged, consolida�on by itself cannot be seen as an immediate solu�on to the stress

being faced by the banking sector. Mergers will do li�le to resolve the issue of a high level of stressed assets on the books of banks and will not result in any meaningful release of capital. The merged en�ty will require capital support from the government; otherwise such a merger would not improve their capitalisa�on profile.

Notably most of the banks which reported

large divergences in NPA have seen change

in top leadership. Change is coming to some

of India’s top private banks as regulators

shunt aside top leaderships in banks in its

bid to improve corporate governance and

good repor�ng culture and to come to grips

with a problem of bad loans.

It is believed that RBI by cu�ng short the

terms of the chief execu�ve of Axis Bank

D. Cracking the whip

and not giving another term at Yes Bank,

ostensibly as these bankswere found

to have a higher divergence of bad

assets than ini�ally reported, has signalled

t h a t b a n k m a n a g e m e n t a r e t o

be held accountable. That’s a posi�ve

development for bank shareholders. ICICI

Bank’s longstanding CEO Chanda Kochhar

had recently stepped down.

7 LIC – IDBI Bail out saga

There was a �me when Industr ia l

Development Bank of India (IDBI) occupied

a unique place as the top Development

Financial Ins�tu�on (DFI) in the country

that helped finance large industries and

established many subsidiaries, the

prominent among them being Small

Industries Development Bank of India

(SIDBI), erstwhile IDBI Bank and Technical

Consultancy Organiza�ons (TCOs)

But, unfortunately, due to moun�ng stress

and resultant upsurge in NPA’s over the

years, more than a quarter of IDBI’s loan

book turned bad – a level last seen in the

sector in 1960’s thereby raising an

immediate need for whip-round to meet its

regulatory capital norms.

Notably, the Government had already

infused INR 0.11 trillion capital into IDBI

(over and above the INR 22 trillion added

between FY15 and FY17) under the

Recapitaliza�on Package to help the

Lender maintain the regulatory minimum

capital adequacy.

Government to ease its own burden of

contribu�on of capital in the 21 PSBs have

roped in the largest Insurer, Life Insurance

Corpora�on of India (LIC), to step in as the

white knight and bail out IDBI. LIC will

acquir controlling stake of 51% in IDBI by

infusing INR 0.13 trillion and will make a

public offer as per SEBI guidelines.

From LIC’s perspec�ve this deal would

have limited impact as is manages ~ INR 23

trillion of policyholder funds, the exposure

of INR 0.13 trillion is small. Further, for LIC

this may be a reasonable level of risk as

IDBI Bank may have already provided for

most of the bad loans and as seen in the

past, any investor who enters when the

worst is nearly behind tends to make the

maximum return post a turnaround.

As for IDBI, LIC bringing in capital by

acquiring majority control, Government

a l s o p r o v i d i n g c a p i t a l u n d e r

recapitaliza�on and the bank making

re co ve r i e s u n d e r I n s o l ve n c y a n d

Bankruptcy Code, all coming together shall

imminently support turnaround and put it

back on growth path.

The RBI

ac�on sends a strong signal

to boards to take their jobs

a lot more seriously when it

comes to evalua�ng CEO

performance and the

ques�on of succession

planning

- Mr. T.T. Ram Mohan

Professor of Finance and

Economics, IIM Ahmedabad

8Current NBFC Liquidity Issues

overall NBFC sector, the la�er is facing the

risk of contagion in the form of trust deficit

situa�on from its financiers.

Certain categories of debt mutual funds

which were primarily providing the CPs to

the NBFCs had in the a�ermath of IL&FS

crisis, turned cau�ous when overnight AAA

rated was downgraded and which coupled

In the wake of recent IL&FS crisis led by

series of credit default, NBFCs as a space

stare at near term liquidity crisis. The

situa�on highlights how financial trouble

at a single Financial Ins�tu�on in India can

trigger a domino effect across the en�re

financial system. While there is no direct

correla�on between the crisis at IL&FS and

1.3

2.2

3.1

5.4

5.7

6.6

6.9

7.4

7.4

8.2

8.8

9.5

9.7

9.8

9.8

10.0

10.2

10.8

12.2

12.4

13.0

Indian Bank

Bank of Baroda

United Bank (I)

I O B

Bank of Maha

Andhra Bank

Dena Bank

Oriental Bank

Pun. & Sind Bank

Vijaya Bank

Bank of India

Canara Bank

Union Bank (I)

UCO Bank

St Bk of India

Central Bank

Syndicate Bank

IDBI Bank

Punjab Natl.Bank

Allahabad Bank

Corpora�on Bank

% Stake of LIC in PSBs as on Mar 2018

% stake

Source: CapitalinePlus

Grim situa�on

IDBI Bank has one of the highest NPA ra�os among public-sector banks, at 30.78% as

on June 2018. In absolute terms, gross bad loans stand at INR 0.58 trillion. The state-

owned bank is under the RBI’s PCA

Chart 11

The government

will take all measures to

ensure that adequate

liquidity is provided to

the NBFCs, the

mutual funds and

the SMEs.

- Mr. Arun Jaitley

Finance Minister

9Challenges

The major

reason for the crisis

being faced by banks is

the absence of a

developed bond

market in the

country

- Mr. Rajiv Mehrishi

Comptroller and Auditor

General of India (CAG)

serious challenges to find enough

takers for the humongous nos. of mid

and small sized companies undergoing

the hammer of auc�on. We carefully

have to navigate through this so that

these large no. of companies do not

end up being sent to liquida�on.

• While steel sector is witnessing strong

recovery in IBCs. Power sector, which

has a large no. of companies with large

NPAs of INR 1 trillion in absence of long

term PPAs and coal linkages may find

few takers else the haircut would be

very steep. It is a challenge to think

differently, as power demand to

absorb these capaci�es is bound to

come and these power assets would

have reasonably higher value than as

present. Challenge is how to protect

and maximize the recovery value for

the current lenders, when the power

demand scenario improves, than

maximising returns for the prospec�ve

bidders of these power assets.

• One of the reasons, amongst several

o t h e rs , fo r s u c h l a rge N PA i n

Indian Banking System is s�ll not on calm

waters and has not completely healed

from the current bad loan crisis. There are

several aspects of the banking system

which requires tough measures and tac�ul

naviga�on with firm resolve from all

stakeholders to transform into a strong and

revitalized banking.

• Banking recapitaliza�on must not be a

dole from tax payers’ money to the sick

PSBs it must be accompanied with

banking reforms and consolida�on.

We clearly need to answer, do we need

21 PBS having common ownership and

compe�ng fiercely with each other in

the market place. In this current cycle

t h i s wa s b a d l y a b u s e d by t h e

borrowers.

• While the heavy li�ing in terms of bad

loan recogni�on may be done and

banks provisioning for these NPA

maybe beginning to taper off, there is

s�ll a long way to go on the efforts for

recoveries from the NPAs. IBC as a new

law is just beginning to se�le with a

few large and trophy assets witnessing

compe��ve bidding interests and

good recovery, but there would be

with usual September end redemp�ons,

led to freeze in rollover or new issuances to

the NBFC space.

It is a dynamic and evolving situa�on and

RBI and other stakeholders are doing their

best and will con�nue to take the requisite

measures to ease the liquidity situa�on

with the NBFCs. NBFCs are an important

clog in the en�re financial system as it

provide last mile deep reach with the small

and retail borrowers. NBFCs cater to this

large space with greater efficiencies as

compared to even the larger banks. NBFCs

also provide credit to MSME where

typically banks may not be comfortable for

a number of reasons or alternately in other

spaces where banks have restric�ons in

lending such as capital market exposures. It

is therefore important to ease the situa�on

with the NBFCs, at the earliest, so as to see

this cons�tuent of the financial markets

flourish and con�nue to cater its clientele.

In the immediate term, the crisis provides

an opportunity to the banks, which are

flush with l iquidity and have l i�le

opportunity for corporate lending, to take

over selec�vely high quality assets of

NBFCs and create a healthy book. RBI has

announced OMOs and lenders led by SBI

have already announced buyout of NBFC

assets which is a win-win situa�on for both.

10Opportuni�es

credit discipline with the borrowers.

Should India out of this current NPA

problem get greater Credit discipline, in

future, this by itself would be a huge

posi�ve.

Rejuvenated and stronger banks post the

healing from all the wounds of bad loans,

would certainly fuel the next phase of the

na�on building, which is long, long road

ahead and shall con�nue to foster the

financial inclusion of the en�re na�on.

Measures sug gested needs to be

implemented effec�vely, else then the

banking system would con�nue to reel

under the mountain of debt pile. These

dynamics during the crisis, although

pa infu l , wou ld cer ta in ly improve

produc�vity / efficiency in the longer run.

This cleansing hypothesis should have a

permanent and las�ng impact of be�er

credit underwri�ng and monitoring with

the lenders and should impart greater

The successful

resolu�on of issues of

banks' non-performing

assets (NPAs) or bad

loans through

the Insolvency and

Bankruptcy Code (IBC)

will help deepen

India's corporate bond

market that is

highly concentrated in

AAA rated bonds

- ASSOCHAM

infrastructure funding has been these

infrastructure assets have really long

25-30 years of earning life cycle having

long gesta�on periods, gradual ramp-

up, then long steady state mature

period before finally tapering off.

Funding of these projects, in the last

investment cycle, witnessed complete

mismatch wherein these long term

projects got funded with 10-15 years

funding. Banks do not have this long

dated deposits and challenge is to

develop matching liability profile at the

banks. Bond markets needs to be

developed to provide a securi�za�on /

sell down market for the assets which

have seen through the project

execu�on risks and have started

ramping up cashflows.

• With the introduc�on of IBC lending in

sectors with heavy physical assets,

shall going forward, lender would be

comfortable. But in asset light sectors

like EPC, Trading business, Low value

added business Agro-processing,

Gems and Jewellery etc. banks needs

to figure out mechanism of securing

their lending. Basically, in current

cycle, working capital oriented lending

did not find any assets to make

re cove r y. C h a l l e n ge to d ev i s e

relending to these space by controlling

& monitoring the movement of the

underlying asset and also of the

cashflows of the borrower company.

• Consor�um lending as a concept needs

revisi�ng as it tremendously slows

down decision making and o�en

borrower lands up in trouble for want

of consensus and �mely decision

making amongst its lenders. Concept

of lead bank apprising & monitoring

the project execu�on and cashflow

monitoring with others being just

par�cipants as co-sharing of rewards

and r i sks (Par�c ipant) may be

developed. In the alterna�ve, a variant

could be top 3 banks in the consor�um

as decision makers, with others just

being par�cipa�ng banks. This will fix

accountability (on lead bank) and shall

greatly reduce the burden (cut

duplica�on) on the par�cipa�ng

banks. Hopefully fewer burdens should

result in more proac�ve monitoring of

lending accounts.

• Ra�ng Agencies has le� a lot to be

desired. Instead of being able to

foresee the trouble coming in most

instances ra�ng agencies down-graded

only a�er defaults actually happened.

IL&FS episode is fresh. These agencies

need to develop robust ra�ng models

and process to match the current

requirements. It has to have its own

secondary intelligence and cannot be

depended on the informa�on as

provided by the corporate which is

rated.

11Conclusion

sustaining high and inclusive growth.

Suppor�ve pruden�al regula�ons aimed

at promo�ng financial innova�ons without

co m p ro m i s i n g s a fet y o f fi n a n c i a l

transac�ons, integrity of financial markets

and stability of the financial system are

impera�ve to faci l i tate this s i lent

revolu�on.Banks are the key financial

intermediaries in India.

Asset stress has hampered credit growth at

a �me when the financing needs for

accelera�ng the pace of economic ac�vity

have emerged as the highest priority.

T h e c o m b i n a � o n o f l i n k i n g t h e

performance of the banks with the

quantum of funds injected through

recapitalisa�on is expected to bring in

d i s c i p l i n e a n d d i s i n c e n � v i s e t h e

recurrence of forbearance and stress.

In the fast changing financial landscape,

banks will need to rework their business

strategies. As regards stress in the banking

system, banks can take advantage of the

IBC to clean up their balance sheets and

improve performance on a sustained basis

to remain compe��ve.

In conjunc�on, banks need to strengthen

their due diligence, credit appraisal and

post-sanc�on loan monitoring to minimise

the risks of such occurrence in future. In an

increasingly interconnected financial

system, banks and financial ins�tu�ons

can benefit each other by improving

corporate governance. This is more in the

nature of self-regula�on with safeguards

to ensure that principles and rules laid

down by the regulators are followed

conscien�ously.

To sum up, the Indian economy is

undergoing structural transforma�on. At

this juncture, reaping the full benefits of

demographic, technological and financial

developments appears cr i�cal for

The two-pronged

approach in the form of

the IBC, 2016 and the

recapitalisa�on of banks is

expected to aid a faster

clean-up of banks’

balance sheets.