For last couple of months or a year there is something or other news in any of the dailies, economic news magazines etc. on the above issues or subjects. It’s really taken a big gestation period for this issue of Bad Loans & Non-Performing Assets (NPA) to be discussed in such detail openly and action taken to recover the same are under review. This disease was known to the several institutions in the economy but there was an element of giving a wink and moving ahead with some not too logical restructuring the bad loans; some time new loans to cover the bad one; capital infusion; some too humble settlement. This act of ignoring the disease has led to RBI reporting that 29 public sector banks (PSBs) had to write off ` 1.14 lakh crore as bad debts from 2013 to 2015.

India Ratings, a Fitch associate, estimates that one-fifth (21% precisely) of the total bank credit is stressed. Total bank credit at the end of March 2016 stands at ` 70 trillion (lakh crore). India’s bad-loans problem looks much worse than lenders have been willing to acknowledge, heaping pressure on banks’ profits and further tightening the screws on distressed debt that could be bigger than New Zealand’s $170 billion economy (ET / 13the May’16).

How this pile up of bad loans happened can be traced to the period when banks were nationalized and stress was put on industry and investments, the political interference and objectives, the lack of a determined attitude of the management of banks to take adequate and timely measures to recover the bad loans coupled with inadequate legal support; the regulator’s role till recent past also puts lot of doubts on a relook at the system. The damaging effects of the vicious processes started showing in late eighties and early nineties in form of perennially loss-making banks, the huge debt burden of sick industries, the write off of bad loans, individual defaults of certain houses appeared to form bulk of the defaults. As these indicators started showing, the RBI Circulars on recognizing NPA, provisioning of bad debts.

On the legal front the advent of BIFR, SICA, and DRTs started coming up under various statutes. The Recovery of Debts Due to Banks and Financial Institutions Act of 1993 (RDDB Act) was brought in with the objective of addressing the bad loan recovery issues of Banks as the available civil suit processes were not solving the issue with the lengthy time involved. But this again was not found adequate for the purpose with no limit to the disposal period, so a special act was passed by the Parliament on 17th December, 2002, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act , 2002 ( SARFAESI Act) with the intent “ enactment of a new legislation for securitization and empowering the banks and financial institutions to take possession of the securities and to sell them without the intervention of the court”. The Banks though got the empowerment, the effect of these Acts were restricted by certain factors so these laws could not arrest the growth of bad loans with its perceived recovery edge.

The legal support system for administration of the RDDB Act and later SARFAESI Act is heavily dependent on the Debt Recovery Tribunals (DRT). In case of SARFAESI Act Sec. 17 states ‘Right to appeal (1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an application along with such fee, as may be prescribed to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken…” The Act also specify that the Applications u/s 17(1) of the Act will be “dealt with by the Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from the date of such application:… however, the total period of pendency of the application with the .., shall not exceed four months…”Now when we see the reality, the 33 DRTs across the country ( at least 3 have got no regular Presiding Officer ) had a pendency of over 24,500 in securitization applications and of over 68,500 in original applications at the end of January 2016. As per TOI Report of March 14, 2016 there are 3 DRTs in Mumbai and together, they disposed of just 32 securitisation applications in January, 2016. During the period April 2015 to February 2016, the Mumbai DRTs disposed of 447 securitisation applications in all. This obviously defeats the purpose of the Act to “expedite” attachment and possession of assets by Banks. Along with the delaying tactics of defaulters using point of technicalities the proceedings before the tribunals in many cases are dragged on for years.

As per Sec. 34 of the SARFAESI Act “No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a DRT… and no injunction shall be granted by any court or other authority…” But in reality, the District Courts, Consumer Forums and at time High Courts every institution is taking up SARFAESI against cases and there are huge number of stay orders being issued by these institutions across the country to stall the recovery processes initiated by Banks /NBFC / ARCs inspite of so many High Court judgements restraining such practices. Business Standard review of database of one of the credit rating agencies , CIBIL, revealed that up to December, 2015 the 56 lending institutions who are associated with CIBIL were fighting in courts to recover at least ` 1.86 lakh crore.(ref. Business Standard of April 4, 2016) So if the judiciary is having the gap in understanding of the objective behind this legislation then can the law achieve its purpose!

As per the SARFAESI Act the secured creditors can apply u/s 14 of the Act before the Chief Metropolitan Magistrate or District Magistrate for seeking assistance in taking physical possession of the mortgaged property. The said provision of the Act is to enable the banks / financial institutions to take possession of the mortgaged property without intervention of the Courts but in practice it is a common issue that in certain parts of the country the DM Orders are not issued at all or are issued in miniscule percentage after a delay of 1-3 years of the application been done by the secured creditor thus virtually the very purpose of the law gets over. This fact do not change even so many judgements or directives been passed by the High Courts. If at all any order is received then the role of Police stations, under whose jurisdiction the property lies, comes in play. It is a night mare for the secured creditors to get the police assistance to complete a possession activity. Result is a number of Orders received are lying unexecuted with banks and ARCs.

There are innumerable other hurdles also in the process but the end result is one: delay, delay and more delay in the recovery process which ultimately help the defaulters in the process. Just one glaring example, the North Goa Collector reportedly put more than 100 dates to pass the possession orders under SARFAESI Act that too after High Court orders, for the property of Vijay Mallya at Goa: Kingfisher Villa!

Thus, it can be seen that there is a strong law but bad execution so the end result will show the process is ineffective. With the analysis on bad loans and NPA it also came out after some large defaulters surfaced on Parliamentary question and RBI Asset Quality Review of banks’ that there are certain defaulters who are according to the Reserve Bank of India are “willful defaulters”. A wilful default is deemed to have occurred in any of the following four circumstances: When there is a default in repayment obligations by the unit (company/individual) to the lender even when it has the capacity to honour the said obligations. There is deliberate intention of not repaying the loan. The funds are not utilized for the specific purpose or the funds have been siphoned off and not been utilized for the purpose for which it was availed. Further, no assets are available which justify the usage of funds and the asset bought by the lenders funds has been sold off without the knowledge of the bank/lender.

The Supreme Court had also asked the RBI in February this year to submit the list of all defaulters with loans of ` 500 crore and more in the past five years and the RBI has submitted the same.The Supreme Court ‘s very significant observation on bank loan defaulters were made as RBI has been cracking down on bad loans with an objective to clean up bank’s books by March’17. The Government is also contemplating taking criminal actions against the wilful defaulters.

Considering the requirement of additional and more effective law to resolve the huge bad loan and NPA stock within a shorter time, the Bankruptcy Code was passed by the parliament on 11th of May’2016. The Code is a very important attempt to expedite the insolvency resolution mechanism, it is aimed to provide an overarching framework for dealing with bankruptcies. This is a very significant step forward in speedy resolution of bankrupt businesses and releasing the blocked capital / assets involved in the economy. The requirement of speedy resolution of insolvency is all the more glaring if we compare the average time required in India for an insolvency suit to conclude is 4.3 years now as against 6 months in Japan, 8 months in Singapore, 1 year in Malaysia as well as UK, and 1.5 years in USA as per World Bank data till 2015.

The Code will also replace the application of multiple laws dealing with the issue at present, including the Companies Act. This will definitely make legal processes easier and the borrowers & lenders can have the advantage of the same. The Code attempts for time bound resolution (180 days, extendable by 90 days…) – this is certainly going to bring in a higher confidence level among the secured creditors and all interested parties to the entity in stress.

The challenges that we perceive is basically with the infrastructure that would be required at the Govt. & Institutional level to make this Code deliver expected results. The faster the Insolvency & Bankruptcy Board of India is constituted and functional will matter a lot in this regard. Again, the Bankruptcy Code has earmarked two adjudicating bodies: DRT – to attend the individual and unlimited partnership debts – and NCLT (a body in lieu of BIFR) for Companies and Limited liability partnerships. In this the present experience of DRT capacity in disposal of cases we discussed earlier. With the present stress it’s through there remains a doubt how the same institution could be geared up with this increased delivery expectation. For NCLT it’s to be seen how the huge number of pending matters with BIFR and other company law issues can be taken forward along with the new cases when the new bankruptcy law is in force. The effectiveness of these institutions will be an important determinant for achieving the objects of the new law.

To conclude we only wish that this Code does overcome the hurdles in its implementation as has been faced by the RDDB Act, other acts and SARFAESI Act with the same challenge in a bigger way – effective execution