The New NPA Battle

Many promising provisions of the new bankruptcy law appear to make it an effective weapon in banks’ onslaught on bad loans.

L IBJ RESEARCH BUREAU

Last month, a Gujarat High Court verdict brought huge relief to banks badly battered by non-performing assets (NPAs). The high court threw out a petition filed by Essar Steel, challenging its lenders against initiating bankruptcy proceedings against it. The Mumbai-headquartered steel company had argued that it was arbitrarily bunched up with 11 other loan-defaulting companies to face the bankruptcy proceedings.

The court's decision arms the banks to fight a fresh battle against bad loans - a mind-boggling Rs 7,28,768 crore as of March 2017 under the new bankruptcy law - Insolvency and Bankruptcy Code (IBC), 2016. A year since the new bankruptcy law came into force, the Union government, the Reserve Bank of India (RBI) and the banks have stepped up their efforts to rid the system of sticky loans.

In May, the government passed an Ordinance to amend the Banking Regulation Act, 1949. The executive order empowers the RBI to direct banks to initiate bankruptcy proceedings against defaulters to recover bad loans. Empowered by the Ordinance, in June, the central bank asked lenders to initiate bankruptcy proceedings against 12 big corporate defaulters, including Essar Steel, Bhushan Steel, Monnet Ispat & Energy and Jaypee Infratech, among others. The 12 corporate houses have collectively run up NPAs worth over Rs 1,75,000 crore, which account for a little over 24 per cent of the banking sector's total sticky loans.

A new ecosystem

Meanwhile, the RBI and the lenders have taken the first, small steps to tackle the NPA menace under the new bankruptcy law. Essar Steel did attempt to delay the lenders' loan-recovery process. But with the Gujarat High Court putting its foot down, the battle against bad debts seems to have got back on track.