Thomas Franco

Random Reflection

The Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) has certain very damaging revelations. It is surprising that RBI gave thumbs up to them and claimed that non-performing assets (NPAs) have come down. The FSR says, since Dec 2016, 6571 Corporate Insolvency Resolution Processes (CIRPs) have been handled. Of that 4519 (69%) closed; of this 21% closed on appeal/review, 19% withdrawn and orders passed on 45%. So only 65% have been settled so far and out of that, only 45% have passed orders. That means only 30% of the CIRPs orders have been passed. We don’t know whether the orders have been really complied with. Why were 19% withdrawn?

Another alarming data given in the FSR is that in 2021-22, a total of Rs.8516.6 crore claims were settled, and the recovery was Rs.399 crores, which is only 4.6% of the claim. Overall, the realization by Financial Creditors (FCs) is only 31.8%. Instead of the initial 180 days given for settlement, now it is relaxed to 350 days (including extension), so now the average time taken is 613 days.

The FSR also says, there were 25107 applications for CIRPs of corporate debts of Rs.8.81 lakh crore, disposed of before their admission to CIRP, till March 2023. Why? How were they disposed of? Was there any recovery? If so, how much? RBI report does not give any details. This is astonishing.

Another interesting data says, “Realizable value of 678 resolved corporate debt was only 1.69 lakh crores though they owed Rs.8.95 lakh crores and NCLT could recover Rs.2.85 lakh crores which is 68% more than the realizable value. So you show the realizable value as low and then show a higher recovery. Out of what was due to the banks, only 31.8% has been recovered. This loot is lauded by RBI as 168% of the realizable value has been recovered. If the loan outstanding was Re.8.95 lakh crores, why did the realizable value come down? Who is responsible? It must be through fraudulent means by the corporate debtors. Who all colluded? How many were punished? How many Board of Directors and Finance Ministry nominees were charge sheeted? Apparently none!

The 32nd report of the parliamentary standing Committee on Finance was submitted to both houses of the Parliament on 3rd August 2021. It recalls the objective of the Insolvency and Bankruptcy Code as time-bound insolvency resolution and value maximization of assets. Unfortunately, as seen from the FSR 2023 the code has failed on both counts.

The committee report says, “The Committee found that the low recovery rates with haircuts as much as 95% and the delay in resolution process with more than 71% cases pending more than 180 days clearly points towards a deviation from the original objective of the code intended by the Parliament”.

“The Committee found that there are numerous content issues with regard to Resolution Professionals (RPs) for which two regulators IPA and IBBI have taken disciplinary action on 123 Insolvency Professionals (IPs) out of 203 inspections conducted till date”. So 60% of the IPs inspected were found to be indulging in malpractices.

“The Committee’s view, keeping in mind the experience gathered so far, there is an urgent need to have a professional code of conduct for the Committee of Creditors (COCs).” The Committee had also recommended fixing a ceiling on haircuts. These have not been implemented.

So the present status of the NCLT performance warrants the dissolution of NCLTs.

Recent newspaper reports say that Anil Ambani’s Reliance capital is going to settle for 65% of the outstanding loan. Why for so many years no action has been taken against Anil Ambani who could have been charged with criminal cases? In fact, the case was pending with NCLT for over three years.

The write-offs will further increase with NCLTs and compromise proposals for wilful defaulters and fraudsters. The NPAs will be brought down by write-offs and not through real recovery, making the banking system suffer. Another cycle of NPA increase will start, followed by write-offs. This is a vicious cycle at the cost of the depositors. Please read my article ‘How banks are making profit’ to know more.

The defaults will increase soon, and the faith in the system will go. We have seen, during a crisis in ICICI, the SBI had to pump in money to save ICICI at the request of the RBI and the government. During the Financial Resolution and Deposit Insurance bill debate, huge withdrawals took place, leading to the withdrawal of the bill.

A similar situation may arise if we do not stop the loot immediately. The banking system is very volatile and if it collapses the total economy will collapse. With so many write-offs, will there be any real profit with the banks? This requires a detailed analysis by experts.

The RBI should implement its own decision made earlier to have a maximum ceiling of credit to one corporate at Rs10000 crore which will reduce the burden of the banks in case of write-offs.

The Parliament should constitute a committee to analyse the real profitability of Indian Banks.

The government should put an end to NCLTs and make stringent norms for recovery including seizing personal and family assets of the fraudsters and wilful defaulters at the earliest. If not this government, then the next government will be compelled to do it as the fallouts will clearly be visible by then.

Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.

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