India’s New Bankruptcy code: A Real Solution for Defaulters?

A Real Solution for Defaulters

A Real Solution for DefaultersBankruptcy code

Bankruptcy has become the serious and biggest obstacle in the path of India’s marathon run towards the top growing economy of the world. And resolving this issue is becoming a great headache for all government agencies and organizations. When a company is at death’s door, it gets to shuffle off its old debts and often gain new owners, so as to start a new life.  The  firms are seeking rebirth under a bankruptcy code adopted in December 2016. In a hopeful development, tycoons might be able to hold on to “their” businesses once,  as banks got stiffed seem likely to be forced to cede control.

India is in great need for a fresh approach to insolvent businesses. Its banks’ balance-sheets sag under 8.4trn rupees ($130bn) of loans that might not be repaid-over 10% of their outstanding loans. But foreclosure is fiddly: it currently takes over four years to process an insolvency, and recovery rates are a lousy 26%. Partly as a result, bankers have often turned a blind eye to firms which they should have foreclosed on.

This is not only  bad for the banks but worse for the nation’s economy, which has been slowed markedly, in part as credit to companies has dried up. This problem has festered for years, not least because banks’ reserves of capital were inadequate to cover the losses which would have resulted, if they had acknowledged dud loans. The state-owned banks is where most of the problems lie, feared even sensible agreements to lower an ailing company’s debt burdens could be painted as cozying up to cronies.

The Indian authorities have removed roadblocks to resolving all this, in stages; Like from 2015, banks were forced to acknowledge which loans were “non-performing”, having spent years expertly sweeping problems under the carpet. The infrastructure for the new bankruptcy code, which requires administrators to run firms in limbo and a new courts system, is being created from scratch. Over a dozen deeply distressed firms were shunted into insolvency proceedings by the authorities in June. These account for like under 3% of all loans, but over a quarter of those are in arrears, reckons Ashish Gupta of Credit Suisse. Nearly 400 companies big and small are going through the process, establishing a first batch of precedents. To make sure that no side delays hurdles the proceedings, the new code says that if creditors and borrowers are not able agree on how to revive the company within 270 days, its assets will be sold for scrap.

But there had been assumptions  that the companies’ “promoters”,(founding shareholders) might  find a way to stay on. Many were planning to bid for their old assets in auctions; but the government has now banned any defaulting promoters from bidding, so it  means they will lose “their” companies to new owners. Now this is a startling reversal of fortunes for a clique of businessmen who have held on to companies through multiple past restructurings, and whose number includes some of corporate India’s grandest names. An appeal  which seems unavoidable; or might workaround, like getting a friendly third party to bid on behalf of the old owners (though this is specifically banned).

Critics are concerned that excluding promoters might lead to banks getting less money for the foreclosed assets, and so increase the bailout burden that would ultimately fall on the public purse. Some entrepreneurs can be fail for forgivable reasons— as in industries such as steel, commodity-price swings can up-end even in well-managed firms. But often these promoters regard loan repayment as optional and  the blanket ban on all of them might seem blunt. But it is a price worth paying to level a pitch that has long been queered in the tycoons’ favor.

Let’s see how things goes on, and hope all the changes made would lead in progressing economy and better future of India. We all hope for a developed nation with better standard of living that can only be achieved with well growing cycle of economy.

Forensic Audit of the Defaulters: Step to Sort out the NPAs

Forensic Audit of the Defaulters

Forensic Audit of the Defaulters

In Recent years, Indian media has been full with news coverage of bankrupted businessman, defaulters, frauds and scams. This time government has decided to take forward step to reduces the count of NPA ( Non Performing Assets). The Government and the Reserve Bank of India are working together on number of changes in rules to reduce the proportion of bad loans in the banking sector, so as to kick-starting the investment cycle and pushing growth. The measures are being finalized include tweaking the existing Joint Lenders Forum for faster resolution of NPAs (non-performing assets), a scheme for onetime settlement of bad debts and penal action for defaulters who have siphoned off loans taken for business purposes. There are also news that PSU ( public sector undertaking) banks have been asked to conduct a forensic audit of top 50 loan defaulters to separate genuine cases of business failure from those where funds have been diverted.

The government might not set up a state-owned Bad Bank to take over NPAs from state-owned banks in the near term, but the Department of Financial Services has been asked to review the existing framework of private asset reconstruction companies over the next few months and submit a report. A large scale auction of bad debts is also being looked into by the government, said by certain sources.

The decision making mechanism might also get bit smoother, so as to take faster decision on restructuring  of loan under JLF. The government may also encourage banks to go for one-time settlement of loans, and this process might be overseen by an oversight committee. The settlement will be done in a manner that it gives comfort to bankers against any regulatory backlash in future.

The proportion of bad loans has been rising over the years, even though the government have announced the Indradhanush plan of reforms for the state-owned banks. Public sector banks’ NPAs surged by over Rs 1 lakh crore during the April-December period of 2016-17. Gross NPAs in the first nine months of the current fiscal rose to Rs 6.06 lakh crore by December 31, 2016, from Rs 5.02 lakh crore during the entire year of 2015-16. The gross NPAs were Rs 2.67 lakh crore at the end of 2014-15.

The amount of total stressed assets, which comprises NPAs and restructured loans, is much higher. Top officials have acknowledged the need to resolve bad debts, in order to push economic growth and bringing the investment cycle back on track. During a meeting of the Parliamentary Consultative Committee Wednesday, Jaitley had said that dealing with bank NPAs is a challenging task and that the government was considering several oversight committees to help with resolution of bad debts.

Members of the consultative committee suggested several measures to deal with the like initiating criminal action against the big willful defaulters, creating a Special Bank where NPAs of all the state-owned banks are transferred, allowing the concerned state government to take part in the auction of stressed assets, fixing the gross NPA in the range of 9-10 per cent and not counting restructured assets as NPAs. Some members suggested that the government must establish a bad bank or a Public Sector Asset Rehabilitation Agency (PARA), which should only consider those NPAs where sector-specific reforms do not work. The Economic Survey for 2016-17 has also suggested the idea of PARA to resolve the problem of bad loans. On the issue of setting-up a “bad bank”, Jaitley said that several possible alternatives exist, and the issue is being debated on public platforms.

Well most of this are what said and what heard, but let’s see how things goes on, how much of it would come in action to solve things practically and just not on papers by words. We all hope for ever growing India with developed environment and lifestyle and with less of such issues which becomes the obstacles for the wheel of success.