NON PERFORMING ASSETS

NON PERFORMING ASSETS

CRITIQUING SURREALISM, ABSURDITY AND PARADOXES IN THE NPA POLICY SCENARIO.

 

Disasters, pandemics and calamities, whether natural or man-made, are integral to life. These lethal negativities not only rip through the animal and plant kingdoms but also impact the cultural and spiritual value-subsoil of the society. These self-propelled progenitors of holocausts often defy, with their inherent ferocity, all controls and regulations and cause devastation of monumental proportions. The dark and deadly phenomenon, in its multiple manifestations, is characterized by extraordinary speed and immeasurably deep impacts.

The policies and strategies of the State may mitigate risks and losses, though no policy, functional design or control mechanism is known to mankind, which can accomplish the most challenging task to fully and flawlessly immunize a specific location, particular group or a particular society from the holocausts or eliminate the tragedies in toto. Thus humanity has to coexist with these subliminal realities.

The holocausts may be accidental, error-generated or experiment-triggered but consequential effects of their diverse forms invariably disrupt and derail the rhythms of normal human life. From the over-guarded nuclear reactors to closely-monitored space projects the disasters are not unknown. Identically from the rare accomplishments of highest levels of human genius, such as, engineering marvels, in the shape of the grand and admirable infra-projects, to the scientifically over-guarded laboratory projects and also to the entire open-ended spectrum of activities and affairs of financial sector, the perilous sparks eternally signaling imminent disasters, continuously hang, in the space-time matrix, as a sword of Damocles.

In the financial terrains, Indian State, acting on the signals of imminent disaster due to debt repayment defaults, adopted with a singular focus, a policy under the nomenclature ‘Prudential Norms for Income Recognition, Asset Reconstruction and Provisioning’, often referred to as Non Performing Assets Policy or (NPA) policy. The critical challenges qua the defaulted commitments of the borrowers of the Banks and Financial institutions, in accumulated form, came to be recognized as Frankenstein in the fortress of financial services sector of the nation.

A deeper look at the policy text indicates that it is framed with a penetrative focus solely on the theme of recovery of dues of the Banks and Financial Institutions. The market dynamics which delineate and define the ground realities of the ever-expanding, non-static and ever-mutating financial realms certainly remained unexplored and untouched by the policy authors in the text of the policy.

Safety of the public funds in the hands of the Banks and Financial Institutions, being of vital importance, has to be a prime concern of the State. Even the well articulated safety of funds in the hands of the Banks and Financial Institutions called for a balanced and time-sensitive approach which State policies quintessentially express and spell out in respect of various other general issues of life, such as, health, good governance, economic growth and education.

One cannot rule out safety risks in normal activities of life but a paranoid approach qua questions of safety and security in the terrains of normal human affairs isolated from the normal spread and speed of the activities of human life always proves counterproductive.

It is matter of common knowledge that death and life are two incontrovertible and intrinsically-related realities. Death as well as death traps, namely, risks, is integral to every experience of human life. Thus while travelling by any motor vehicle, travelers on the roads countenance risks, even serious risks to their limb and life. If the deliberations and assessments qua the issue of mitigating such risks do not remain realistic, balanced, and prudent, the thought-processes would tend to lean heavily towards eliminating risks, the results are bound to be absurd. When references in the context of policy framing turn abnormally constrictive and digress into singularly-focused and shrunken templates of thinking, the outcomes turn absurd or hazardous. Such unrealistic focus of thought process is bound to denude the conclusions of relevance. Thus when a notion of ‘absolute safety’ is made fetish of planning in the context of road safety, the people may get misdirected, in a paranoid focus, to commute by extraordinarily robust vehicles, such as, military tanks like insurmountable Shermon Tanks, in preference to any other roadworthy option, as indeed all other vehicles are comparatively fragile.

The questions that necessarily haunt the unwholesome locales of piecemeal deliberations to shape the policy text, while focusing on the task of fundamentally re-structuring the extant legal regime are;

(a)Would such single-minded and safety-focused policy rigors actually lead to a sustainable order in the diverse and scattered minefields of entrepreneurial values?

(b)Would single-tracked architecture under NPA policy not per se trigger and maximize disorder and chaos, antithetic to the fundamental intent of the policy to generate a sustainable order in the functional domains of Finance?

The approach of the State, shaped by single-mindedness on the issue of recovery of amounts in default qua debts of Banks and Financial Institutions coupled with safety-focused options in the policy-guided institutions, led to a situation described by Richard H. Thaler as Winner’s curse. Certainly various relevant factors for supporting general business growth and preventing adverse impacts on production and employment stood underplayed. In such chaotic scenario, the State-guided course of multi-level deliberations for planning remained aloof from the task of State to nurture entrepreneurial values symbolized by insurmountable spirit to face global competition. Thus the visible bane of surrealism and absurdity also ensued as critical consequences in the form of unjustified import-dependence across the length and breadth of economic landscape.

The much-celebrated ‘new order’ constructed by bricks and mortar of isothermal thoughts of the authors of the NPA policy, intrinsically lacking the potency of piercing through the intensity and spread of the ‘crisis’ left much in ‘new order’ to be desired. The policy-framing processes of welfare State ought to identify and resolve, through multi-directional strategies, the entire spectrum of visible and feasible potentialities of the crisis which is the focus of the policy. Apparently a quick ready-reckoner textually introduced in the policy to facilitate launching of coercive steps against the encumbered assets of ‘recovery-deficient’ borrowers in the garb of NPA policy, despite generating an instant euphoria in markets, fails to hold credible promise to nurture a holistic, wholesome and futuristic order in the socio-economic realities of aspiring India.

In the historical perspective, a tour d’horizon of the tasks and obligations of the Financial Sector as guided by legislative initiatives from time to time, presents a critical slew of paradoxes. Such paradoxes rattling in the functional paradigms in the Financial Sector policies also point to the grave omissions and unfair tilts in the text of the NPA Policy. The NPA policy adopted by the State is replete with facile homilies and ponderous platitudes.

In the year 1986, not distant from the present-day NPA-policy timing, in pursuance to Tandon Committee Report as well as in the wake of H.N. Ray Committee Report, the Sick Industrial Company (Special Provisions) Act 1985 was notified by the Government to explore ways and means to prefer revival of sick industrial units in lieu of their unsung extinction in the usual and normal course of recovery regimen of the Banks and Financial Institutions. The statement of objects and reasons of the Sick Industrial Company (Special Provisions) Act 1985 not only flags the concern of the State for ill effects of critical incidence of sickness of industrial companies but affirmatively acknowledges a commitment of the State to mitigate, if not prevent, the perils of ‘dead capital’ and ‘dead assets’ in the lifeline of the national economy. The objects and reasons of the said Central Act aptly highlight and emphasize the sensitivity of the State to multiple challenges in the nature of (i) loss of production (ii) loss of employment (iii) loss of revenue to Central and State Government (iv) locking-up of industrial funds of banks and financial institutions. Such illustrative negativities of the Industrial sickness, while expressing State Commitment to act affirmatively to improve the incidence of Industrial sickness are starkly absent from the NPA Policy as well as resultant paradigms. It is indeed always imperative to salvage the productive assets and to prevent wastage, degradation and depletion of economic assets, while the post-policy legislative measures are critically silent about such concerns of the welfare State. Thus with what was hailed as laudable objects prefacing the Sick Industrial Company (Special Provisions) Act 1985 seems to have been re-evaluated just on the next moment as profligate redundancy.  The Sick Industrial Company (Special Provisions) Act 1985 recently stands replaced, though with muted undertones, by the folds of a more comprehensive Insolvency and Bankruptcy Code, 2016. Strangely, the objects and reasons, which led to enactment of Sick Industrial Companies (Special Provisions) Act 1985, even though equally significant today, stood totally obliterated from the ‘terms of reference’ for the Committees constituted by the State. Resultantly the policy of rehabilitation and revival of the stressed enterprises literally vanished from the course of deliberations as well as from the outcomes of the Committees for Financial sector reforms which ushered in the financial world through the NPA policy. The consequential paradigms and enforcement routes, in the shape of DRTs as well as Authorized Officers under Securitisation Act, stood statutorily crowned to almost-exclusively rule the jurisdictions of the financial sector.

NPA policy as well as the institutional outfits created thereunder urgently need to be revisited by the State through its legislative wing. Much-needed amendments to create a meaningful space for conjoint operations of comprehensive strategies, in contrast with single-tracked recovery strategy, call for being statutorily provided simultaneously and synchronously with efficacious recovery-oriented measures. Comprehensive and multi-focal measures would certainly facilitate recovery of the risk-prone and risk-hit public funds of Banks and Financial Institutions, while also allowing the viable units to revive and sustain. Sadly, in the policy framework in operation, the task of nurturing and fortifying the stressed enterprises simultaneously with recovery efforts, remained sidetracked, though such vital task always remains worthy of due attention of a Welfare State and a progressive State.

State Policy for NPAs, ostensibly framed with innovative tools and superior wisdom of the State has certainly missed on one side almost as much as it tended to gain on the other. The NPA policy ought to have fairly ruled out forcible closure of the businesses and enterprises, especially the ones having any signs of life or potential for viability. The value-chains of production, employment and supply even of financially-stressed business and enterprises could not be ritualistically discarded, without even fair evaluation in a rational perspective. The paranoid focus on the ‘commitment-compliance’ culture in banking based on notions of revenue generation of the business and enterprise certainly carries a heavy cost of wasting various worthwhile values in the economic cycles.

Historically, the pre-policy scenario in India was characterized by decades of loose-ended, nay, liberal phases of credit policies of Banks and Financial Institutions. The functional swings of ‘crazy banking’ phase in financial sector and ‘lazy banking’ phase in financial sector often finds mention in RBI deliberations qua their role as supervisors or navigators. Thus a keenly-watched ‘buffer-period’ prior to adoption of the stringent measures against ‘compliance-deviant’ enterprises was indeed required to control, re-direct and re-arrange the inherent tilts and surface unevenness in the economic terrains.

A multi-pronged strategy was critically needed in preference to the present-day recovery-alone policy, as adopted by the State, without even a vital safety valve in the nature of a ‘buffer period’.

The State, in its zeal to recover the defaulted amounts from the borrowers of Banks and Financial Institutions, literally suffered a focus-related disorder, in the functional hubs of its policy. It may be a bit hard to suggest but the focus loss in framing the policy is almost akin to Attention Deficit Hyperactivity Disorder (ADHD)(commonly called loss of focus) qua  priorities of economy. Thus the authorities of the State faltered in their vital task to even frame comprehensive terms of reference. Thus the expert Committees did not engage themselves, head and heart, to explore ways and means for synchronizing recovery of dues with supporting measures to bolster revenue generation through collateral policies of rehabilitation and revitalization of the stressed and struggling business and enterprises. Thus the question of nurture to full-blossomed life of the weak and struggling enterprises, who were critically coping with the extreme stress and strain of financial nature, painfully remained dislocated from the narrowly-contoured zones of consideration of the State. Various enterprises were slowly breathing or ‘temporarily breathless’ on the day of implementation of the State policy and the deficient handling of the issue of defaulted commitments under the policy led to their terminal collapse.

The stressed, struggling but still breathing enterprises and business, despite the fact that their deficiencies were corrigible and their ailments were curable, turned into defenseless victims of new financial regimen under the nomenclature ‘pay or  die’. The financial health of the stressed units stood also exposed, inter alia, to the pain of ‘debt overhangs’ and other financial paucity issues. Thus the stressed and anemic enterprises turned fragile or frail and could not withstand the sudden ferocity of stringent recovery policies of the State.  The economic ‘push-pull’ factors turned asymmetric and even long-nurtured State endeavours to fortify stressed business and enterprises lost direction and consequently faltered. Painfully, the entire brunt, under hastily devised and implemented policy for non-performing assets, fell fatally on the struggling enterprises.

An evaluation of Narsimam Committee Report (Committee headed by M.Narsimam, Ex-Governor, RBI) which led to introduction of the policy described as ‘Prudential Norms, Assets Classification and Provisioning Policy’ for the Banks and Financial Institution. The said reports in conjunction with preceding and succeeding led to the constitution Debt Recovery Tribunals.

The Narasimham Committee report was a two stage exercise. A glimpse of the broad features of the said report is necessary to elucidate the spadework and seeding of the policy of recovery of due by the Banks and Financial Institution.

Narasimham Committee I. – The Narasimham Committee was constituted in the year 1991 to explore solutions to the fagged issues pertaining to the health and global competitiveness of the financial institutions of the country. The said Committee, as per terms of its constitution, evaluated and analyzed wide-ranging issues relevant to the economy. The final report of the said Committee under Chapter V titled “Capital Adequacy, Accounting Policies and other Related Matters”, recommended a proper system of income recognition and provisioning to foster strength and stability of the banking system. The Committee treated the classification of assets as a mandatory requirement for prudent banking.

It is relevant that even prior to the aforesaid Committee report, Reserve Bank of India had already classified the assets of a bank. Under the RBI classification, popularly called Health Code classification, one category was bad debts/doubtful debts. Thus the committee had an occasion to weigh the extant classification policy of assets in the light of global banking parameters. The said Committee referred to international practices which contemplated that an asset be treated as non-performing, when the interest thereon falls overdue for at least two quarters. Even with regard to Income Recognition, the global standards were found to be actual receipt-based and not accrual-based and the said Committee accordingly recommended upgradation of income recognition methods and asset classification norms to synchronize with global standards.

The Committee recommended that in consonance with the globally evolved standards an asset be shown as non-performing asset by the banks and financial institutions in India where the interest remains due for more than 180 days. Reserve Bank of India was to be competent authority to prescribe clear and objective definitions in respect of assets which may have to be treated as doubtful, standard or substandard, depending upon well articulated vulnerability status of the assets. Apart from recommending establishment of Special Tribunals to deal with the recovery of dues of the amounts in default by the Banks, the said Committee, inter alia, expressed its views on the subject as under:

“The Committee has looked at the mechanism employed under similar circumstances in certain other countries and recommends the setting up of, if necessary by special legislation, a separate institution by the Government of India to be known as ‘Assets Reconstruction Fund’ (ARF) with the express purpose of taking over such assts from banks and financial institutions and subsequently following up on the recovery of dues owed to them from the primary borrowers.”

While recommending for setting up of Special Tribunals, the Committee observed:

“Banks and financial institutions at present face considerable difficulties in recovery of dues from the clients and enforcement of security charged to them due to the delay in the legal processes. A significant portion of the funds of banks and financial institutions is thus blocked in unproductive assts, the values of which keep deteriorating with the passage of time. Banks also incur substantial accounts of expenditure by way of legal charges which add to their overheads. The question of speeding up the process of recovery was examined in great detail by a Committee set up by the Government under the Chairmanship of the Late Shri Tiwari. The Tiwari Committee recommended, inter alia, the setting up of Special Tribunals which could expedite the recovery process….”

 

In step with the first report, Narasimham Committee II report was also submitted by the Committee in April 1998 to introduce further improvements in the asset classifications by the banks and financial institutions in India. The said report-II contained the following recommendations;

• An Asset needs to be classified as bad or doubtful in case such asset continues to remain substandard asset for preceding twelve months while actual writing off the resultant loss is not treated as a prerequisite.
• The advances guaranteed by the Government, liable otherwise to be classified as NPA, need to be treated differently, if so evaluated by banks and financial institutions, but transparency norms be not compromised.
• Banks need to reduce the NPAs in their books to a level below 5% of their asset-size by the year 2000 and thereafter endeavor to further reduce the same below 3% by the year 2002;
• The assets of the banks constituting a size of NPAs higher than the benchmarks and further categorized as the bad or loss and doubtful are required to be transferred to an Asset Reconstruction Company (ARC). The Asset Reconstruction Company may respond the transaction by issuance of swap bonds, representing the realizable value of the bulk or assets so transferred by banks and Financial institutions;
• The banking industry needs to be supported and guided to switch over to international practices with regard to income recognition, by introducing a 90 days norm;
• Provision generally to the tune of 1% needs to be made on Assets of the standard category;
• The banks needs to focus diligently on the Asset Liability Management to obviate mismatches and through appropriate mechanism banks be directed to mitigate liquidity and interest rate risks;
• An independent mechanism for reviewing and identifying the potential NPAs needs to be introduced;
• Legal provisions need to be amended to keep pace with commercial practices and market behaviour in the financial sector.

 

In its Second Report, the Narasimham Committee observed that NPAs in 1992 were critically high for most of the public sector banks. In Chapter VIII of the Second Report, the Narasimham Committee deals with the legal and legislative framework and noted:

“8.1. A legal framework that clearly defines the rights and liabilities of parties to contracts and provides for speedy resolution of disputes is a sine qua non for efficient trade and commerce, especially for financial intermediation. In our system, the evolution of the legal framework has not kept pace with changing commercial practice and with the financial sector reforms. As a result, the economy has not been able to reap the full benefits of the reforms process. As an illustration, we could look at the scheme of mortgage in the Transfer of Property Act, which is critical to the work of financial intermediaries…..”

One of the measures recommended by the Committee was to clothe the Banks and Financial Institutions, through special statutes, with unhindered powers of sale of the assets, without intervention of the Courts and for implementing appropriate measures for the purpose of reconstruction of assets. In the prevailing scenario, the magnitude of consolidated default amount of commitment-related defaults and ‘past due’ amounts was found to be alarming. The recovery of such blocked and risk-prone public funds was urgently needed. Thus effective legislation for the purpose of recovery of the defaulted amounts in a time bound manner appeared justified on the anvil of public policy.

As regards the Tiwari Committee report, which also finds mention in Narasimham Committee report, it is worthwhile to have a glance at the broad outline of the same. In 1981 a Committee under the Chairmanship of Shri T.Tiwari examined the legal and other difficulties faced by the banks and financial institutions and suggested remedial measures including changes in law. Tiwari Committee had also suggested setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a summary procedure. The setting up of Special Tribunals was deemed necessary not only fulfil a long-felt need, but also to initiate an important step in the implementation of the Report of Narasimham Committee.

 

13. Tiwari Committee Report-Adjudication, execution and priorities.- In the Tiwari Committee Report of 1981, it was stated in Chapter VIII, para 8.2, that in respect of suits by banks and financial institutions there have been abnormal delays at the stage of trial as well as the stage of execution in various Courts and hence it stated:

“the principle that the State should have a special procedure to enforce its own demands should equally be extended to the recovery of dues of banks and financial institutions as well.”

“The adjudication officer will have such power to distribute the sale proceeds to the banks and financial institutions being secured creditors, in accordance with inter se agreement/arrangement between them and to the other persons, entitled thereto in accordance with the priorities in the law.”

 

The Committee also recommended a slew of legislative measures to meet the critical challenges of the time.

However, as the facts bear out, after the Report of Narasimham Committee, another Committee was constituted by the government under Chairmanship T.R. Andhyarujina. The said Committee headed by former Solicitor General of India was appointed in February, 1999 to work out a requisite legal framework in the direction of constitution of special Tribunals. The said Committee is known as Andhyarujina Committee.

Another report i.e. Andhyarujina Committee report was also officially released in  the year 2000. The Committee under Chairmanship T.R. Andhyarujina, former Solicitor General of India was appointed in February, 1999 for the purpose of introducing legal reforms in banking sector. The Committee recommended the following reforms:

• Banks need to be clothed with power to take possession of the charged assets and to sell the securities without intervention of the Courts.
• Amendments need to be introduced in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to make the said Statutory Scheme more effective in the context of recovery of the dues of the Banks etc.
• Necessary amendments need to be also made in the Contract Act to facilitate other amendments.

Besides Adhyarurjina Committee, another Committee described as Working Group on Development of Market for Assets Securitization, was also set up by Reserve Bank of India in the year 1999.

As the result of recommendation of the aforesaid Committees and in the light of globally evolved norms, a legislative step was taken to create a new order in the financial sector. Thus on 21.06.2002, an ordinance was passed under the nomenclature ‘Securitization and Reconstruction of The Financial Assets and Enforcement of Security Interest ordinance’. The said ordinance was subsequently notified as an Act of Parliament on 17.12.2002. The most stringent Financial discipline regimen in the garb of Securitization and Reconstruction of The Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002) was notified on 17.12.2002.

Thus a robust statutory text of Securitization and Reconstruction of The Financial Assets and Enforcement of Security Interest Act, 2002, hastened to capture the space hitherto available, inter alia, for recuperation of the financially stressed business enterprises. Thus the State-sponsored sanatorium in the name of Board for Industrial  and Financial Reconstruction i.e. BIFR constituted under Sick Industrial Company (Special Provisions) Act 1985 suddenly disappeared hook, line and sinker in the shadows of ‘jurisprudence of vengeance’ euphemistically hidden in the judicial dictum: ‘fairness is a two-way street’. Various amendments were made to the said stringent Act, namely Securitization and Reconstruction of The Financial Assets and Security Interest Enforcement  Act’ in the years 2004, 2012, 2016, 2018 and finally in 2020 to close the identified escape routes for the borrowers, re-christened through inexorable ritual on a statistical palette, as ‘defaulters’ and ‘willful defaulters’.

Before proceeding further on the newly carved statutory paths created in India to accomplish the task of reduction of non-performing assets and recovery of the defaulted amounts, the entire skyline of the economic activities, both macro and micro layers, need to be critically surveyed, especially from the angle of inter-relations and intersections of the banking sector activities in the totality of entrepreneurial energy centers of the society. The significance of inter-relations of the economic activities cannot be underestimated in any economic planning, while the aforesaid Committees, due to inherent constraints and limitations of their foundational pillar i.e. ‘terms of reference’, remained singularly focused only on the recovery issues, in a grossly isolated, segregated and distanced from the core of other economic values.

An anecdotal reference in this regard to a  well known fact that Japan was pushed badly in quasi isolation from the entire international trade and the 30 million surviving Japanese had to sign military dictated unequal and unfair treaties, which threatened to eternally ruin the economy of Japan deserves a mention. The Japanese society, bolstered by autarky, rose to sophisticated market economies of the world within few years and soon emerged as an economic power, globally acknowledged and globally recognized. Their effort speaks volumes for the value and vitality of right strategies and right execution. The said society acted on the principle of syncretism and spirited collaboration on the path of autarky, based on ‘factor content’ of their self-drafted scripts of trade.

In contrast with the said revival-focused scenario of post war business of Japan,in the post-BIFR regime, the issues of identification and treatment of Non Performing Assets in India turned not only inwardly-inclined but exclusively recovery-focused. Such approach not only lost focus on the revival issues of  the stressed and struggling business entities but also enfeebled the then existing policies and paradigms of financial planning. Thus  the business and enterprises facing the financial or market stresses were swooped by ‘Seize and Grab’ powers in the almost unguided hands of Banks and Financial Institutions and with a phenomenal speed. The approach of the newly empowered Banks and Financial Institutions remained all through lacking even minimal vestibules of jurisprudence. Thus the Banks and Financial Institutions, under the notified policy of classification of assets and coercive recovery, suffered a perspective-blindness and behaved highhandedly as muscular money lenders in the streets. In the process even viable business and functional enterprise bled to death, unsung and unseen. The mode and manner of the implementation of the policies for asset classification and recovery by Banks and Financial Institutions neither treated nor cured the ‘malaise’ but simply relocated the ‘malaise’ on the camps of entrepreneurs in the economic terrains.

At the hindsight, we also need to pause to recollect that at the global level, initially in the year 1974, a Committee of the Governors of ten Central Banks of different countries held its meetings on the subject of banking supervision and developed what came to be known as Basel Norms. Their venue of the meeting was a City Basel in Switzerland, which is also a Headquarters of the Bureau of International Settlement (BIS). The Committee developed functional models to achieve the common goal of financial stability as well as common standards and regulations qua banking supervision. At present, the strength of Basel Committee has increased to 45 members from 28 jurisdictions.

The Basel Committee prepared the Basel Norms, also called Basel Accords, which came to be described as Basel-I Report; the said report saw the light of the day in the year 1988. The main focus of the said report was capital and structure of risk weights in banking disclosure systems. Basel-I stipulated that minimum capital requirement for any Bank was 8% of the risk weighted assets of the Bank. Subsequently in the year 2004, Basel-II report came to be accepted. The said 2004 report (Basel-II) introduced following 3 parameters for necessary compliance by the Banks:

• Capital requirement as to be maintained at 8% of the risks weighted assets.
• Supervisory review mechanism has to be introduced effectively.
• Market discipline needs to be strictly regulated and adhere to by the Banks.

As the banking scenario continues to face more and more critical challenges in the year 2010, Basel-III report, containing four vital banking parameters, intended to shape-up the banking system of the globe. The four vital banking parameters envisaged in the Basel report are:

• Capital
• Leverage
• Funding
• Liquidity

Capital adequacy in accordance with Basel mandates, was enhanced to 12.9% of the risks weighted assets. The said ratio was further segregated to Tier-I capital to the extent of 10.5% and Tier-II Capital to the extent of 2.5% of risks weighted assets. In this regard it is stated that Tier-I capital is the core capital comprised of equity and disclosed reserves and Tier-II capital signifies supplementary capital comprised in undisclosed reserves and unsecured subordinated debt instruments with original maturity of 5 years.

As regards leverage, the leverage rate is computed by dividing bank’s tier capital with average of consolidated assets. The report stipulates that leverage rate has to be maintained at 3%. The funding aspect led to introduction of Net Stable Funds Rate (NSFR). Stable funding profile is stipulated in Basel-III to be maintained in relation to off balance sheet assets and equities. For the short term resilience (30 days) and for medium term resilience (1 year) NSFR is to be maintained at 100%.

As regards liquidity, two liquidity ratios are introduced in Basel-III report. Liquidity Coverage Ratio (LCR) is defined as Buffer of high quality liquid asset sufficient to deal with cash outflows. For short term stress scenario to prevent bank run, the liquidity to be maintained has to be for 30 days stress related banking transactions.

The Non-performing Assets (NPAs) or ‘bad debts’ of banks and financial institutions crossed the figure of Rs.1,10,000 crores as on March 31, 2002. This phenomenal financial sector malignancy triggered a sense of panic in public. However, in 2019-20 the said NPA figure stood at Rs.6.8 Lakh Crores (against Rs.8.96 Lakh Crores in the  immediately preceding year) after write off by Banks and Financial institutions to the extent of about Rs.2 Lakh Crores.

In this regard the approach of the State to the alarming bad debt scenario was also reflected in the Union Budget on February 28, 2002, the  budgetary speech of then Finance Minister stated, reads as under;

“Reforms in the Banking Sector will be continued to enhance the efficiency and competitiveness of the sector. The following measures have either been taken or are being taken:

• Public Sector Banks recovered Rs.12,860 crore in 2000-01 as compared with Rs.9,883 crore in the previous year and net NPAs as percentage of net advances came down to 6.7% as on March, 2001 as compared to 7.4% in the previous year.
• 29 Debt Recovery Tribunals and 5 Appellate Tribunals have been set up as on September 30, 2001. The DRTs had disposed of 18,703 cases involving Rs.14,026 crores. Recovery made was Rs.3,527 crore.
• To help banks and financial institutions to provision for NPAs as required by the RBI, additional fiscal relief is being offered, details of which will be given in part B of my speech. This will enable banks to review their lending rates.
• A new Bill on Banking Sector Reforms is proposed to be introduced in Parliament to strengthen creditor rights through foreclosure and enforcement of securities by banks and financial institutions. This Bill will also enable securitization for money locked up in long-term loans.
• A pilot asst reconstruction company will be set up by June 30, 2002 with the participation of public and private sector banks, financial institutions and multilateral agencies. This Company will initiate measures for taking over non-performing assets in the banking sector and also develop a market for securitized loans.”

The budget speech emphasized the issue with following eloquent words;

“Presently, banks are allowed to deduct up to 5% of their total income against provisions made by them for bad and doubtful debts. In order to strengthen the financial position of banks, I propose to increase this allowance to 7.5% of the total income. Further, in my budget for the year 1999-2000, I had granted an option to banks to deduct up to 5% of their NPAs falling in the category of loss or doubtful assets as on the last day of the accounting year. I propose to enhance this optional deduction to 10%, and also allow a similar option of deduction upto 10% of loss or doubtful assets to public financial institutions.”

The Finance Minister justified the coercive approach in preference to supportive approach by what he called ‘special attention’ to the recovery of NPAs. The Minister supported his policy by adding that because of special attention being paid in that direction, the Public Sector Banks had been able to recover Rs.800 crores of the NPAs from 2 lakh accounts in 2000-01, with the result that net NPAs as percentage of net advances were almost half at 7.4% in 1999-2000 compared to 14.5% in 1993-94.

As the facts bear out, in pursuance to the report of various Committees, Reserve Bank of India, notified prudential norms on income recognition, asset classification and provisioning pertaining to advances by the Bank. The said norms are periodically revised by Reserve Bank of India to meet, inter alia, global policy parameters of banking supervision and regulation.

The risk perceptions and safety options in the context of assets of banking critically warranted more transparent and more realistic assessments and much broader and wider horizons of the policy design.

The aforesaid Committees , being fettered by the specificities of terms of  foundational reference, did not commit an act of overreach and resultantly  the horizons of business and finance were not fully explored to find sustainable ways of exorcism of all internal and external ills from the financial sector. As a result ‘business and enterprises’, showing signs of stress, stood suddenly reduced into newly discovered tools under NPA policy to gauge the risk-profiles and were humbled, stigmatized and finally dumped in the ‘auction mode’. Thus the ‘business and enterprises’ mercilessly suffered the pain of new policy-scripted rituals of ‘catharsis’ in the financial sector.

Under these circumstances, the State authorities turned a blind eye to the valid aspects of realities as well as challenges of time in the context of self-sufficiency ideals of economy. Thus the ‘how’ and ‘why’ of the exposure of the enterprises and businesses of the day to multiple stresses and vulnerabilities remained a muted and over-shadowed side-issue in the deliberations. Both the Committees, Narsimam Committee as well as Adhyarijuna Committee, being bound by their terms of reference, reflected an approach and focus-area in their outcomes which are akin to what Robert J Schiller( Nobel Laureate for economics, year 2002) treated as ‘irrational exuberance’ in the functional models. Even the judicial challenge to stringency and one-sidedness of the laws, though fairly disposed by the Bench, did not actually result in the much-needed succor to business and enterprises.

 

In Mardia Chemicals Ltd. Etc. vs U.O.I. & Ors. Etc. (2004 AIR 2371), Hon’ble Bench took serious note of the aberrations in the financial sector. The following observations of the Bench are eloquent about the resolve of the nation;

“34.     Some facts which need be taken note of are that the banks and the financial institutions have heavily financed the petitioners and other industries. It is also a fact that a large sum of amount remains unrecovered. Normal process of recovery of debts through courts is lengthy and time taken is not suited for recovery of such dues. For financial assistance rendered to the industries by the financial institutions, financial liquidity is essential failing which there is a blockade of large sums of amounts creating circumstances which retard the economic progress followed by a large number of other consequential ill effects. Considering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the governments in creating Debt Recovery Tribunals and appointing Presiding Officers, for a long time. Even after leaving that margin, it is to be noted that things in the concerned spheres are desired to move faster. In the present day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. Hence, in our view, it cannot be said that a step taken towards securitization of the debts and to evolve means for faster recovery of the NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field namely the Recovery of Debts due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation. It appears that a thought was given to the problems and Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another expert committee was constituted then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved.

35. As referred to above, the Narasimham Committee was constituted in 1991 relating to the Financial System prevailing in the country. It considered wide ranging issues relevant to the economy, banking and financing etc. Under Chapter V of the Report under the heading ‘Capital Adequacy, Accounting Policies and other Related Matters’ it was opined that a proper system of income recognition and provisioning is fundamental to the preservation of the strength and stability of banking system. It was also observed that the assets are required to be classified, it also takes note of the fact that the Reserve Bank of India had classified the advances of a bank, one category of which was bad debts/doubtful debts. It then mentions that according to the international practice, an asset is treated as non-performing when the interest is overdue for at least two quarters. Income of interest is considered as such, only when it is received and not on the accrual basis. The Committee suggested that the same should be followed by the banks and financial institutions in India and an advance is to be shown as non-performing assets where the interest remains due for more than 180 days. It was further suggested that the Reserve Bank of India should prescribe clear and objective definitions in respect of advances which may have to be treated as doubtful, standard or sub-standard, depending upon different situations. Apart from recommending to set up of special Tribunals to deal with the recovery of dues of the advances made by the banks the committee observed that impact of such steps would be felt by the banks only over a period of time, in the meanwhile, the Committee also suggested for reconstruction of assets saying “the Committee has looked at the mechanism employed under similar circumstances in certain other countries and recommends the setting up of, if necessary by special legislation, a separate institution by the Government of India to be known as ‘Assets Reconstruction Fund (ARF) with the express purpose of taking over such assets from banks and financial institutions and subsequently following up on the recovery of dues owed to them from the primary borrowers.” While recommending for setting up of special Tribunals, the Committee observed: “Banks and financial institutions at present face considerable difficulties in recovery of dues from the clients and enforcement of security charged to them due to the delay in the legal processes. A significant portion of the funds of banks and financial institutions is thus blocked in unproductive assets, the values of which keep deteriorating with the passage of time. Banks also incur substantial amounts of expenditure by way of legal charges which add to their overheads. The question of speeding up the process of recovery was examined in great detail by a committee set up by the Government under the Chairmanship of the late Shri Tiwari. The Tiwari Committee recommended, inter alia, the setting up of Special Tribunals which could expedite the recovery of process….”

The Committee also suggested some legislative measures to meet the situation.

36. In its Second Report, the Narasimham Committee observed that the NPAs in 1992 were uncomfortably high for most of the public sector banks. In Chapter VIII of the Second Report the Narasimham Committee deals about legal and legislative framework and observed:

“8.1 A legal framework that clearly defines the rights and liabilities of parties to contracts and provides for speedy resolution of disputes is a sine qua non for efficient trade and commerce, especially for financial intermediation. In our system, the evolution of the legal framework has not kept pace with changing commercial practice and with the financial sector reforms. As a result, the economy has not been able to reap the full benefits of the reforms process. As an illustration, we could look at the scheme of mortgage in the Transfer of Property Act, which is critical to the work of financial intermediaries……….”

One of the measures recommended in the circumstances was to vest the financial institutions through special statutes, the power of sale of the asset without intervention of the court and for reconstruction of the assets. It is thus to be seen that the question of non-recoverable or delayed recovery of debts advanced by the banks or financial institutions has been attracting the attention and the matter was considered in depth by the committees specially constituted consisting of the experts in the field. In the prevalent situation where the amount of dues are huge and hope of early recovery is less, it cannot be said that a more effective legislation for the purpose was uncalled for or that it could not be resorted to. It is again to be noted that after the report of the Narasimham Committee, yet another committee was constituted headed by Mr.Andhyarujina for bringing about the needed steps within the legal framework. We are therefore, unable to find much substance in the submission made on behalf of the petitioners that while the Recovery of debts due to Banks and Financial Institutions Act was in operation it was uncalled for to have yet another legislation for the recovery of the mounting dues. Considering the totality of circumstances the financial climate world over, if it was thought as a matter of policy, to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor it is a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy.

37. Next we come to the question as to whether it is on whims and fancies of the financial institutions to classify the assets as non-performing assets, as canvassed before us. We find it not to be so. As a matter of fact a policy has been laid down by the Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as “RBI’s prudential norms on income recognition, asset classification and provisioning – pertaining to advances” through a Circular dated August 30, 2001. It is mentioned in the said Circular as follows:

“1.1 In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman, Shri M.Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts.”

2.1 Non-performing Assets:

“2.1.1 An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘nonperforming asset’ (NPA) was defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period 1993 four quarters 1994 three quarters 1995 onwards two quarters 2.1.2 An amount due under any credit facility is treated as “past due” when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with ‘past due’ concept, with effect from March 31, 2001. Accordingly, as from that date, a Non- performing Asset (NPA) shall be an advance where

(i)         interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,

(ii)        the account remains ‘out of order’ for a period of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC),

(iii)       the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,

(iv)       interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and

(v)        any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

 

4.2.2 Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cutoff point should be valid for the entire accounting year.

            Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines.”

            From what is quoted above, it is quite evident that guidelines as laid down by the Reserve Bank of India which are in more details but not necessary to be reproduced here, laying down the terms and conditions and circumstances in which the debt is to be classified as non-performing asset as early as possible. Therefore, we find no substance in the submission made on behalf of the petitioners that there are no guidelines for treating the debt as a non-performing asset.

 

The perspectives of the learned authors of the policies certainly omitted to evaluate the worth of ‘culture of entrepreneurship’. A stark fact that ‘Business and enterprises’, even the highly stressed ones, exemplify unsung amalgam of virtues which signify quintessential values of culture of entrepreneurship. Such virtues can aptly be describes as ‘virtues of affirmance’. The expression ‘virtues of affirmance’ signify the virtues which stand successfully time-tested in the terrains of economic life of the society. ‘Business and enterprises’, inter alia, have following time-tested features;

• ‘Business and enterprises’, being quintessentially courageous navigators in the oceans of opportunities, are not risk-averse and through their self-generated intense energy kindle a positive change in the socio-economic scenario and uproot the regressive stubble of status quoism and fatalism.
• ‘Business and enterprises’ are quintessentially dynamic and continue to stimulate and sustain vibrancy in the economy by generating and strengthening the demand-supply chains in a productive and progressive manner.
• ‘Business and enterprises’ are positively oriented and forward-looking and negate, by their intrinsic resilience, all the negative trends of slumps, slowdowns and recession in the economy and brilliantly maintain the ecology in socio-economic zones.
• ‘Business and enterprises’ generate, by their own self-invented and self-evolved navigation skills, a climate to accomplish equitable wealth sharing systems, inter alia, by broad-basing the ethos of participative economy, through  the market-based ingenuity which guides the paths of grabbing  and using the ‘fleeting opportunities’ in the financial trajectories.
• ‘Business and enterprises’ meet, with their cautiously nurtured robustness and well-cultivated value-paradigms, the critical challenges of social security by offering their functional spreads to operate as ‘employment hubs’.
• ‘Business and enterprises’ with their hindsight and incorrigible optimism exemplify the highest standards of courage and ingenuity by charting their own ways to safe-drive in the rough terrains of economic boom and bust.
• ‘Business and enterprises’ handle the asymmetry of the freestyle ‘games of preemption’ and the ‘games of attrition’ in the competitive environment of markets, while gaining additional strengths through insights gained by arduous tasks of self-propelling on the choppy waters of economy.
• ‘Business and enterprises’ remain confidently engaged with the perpetual fluidity of challenges by inexhaustible strength of their own inventive faculties, without waiting for the usually belated State responses, and experiment and test their situation-specific strategies, unnerved by the stormy challenges of inflation, deflation, stagflation and hyperinflation.
• ‘Business and enterprises’ generate a unique fluidity in their market-generated functional profiles to withstand and overcome the disruptive effects of unpredictable phases of ‘revenue-freezes’ during the wanton plays of market forces and business operations.
• ‘Business and enterprises’ even carve, through positivity and intensity of aspirations, exalted paths to facilitate personal identity–projection of the entrepreneurs and also to enable the entrepreneurs to accomplish the goals of self-actualization.

The value, impact and implications of these glorious virtues of affirmance constituting the core of business and enterprises found scant and shriveled space in the State policies to improve the financial sector, as per final scripts emerging out of the multi-faceted deliberations by the high-powered institutions. Various questions remained unanswered by the massive State machinery, while framing and implementing the recovery policies.

The following preliminary questions still frantically beg answers amidst the ruins of ‘shut and dumped’ business and enterprises in the wake of ‘NPA policy’ rituals.

• Whether Banks and Financial Institutions are not required to develop academic and scientific foundations and facilities for specialized disciplines of empirical studies, data analysis and business research to improve and update their own policies and tools in aid of their ongoing and continuous tasks to support processes of optimization of scarce resources of the State?
• Whether Banks and Financial Institutions are not required to define, promote and develop ‘core values’ of entrepreneurship on the basis of their empirical inputs and insights gained during the critical evaluations of the enterprises and whether these institutions not obligated   to meaningfully employ the data-based studies to bolster the potential for viability of the business or enterprise before its forcible closure?
• Whether the institutional failure of Banks and Financial Institutions to create credible and updated data banks to actively support and sponsor academic research on the vital themes of economic desirability of the stressed project revival policies, valid mechanism for nurture of ‘core values’ of the ‘entrepreneurial culture’ to dismantle the generally status quoist  and fatalist culture of the society as well as  their failure to introduce and develop new disciplines of preparing value-based viability indexes, mechanisms and modules for the business and enterprises has not  adversely impacted the processes of improvement in the Financial Sector health of the nation?
• Whether the institutional failure of Banks and financial institutions to credibly strengthen and improve their own tools of evaluation as well as tools of prognosis and prevention of the chaos before hastening to initiate the harsh and stringent recovery action does not itself operate as a gross instance of Procrustean justice?
• Whether the institutional failure of Banks and financial institutions to compare in a fair perspective the negative weight of risk values with the diligently assessed buoyancy value of economic trends and tendencies of a business and enterprise in terms of employment generation, demand stabilization, supply rationalization, social security concerns and also in corporate responsibility perspective of  supporting nurture and nourishment of ‘entrepreneurial culture’ in the generally risk-averse society is not antithetic to the objects of the policies?
• Whether the institutional failure of Banks and financial institutions to assess the causes of ‘revenue-crunch’ or a ‘revenue freeze’, of business and enterprise in the economic domains does not per se amount to unjustified disregard of the viability potential or intrinsic values of the victim-units before declaring it as a persona non grata  is not unfair and regressive?
• Whether the institutional failure of Banks and financial institutions in the context of realistic assessment of the market-generated pain of slump or slowdown by the business and enterprises before sudden recourse to highhanded action to dump and discard well-established and still-viable projects in the chaos of real estate inventories is not subversive of national economic interests?

 

In the context of economic realities, the trends and tendencies of status quoism and fatalism in a society tantamount to harsh and crude affront to the soul of the individuals. A society affirming such life-style of status quoism and fatalism, through dark silence of regressive inaction, generates and justifies a culture of insensitivity amongst its members to bear with the pain of such affront to their selfhood. Thus nurturing and supporting a climate of entrepreneurship is obligatory for the State to save the society from gradual degeneration in terms of quality, ethics and positive vibrancy of human life. State endeavours of nurturing and supporting a climate of entrepreneurship need to have a consistency, direction and determination.

In this arena the celebrated works, explaining behavioral science correlation with economic realities, of an eminent an American economist, Richard Thaler, who was awarded Nobel Prize in the year 2017, are relevant. He strongly believed in the aphorism “If you want people to do something, make it easy”. His empirical findings and theoretical insights on ‘choice architecture’ of individuals as well as on ‘choice mechanics’ deserve central space in the exercises for policy framing in the Financial Sector. His Book ‘Winner’s Curse’ analyses paradoxes and anomalies of economic life.

A glance at the relevant data and statistics relating to forcibly closed units, the ruins of dead assets in the industrial estates, rusted machines and tools, heaps of unmarketable inventories under lock of the lenders, perishing and obsolescent stocks and the dark spectrum of meaninglessness in the wake of policy-shaped State actions not only operate as a catalysts in the regressive processes in economic scenario leading to erosion of economic values but also speak volumes for the insensitivity of the system to the erosion of ‘entrepreneurial culture’. The data and statistics per se demonstrate the negativities in the ‘Gains versus Losses’ story. The scripts of policies changed the paradigms, on one hand, while, on the other, introduced an unintended culture of ‘pseudo-dynamics’ in the financial sector, where State turned into celebration mode with designer embroidery of new paradigms, while entrepreneurs were dismissively offered  wrinkled ‘mourning robes’ as per sartorial designs contemplated in the ‘recovery policy’ . Such ‘pseudo-dynamics’ led to radical de-sensitization of the institutions even in the tasks to save what could with reasonable effort, be saved.

Strangely, when Banks themselves gluttonously consumed 1.75% of GDP of India (equivalent to Rs.3.6 lakh crores) in the name of recapitalization for their survival, the market-generated appetites of opportunity-hunting business and enterprises were despised and came to be treated by them as outrageously vicious.

What we recovered through these policies has to be, at the first instance, evaluated with the aid of cost benefit ratio analysis. Secondly, the net gain figure also needs to be critically assessed with pre-NPA policy recovery scenario to ascertain the real effects. As a necessary step in such evaluation, we need to calculate the losses suffered by the State due to sudden closure of even viable business and enterprises, through the cutting edge of ‘pseudo-dynamics’ abiding in the algorithms of the NPA Policy.

The First step of such statistical exercise deals with the actual recovery through the massive structures of Tribunals created under NPA Policy, by segregating, for the sake of analysis, the amounts recovered through pre-existing One Time Settlement Policies of the Banks and Financial Institutions.

The Second step in this statistical exercise highlights costs including recurring cost of the massive structures of Tribunals vis-à-vis the real-time benefit of disburdening the Civil Courts from the bank related litigation.

The Third step in this statistical exercise relates to the most crucial and critically under-valued subject. This subject of actuarial assessments of real-time loss of forced closures of business and enterprise in the toxic scenario of free-wheeling disposal of economic assets in the scenario of ‘pay-or-die’ games remained grossly overlooked in the new climate of radically transformed institutions.

The last step in the statistical exercise entails deeper probes and deeper insights into critical issues of ‘dead capital’ and ‘dead economic assets’ in the overall economic scenario as well as evaluation of the financial implications of the de-sensitized recovery-oriented State actions on the entrepreneurial dynamics (in contrast with ‘pseudo-dynamics’)  and aspirational values of the entrepreneurship in the economy.

As regards the evaluation of performance of the Debt Recovery Tribunals i.e. DRTs, on the strength of comparison with pre-NPA functioning and performance of Civil Courts is undertaken the outcomes are mixed qua qualitative and quantitative analysis. Even though quantitatively the performance of DRTs satisfactory in the context of recovery of dues, some vital questions pertaining to ‘dead asset’ scenario and active euthanasia for viable units, economic justification of the one-sidedness of approach   remain unanswered. Further if the performance statistics of DRTs are rationalized by identifying and excluding from the performance parameters of DRTs the results of ‘One Time Settlement’ exercises independently at the level of the Banks and financial Institutions, the graphs of actual performance of DRTs in the context of recovery are bound to mismatch with the available ones.

The evaluation of the DRTs, impacted by inherent parochialism of perspectives in the normative layers of task-specific jurisprudence, needs to be undertaken comprehensively. Preliminary observations in the context of evaluation of DRTs stand on the pedestal  of assessable tangible economic outcomes (both in terms of recovery as well as in terms of optimal utilization of economic assets) meanigfully point to jurisdictional limitations and frailties of the Tribunals. The functional strengths or ‘judicial quality’ of specialized Tribunals in the context of revitalization of the default-ridden financial sector, if evaluated on performance parameters, also leads to promiscuous results.

As regards the larger questions about optimal utilization of assets in the economic cycles and revitalization of financial sector, the DRTs, with a sense of aplomb, can fairly shrug off the answer, on the strength of limitations of their jurisdictional domains. Thus even the vital questions of scatterted skeletons of dead assets, sudden disruption of moving wheels of industry, losses in production, employment and revenue, the visible redundancy as well as the financial burdens of idle inventories of recklessly seized assets by Banks and Financial institutions stand unjustifiably undervalued in the restructured perspectives and re-built paradigms of the policy which per se constitute the task-specific jurisprudence.

The norms and procedures of the post-policy legalese qua public fund utilization do not hold space for the gains and losses analysis in a larger economic perspective. However, an authentic research into the cost benefit analysis of DRTs, by excluding the recovery through Bank’s own One Time Settlement policy- routes, required to the absurdity and surrealism of the flagship policies and paradigms in the structural folds of national ‘Financial-care’.

The evaluation of the economic implications qua the ‘dead assets’ scenario as well as the actuarial assessments of real time losses in terms of production, revenue and employment and other value-outputs of the ‘shut and dumped’ units, under the aegis of the new policy regime has not been undertaken by RBI or any other institution of the State, while DRTs, like other State institutions, continue to rest on oars in the placid waters of their task-specific jurisdiction.

The data-based research papers available on the performance aspects of DRTs are very few and limited. However, one researcher, Ms Sujata Visaria, of Columbia University in her research paper ‘Legal Reforms and Loan Repayment’- The Microeconomic Impact of Debt Recovery Tribunals in India (January 2005) analyzed some sporadic data through difference-in–difference research methodology with focus on micro-level mechanisms to assess judicial quality influences on the economic development. The said researcher worked on two sources of variation. Her research paper, available online, inter alia, discloses that all-inclusive( including recovery by Banks etc. through OTS routes) reduction by 3% to 10% in repayment delinquency is a fairly credible performance milestone of DRTs. Needless to add that the data pertains only to the repayment delinquency and includes recoveries under One Time Settlement policy of the Banks and Financial Institutions.

 

As per 2013-14 data ostensibly uploaded by a research group, DRTs recovered Rs.30, 950 Crores, while amount in claim of the Banks and financial Institutions before DRTs was Rs.2, 36,600 Crores. The said data discloses that recovery is to the extent only of 13% the amount in claim by the Bank and financial institution. The amount in claim by Banks and financial Institutions increased to Rs.3, 74,983 Crores in the year 2015, while the disposal rate of the cases in all 33 DRTs averaged out to 25% of the pending cases in the year 2015-16.

Richard H. Thaler, a Noble Laureate, in Economics in the year 2017, worked on the thesis of behavioral effects on economy in the context of accomplishment of the targeted results. He leaned heavily in favour of ‘Nudging Theory’ in Economics, popularly called ‘Thaler Nudge’. The micro-nudging techniques in economic sphere are time tested. Richard H. Thaler, analyzed the relevance and utility of micro-nudging techniques in the economic spheres, both at micro as well as at the macro levels. Under the said micro-nudging technique the bad factors have to be nudged out from the available choices by making the ‘desired products’ more visible on the shelves of choices.

In the vitiated scenario of bad loans, even a policy of flexible interest rates, with a supportive ‘push factor’, strongly favoring the compliant-enterprises with a transparent and value-based slew of incentives could be fairly introduced to accentuate the choice of the entrepreneurs in the direction of compliances. Such functional moulds, if properly constructed, could operate to nudge out the choice for non-compliant behaviour in favour of disciplined or compliant behaviour. A well-delineated micro-nudging methodology for a reasonable period of time ought to have preceded the NPA classification of the accounts and consequential shattering effects in the economic scenario. Before withdrawing life support to the business and enterprises under the new NPA policy, even the following vital aspects stood relegated to the backseat;

• What are the sale figures and purchase figures in the preceding four quarters of the business or enterprise and relevance of these figures in the value chain of the economy?
• What is the actual employment level in the business or enterprise in the four preceding quarters and what is the value and potential of the enterprise as an employment hub to support the economic and social stability?
• What is the actual contribution of the business or enterprise in meeting the urgent demand for particular product in the market?
• What is the revenue generation and contribution to the direct and indirect practices on the strength of the business or enterprise in question?
• What is the real value of the economic assets in their functional forms and what would be the expense of preserving, maintaining and safe keeping the assets before redeployment of such assets at another location, having regard to actual disposal time of the legal cases arising out of possession/sale?
• What would be the options available to the lenders in terms of left over assets to meet the deficit amounts after possession/sale of the prime assets of the business or enterprise?

 

The NPA policy remains painfully silent with regard to the economic consequences of ‘protect or dump’ choices qua weak, stressed and struggling enterprises. Thus even while in multiple segments heavy imports are becoming inevitable option to meet the growing domestic demands, the supply-side aberrations calling for urgent attention of the State, remain neglected in the NPA policy and the resultant paradigms for recovery of the dues.

Soren Kierkgaard Danish, Philosopher, aptly observed: “Life can only be understood backwards: but it must be lived forwards.” NPA Policy was neither fully tested on the relevant energy-flow-patterns in the historical perspective of economic scenario nor holds credible promise qua the futuristic perspectives and Atam-Nirbhar (self-reliant) oriented paradigms.

The following eloquent words of Nani A. Palkhivala, an eminent Jurist and Advocate, are relevant in the context of pari materia recovery policies of the State;

“Taxes are the life-blood of any government, but it cannot be overlooked that that blood is taken from the arteries of the taxpayer and, therefore, the transfusion is not to be accomplished on dictates of political expediency but in accordance with the principles of justice and good conscience.”