Roshni Sinha and Gayatri Mann - April 3, 2019 The increasing Non-Performing Assets (NPAs) in the Indian banking sector has recently been the subject of much discussion and scrutiny. Yesterday, the Supreme Court struck down a circular dated February 12, 2018 issued by the Reserve Bank of India (RBI). The RBI circular laid down a revised framework for the resolution of stressed assets. In this blog, we examine the extent of NPAs in India, and recent events leading up to the Supreme Court judgement.

What is the extent and effect of the NPA problem in India? Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorised as: (i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped making interest or principal repayments for over 90 days.

As of 2018, the total NPAs in the economy stand at Rs 9.6 lakh crore. About 88% of these NPAs are from loans and advances of public sector banks. Banks are required to lend a certain percentage of their loans to priority sectors. These sectors are identified by the RBI and include agriculture, housing, education and small scale industries.[1] In 2018, of the total NPAs, 22% were from priority sector loans, and 78% were from non-priority sector loans.

In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 (see Figure 1). This indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.

What has been done to address the problem of growing NPAs? The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, remedial measures for banks prescribed by the RBI for internal restructuring of stressed assets, and second, legislative means of resolving NPAs under various laws (like the Insolvency and Bankruptcy Code, 2016).

Remedial Measures Over the years, the RBI has issued various guidelines for banks aimed at the resolution of stressed assets in the economy. These included introduction of certain schemes such as: (i) Strategic Debt Restructuring (which allowed banks to change the management of the defaulting company), and (ii) Joint Lenders’ Forum (where lenders evolved a resolution plan and voted on its implementation). A summary of the various schemes implemented by the RBI is provided in Table 1.

Loan restructuring Banks internally undertake restructuring of loans, if the borrower is unable to repay the amount. This involves changing the terms of repayment, which includes altering the payment schedule of loans or interest rates.

Corporate Debt Restructuring Allows for restructuring of a borrower’s outstanding loans from more than one bank. This mechanism is available if the borrower’s outstanding loans are more than Rs 10 crore.[2]

Joint Lender's Forum Lenders evolve an action plan to resolve the NPA of a defaulter.[3] If 60% of the creditors by value, and 50% of the creditors by number agree, a recovery plan will be implemented.[4]

5:25 Scheme Banks can extend loan term to 25 years based on cash flow of projects for which the loan was given. Interest rates and other terms of the loans may be readjusted every five years.[5]

Strategic Debt Restructuring Banks convert their debt into equity to hold a majority of shares in a company. This allows banks to change the management of the defaulting company.[6]

Sustainable Structuring of Stressed Assets Allows for conversion of a part of the outstanding debt to equity or preference shares if: (i) project for which loan was taken has commenced operations, and (ii) borrower can repay over 50% of the loan.[7]

Legislative Measures The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts. When a default occurs, the creditors or debtor may apply to the National Company Law Tribunal for initiating the resolution process. Once the application is approved, the resolution process will have to be completed within 180 days (extendable by 90 days) from the date of approval. The resolution process will be presided over by an insolvency professional to decide whether to restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount. If a timely decision is not arrived at, the defaulter’s assets are liquidated.

The Banking Regulation (Amendment) Act, 2017: The amendment allows RBI to direct banks to initiate recovery proceedings against defaulting accounts under the IBC. Further, under Section 35AA of the Act, RBI may also issue directions to banks for resolution of specific stressed assets.

In June 2017, an internal advisory committee of RBI identified 500 defaulters with the highest value of NPAs.[8] The committee recommended that 12 largest non-performing accounts, each with outstanding amounts greater than Rs 5,000 crore and totalling 25% of the NPAs of the economy, be referred for resolution under the IBC immediately. Proceedings against the 12 largest defaulters have been initiated under the IBC.

What was the February 12 circular issued by the RBI? Subsequent to the enactment of the IBC, the RBI put in place a framework for restructuring of stressed assets of over Rs 2,000 crore on or after March 1, 2018. The resolution plan for such restructuring must be unanimously approved by all lenders and implemented within 180 days from the date of the first default. If the plan is not implemented within the stipulated time period, the stressed assets are required to be referred to the NCLT under IBC within 15 days. Further, the framework introduced a provision for early identification and categorisation of stressed assets before they are classified as NPAs.

On what grounds was the RBI circular challenged? Borrowers whose loans were tagged as NPAs before the release of the circular recently crossed the 180-day deadline for internal resolution by banks. Some of these borrowers, including various power producers and sugar mills, had appealed against the RBI circular in various High Courts. A two-judge bench of the Allahabad High Court ruled in favour of the RBI’s powers to issue these guidelines, and refused to grant interim relief to power producers from being taken to the NCLT for bankruptcy. These batch of petitions against the circular were transferred to the Supreme Court, which issued an order in September 2018 to maintain status quo on the same.

What did the Supreme Court order? The Court held the circular issued by RBI was outside the scope of the power given to it under Article 35AA of the Banking Regulation (Amendment) Act, 2017. The Court reasoned that Section 35AA was proposed by the 2017 Act to authorise the RBI to issues directions only in relation to specific cases of default by specific debtors. It held that the RBI circular issued directions in relation to debtors in general and this was outside their scope of power. The court also held that consequently all IBC proceedings initiated under the RBI circular are quashed.

During the proceedings, various companies argued that the RBI circular applies to all corporate debtors alike, without looking into each individual’s sectors problems and attempting to solve them. For instance, several power companies provided sector specific reasons for delay in payment of bank dues. The reasons included: (i) cancellation of coal blocks by the SC leading to non-availability of fuel, (ii) lack of enough power purchase agreements by states, (iii) non-payment of dues by DISCOMs, and (iv) delays in project implementation leading to cost overruns. Note that, in its 40th report, the Parliamentary Standing Committee on Energy analysed the impact of the RBI circular on the power sector and noted that the ‘one size fits all’ approach of the RBI is erroneous.

As many as 5,332 fire spots had been noticed since November 1 last year, the beginning of forest fire season, in the State. The month of March had alone registered 4,495 fire spots.

Why worry about forest fires? Apart from causing a huge loss to the timber and other fruit and leaf bearing trees and creepers of the forest, fires also destroy wildlife and their habitat. Nests and eggs of ground dwelling birds are lost. Reptiles also lose their young ones due to forest fires.

Causes of Forest Fire: Forest fires are caused by Natural causes as well as Man-made or anthropogenic causes. Natural causes such as lightning which set trees on fire. High atmospheric temperatures and low humidity offer favourable circumstance for a fire to start.

Man-made causes like flame, cigarette, electric spark or any source of ignition will also cause forest fires. Traditionally Indian forests have been affected by fires. The problem has been aggravated with rising human and cattle population and the increase in demand for grazing, shifting cultivation and Forest products by individuals and communities.

High temperature, wind speed and direction, level of moisture in soil and atmosphere and duration of dry spells can intensify the forest fires.

Preparedness and mitigation measures: Forest fires are usually seasonal. They usually start in the dry season and can be prevented by adequate precautions. Increase the number of fire fighters as well as equip them properly with drinking water bottles, back-up supplies of food and water, proper shoes or boots, rakes, spades and other implements, light, rechargeable torches, and so on.

Seasonal labour could be contracted during the fire season. With adequate training, they would serve to fill gaps along the line. Local villagers would be the best resource. To keep the source of fire separated from combustible material. Do not allow combustible material to pile up

Adopt safe practices in areas near forests viz. factories, coalmines, oil stores, chemical plants and even in household kitchens. In case of forest fires, the volunteer teams are essential not only for fire fighting but also to keep watch on the start of forest and sound an alert. Arrange fire fighting drills Extra funds should be used for hiring more Forest Department field staff to put out fires during the fire season and to patrol the forests during other times.

How does government get informed on Forest Fire? When a fire is detected by NASA’s MODIS (Moderate Resolution Imaging Spectroradiometer) and VIIRS (Visible Infrared Imaging Radiometer Suite) satellites, the Forest Survey of India (FSI) analyses the data by overlaying the digitised boundaries of forest areas to pinpoint the location to the exact forest compartment.

The FSI relays news of the fire to the concerned State, so that the Divisional Forest Officer (DFO) in charge of the forest where the fire is raging is informed.

About MODIS: MODIS (or Moderate Resolution Imaging Spectroradiometer) is a key instrument aboard the Terra (originally known as EOS AM-1) and Aqua (originally known as EOS PM-1) satellites.

Terra’s orbit around the Earth is timed so that it passes from north to south across the equator in the morning, while Aqua passes south to north over the equator in the afternoon.

Terra MODIS and Aqua MODIS are viewing the entire Earth’s surface every 1 to 2 days, acquiring data in 36 spectral bands, or groups of wavelengths. Significance: These data will improve our understanding of global dynamics and processes occurring on the land, in the oceans, and in the lower atmosphere. MODIS is playing a vital role in the development of validated, global, interactive Earth system models able to predict global change accurately enough to assist policy makers in making sound decisions concerning the protection of our environment.

It was launched on-board PSLV-C45. As many as 28 small satellites of international customers were also put in space as secondary riders.

How does EMISAT work? EMISAT is an advanced electronic intelligence (ELINT) satellite jointly developed by ISRO-DRDO. It is meant for electromagnetic spectrum measurements.

It is modelled after a famous Israeli spy satellite called SARAL (Satellite with ARgos and ALtika). Both these satellites have the SSB-2 bus protocol — the core component for their sharp electronic surveillance capabilities across the length and width of a large country like India.

EMISAT also has a special altimeter (a radar altitude measuring device) called ‘AltiKa’ that works in the Ka-band microwave region of the spectrum. The electronic surveillance payload of EMISAT was developed under a DRDO’s project called KAUTILYA.

The main capability of EMISAT is in signal intelligence — intercepting signals broadcasted by communication systems, radars, and other electronic systems. The Ka-band frequency that EMISAT is sensitive to, allows the 436-kg EMISAT — India’s newest spy in the sky — to scan through ice, rain, coastal zones, land masses, forests and wave heights with ease.

Many First In The Launch: First time ISRO is launching satellites in three different orbits. The PSLV-C45 launch vehicle is also the first PSLV rocket to use four strap-on motors. The four strap-on motor rockets are from the PSLV-QL range. This is the first time it has been envisaged to provide a microgravity environment for research organizations and academic institutes to perform experiments.

The PSLV-C45 is also the first launch to use solar panels to make the fourth stage last longer in orbit. Using the solar panels in the fourth stage, the PSLV can provide power to attached payloads almost indefinitely. PSLV-C45: First Launch Vehicle to Use Solar Propulsion.

Key facts: SRO is the first-level regulator that performs the crucial task of regulating intermediaries representing a particular segment of securities market on behalf of the regulator. It would be seen as an extension of the regulatory authority of the SEBI and would perform the tasks delegated to it by the SEBI.

The role of SRO is developmental, regulatory, related to grievance redressal and dispute resolution as well as taking disciplinary actions. The regulator has proposed a governing board with at least 50% public interest directors along with 25% representation each of shareholder directors and elected representatives.

Further, the governing board can appoint a managing director or chief executive officer to manage the daily affairs of the SRO.

Need: SEBI was in receipt of a large number of complaints alleging charging of exorbitant fees, assurance of returns, misconduct etc. by investment advisers. Given the growth in this segment of the market, it was felt that the time is appropriate to initiate the formation of an SRO.

Key facts: India and Bolivia agreed to forge a mutually beneficial partnership to facilitate Bolivian supplies of lithium Carbonate to India and foster joint ventures for lithium battery/cell production plants in India. This agreement will make Bolivia, which is known to have one-fourth of the world’s lithium reserves, one of the major provider of metal for India’s e-mobility and e-storage needs.

The agreement facilitates mechanisms for the commercialization of Lithium Carbonate and Potassium Chloride produced in Bolivia by Yacimientos de Litio Bolivianos Corporación (YLB – Corporación).

Significance of the agreement: Bolivia is estimated to hold over 60% of the world’s reserves for lithium but has not yet started producing it commercially. India is the second largest manufacturer of mobile phones in the world and has the ambitious goal of 30 per cent electric vehicles by 2030. But India imports all its lithium-ion batteries since India has no known sources of lithium, and zero lithium-ion battery manufacturing capabilities currently. As a result, India is heavily dependent on China, Taiwan and Japan for import, especially of batteries required for portable electronics.

With this agreement, number of Indian companies setting up production capabilities in Bolivia goes up, as well as the import of lithium to India. Domestic production is also set to see a boost, from the automotive perspective. Further, the arrival of hybrids and electric vehicles from as early as 2020 onwards, will force manufacturers to look at local production.

This agreement could also turn out to be the backbone for the recently launched FAME India policy (Faster Adoption and Manufacture of (Hybrid and) Electric Vehicles) and will also give a substantial push to India’s ambition to have at least 30 per cent of its vehicles run on electric batteries by 2030.

Key facts: The golden yellow spice, named after the district where it is produced, has been cultivated since time immemorial and is known for its medicinal value. Turmeric is the main cash crop of tribal people in Kandhamal.

Apart from domestic use, turmeric is also used for cosmetic and medicinal purposes. More than 60,000 families (nearly 50% of Kandhamal population) are engaged in growing the variety. The crop is sustainable in adverse climatic conditions.

About GI tag: What is it? A GI is primarily an agricultural, natural or a manufactured product (handicrafts and industrial goods) originating from a definite geographical territory.

Significance of a GI tag: Typically, such a name conveys an assurance of quality and distinctiveness, which is essentially attributable to the place of its origin.

Security: Once the GI protection is granted, no other producer can misuse the name to market similar products. It also provides comfort to customers about the authenticity of that product.

Provisions in this regard: GI is covered as element of intellectual property rights (IPRs) under Paris Convention for Protection of Industrial Property.

At international level, GI is governed by WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In India, Geographical Indications of Goods (Registration and Protection Act), 1999 governs it.

What is it? ‘Café Scientifique’ is the first of its kind initiative in the State of Kerala aimed at popularising Science.

Objective: The café envisages to bring science back into popular culture by demystifying scientific research for the public and empowering non-scientists to comfortably assess science and technology issues, particularly those that impact social policymaking.

Background: It is a grassroots public science initiative based on the French Café Philosophique model. Originating in England, the concept quickly gained popularity and was adopted by other countries.

How it works? The plan is to organise meetings of science enthusiasts in the district every month at a café or a convenient place, where one or more scientists are invited to talk to the public about new developments in science. The project is also aimed at making science relevant, powerful and important to the public, especially the younger generations. Various topics such as universe, climate change, evolution, genetics and human-animal relations will be discussed in every monthly gathering.