The Economic Survey of 2017-18 believes the government’s twin reforms of the Insolvency and Bankruptcy Code (IBC) and the bank recapitalisation plan will help companies resume spending activities. Also, banks would be better positioned to increase their lending to “critical, but currently stressed sectors of infrastructure and manufacturing”.
While the IBC provides a strong resolution framework for companies to clean up their balance sheets and settle debts, the recapitalisation plan, which, according to the Economic Survey, is estimated to cost 1.2 per cent of the country’s gross domestic product (GDP), will uplift the capital base of major public sector banks (PSBs). The recapitalisation package was announced in October 2017 with the aim of strengthening PSBs’ health and, therefore, improving conditions in credit markets.
Credit growth to the industrial sector, for example, only turned around recently after remaining “persistently” negative during October 2016 and October 2017, while credit growth to medium-scale industries has remained negative since June 2015, the Economic Survey says.
The IBC legislation was passed in May 2016, and around 525 petitions have been admitted by the National Company Law Tribunal (NCLT) bench across the country so far. As of January 6, 2018, there were 451 cases in progress under the Corporate Insolvency Resolution Process (CIRP), totaling Rs 1.28 trillion (Table 1).
So far, 10 resolution plans have been approved, 36 cases have been closed subject to appeal and/or review, and liquidation orders have been passed in 30 cases. The gross non-performing advances (GNPA) ratio of scheduled commercial banks (SCBs) rose to 10.2 per cent as of September 2017 from 9.6 per cent in March 2017, according to the Survey. On the other hand, the stressed advances (SA) ratio rose slightly from 12.1 per cent in March 2017 to 12.2 per cent in September 2017.
For public sector banks, their GNPA ratios rose from 12.5 per cent in March 2017 to 13.5 per cent in September 2017, while their SA ratio rose from 15.6 per cent to 16.2 per cent during the period, according to the survey.
The effectiveness of the new code has been the judiciary’s adjudication in these matters, the survey’s authors say, wherein the strict time limits set by the code have been adhered to, by all NCLT benches across the country, despite huge inflow of cases. These benches have admitted or rejected applications under the CIRP effectively, with minimal delays, the Survey notes.
It goes on to say, “in addition, appellate courts, including the NCLAT (National Company Law Appellate Tribunal), high courts and the Supreme Court have also disposed of appeals quickly and decisively. In this process, a rich case-law has evolved, reducing future legal uncertainty.”