A good start

Build capacity to support the RBI's bold decisions on NPAs

The Reserve Bank of India (RBI) has made an important start towards tackling India’s bad debt problem. On Tuesday, the independent advisory committee that the RBI has set up to advise on loan resolution chose 12 large non-performing accounts for resolution under the Insolvency and Bankruptcy Code (IBC). These chosen accounts together make up 25 per cent of India’s gross non-performing assets (NPAs) and they will now be subject to the resolution provisions of the new IBC. This is a welcome move, and it comes with refreshing speed a month or so after the RBI was empowered to create the independent advisory committee. It is not clear which accounts have been chosen, for the RBI says it has used certain general principles — that 60 per cent of the account be non-performing, that it has been classified as a bad loan for at least a year, and so on. Accusations of arbitrariness will thus be difficult to levy. What is important now is to swiftly follow up once this decision is made. But several challenges lie ahead that will have to be addressed before this course of action yields results.

For one, the IBC is untested. Many are sceptical that it will be able to handle large-scale resolution, especially given the stringent timetables that are part of the law. Now that the committee has chosen certain accounts and associated assets, the next step is for banks to approach the National Company Law Tribunal (NCLT), which will appoint a resolution professional to manage the assets under question. The problem is that, at this precise moment, the supporting institutional infrastructure for the ambitious new bankruptcy code has not really been built. This will be a severe test for the various tribunals that are supposed to implement the law, as well as for the supply of trained resolution professionals. It is noteworthy that there is no existing track record for the implementation of the IBC successfully on smaller accounts.

Unfortunately, assets currently being administered under the IBC have not passed through to the resolution stage yet; most are tied up in litigation in the higher judiciary over questions about the interpretation of the Code. The ultimate effectiveness of the new system has not yet, therefore, been demonstrated. In addition, as a consequence of litigation and open legal questions over interpretation, many resolution professionals are a little hesitant to step into the fray immediately. They would ideally prefer that these open questions of law be settled first. Nobody wants to find himself before a court for actions taken in good faith in the course of carrying out professional duties. The government and the legal system thus has considerable work to do in order to ensure that there is capacity in place to deal with non-performing assets that will shortly start coming through the system. The price discovery process for the sell-off of assets may also be challenging at a time when business confidence is shaky and it is uncertain whether banks are in a position to accept bigger haircuts should the situation arise. Most important are the insulation, independence, and empowerment of the “oversight committee” — which will make the all-important decision on how much of a haircut will be taken.