THE CLEAN UP ACT
The Modi regime has worked towards restoring the health of the banking sector by reducing bad loans and bringing judicial discipline in the insolvency process
THE GLOBAL FINANCIAL CRISIS OF 2008 SAW SEVERAL COUNTRIES resort to fiscal stimulus to bolster their economies. India was no exception. However, the massive capital infusion led to profligacy and a subsequent bad loan pile-up, triggering the ‘twin balance sheet problem’—where corporates overleveraged themselves to the point of being unable to repay loans, and banks came under severe stress due to mounting nonperforming assets (NPAs).
From around Rs 60,000 crore in March 2010, NPAs saw an over threefold surge to Rs 2 lakh crore by March 2014, just before the Bharatiya Janata Party (BJP) assumed power at the Centre. By March 2018, they had further escalated to a staggering Rs 10.2 lakh crore, with public sector banks (PSBs) accounting for a whopping 80 per cent.
This enfeebled the banks, hampering their lending capabilities. With numerous companies grappling with issues related to land acquisition or procuring feedstock, a comprehensive code to address insolvency and bankruptcy of corporates and individuals also became imperative, ushering in judicial discipline in the process. The Insolvency and Bankruptcy Code (IBC) 2016, thus, aimed at addressing inadequacies in the process of winding up companies in the Companies Act 1956 and 2013. Even the Sick Industrial Companies (Special Provisions) Act 1985 had failed to deliver on this front. In all, 887 insolvent firms saw a resolution between late 2016, when the IBC was adopted, and December 2023. The total realisation for creditors stood at about Rs 3.2 lakh crore, or nearly 32 per cent of their admitted claims. This meant banks had to take huge ‘haircuts’ on their loans, but nevertheless saw some part of the dues being repaid. Meanwhile, further measures were implemented to reduce bad loans. By the end of CY2023, gross NPAs came down to Rs 4.85 lakh crore, the reduction attributed to the recovery of loans by banks as well as some big write-offs, though some critics have termed it as “window-dressing”.
The Centre also carried out a major consolidation of PSBs to strengthen their balance sheets and improve their ability to lend. It started with the State Bank of India (SBI) acquiring five of its subsidiary banks in 2017. Today, there are only 12 PSBs, down from 27 that year. “We are happy to have restored the Indian banks to good health, but the entire sector needs a lot more vibrancy and we need a lot more banks,” Union finance minister Nirmala Sitharaman told ¡¢ £¤¡¢¥. This would be a mix of big and small banks, she added. ■