New Delhi: The Insolvency and Bankruptcy Code and the Financial Resolution and Deposit Insurance Bill 2017 are symbiotic or at loggerheads?

The successive governments were understating the figures of non-performing assets for long but Mr. Jaitley admitted on 25 October 2015 that NPAs had soared to an unsustainable level of Rs. 7.33 lakh crore by June 2017. The leaders of AIBEA, the association of bank employees, are however arguing that the total bad assets including NPAs, restructured loans and stressed assets would be in the range of Rs. 16–17 lakh crore. The AIBEA leaders might be right because as far back as in June 2015 itself, Srinivasan Jain from NDTV worked out that the bad assets added up to Rs. 14 lakh crore (See

The numerous measures that the government earlier took to tackle NPAs did not bear fruit. Belatedly recognising the enormity of the problem, the NDA Government passed the Insolvency and Bankruptcy Code (IBC) in 2015 and the National Company Law Tribunal (NCLT) was refurbished under this to tackle the problem of insolvency as the sole authority.

2015 was the year when all PSBs together reported a net loss of Rs. 18,000 crore despite earning operational surplus of Rs. 1.40 lakh crore due to provisioning for the bad loans. In the December quarter of FY2017, the increase in NPAs exceeded the operational profits. That was the kind of debt trap the PSBs were wading into.

The PSB NPAs started having serious fiscal implications what with the capital requirement of PSBs hitting Rs. 2.4 lakh crore to stay afloat and the huge recapitalisation requirements from the budget alone pegged at Rs.70,000 crore by 2019. In October 2017, Mr. Jaitley announced a recapitalisation package of Rs.2.11 crore while asserting that it could be the last one and the banks should not expect any more packages. Was he close to the requirement? Upon closer scrutiny, it became clear the Mr. Jaitley had provided only Rs. 18,000 crore from budget and had asked the banks to raise Rs.1.35 lakh crore through recapitalisation bonds and Rs. 58,000 crore from the share market! Jaitley’s half-measure tops a series of half-measures by the successive governments in tackling the NPAs.

Meanwhile, the Modi Government has tabled the Financial Resolution and Deposit Insurance Bill 2017 (FRDI Bill) in the parliament, which is now under consideration of a Joint Parliamentary Committee (JPC) and is expected to be rushed through as a finance bill once the JPC submits its report, possibly in the Winter Session itself. This Bill provides for insolvency of banks and financial institutions. Is the Modi government seriously thinking of declaring some banks beyond salvage and planning to push them into bankruptcy? Why rush through such a bankruptcy bill without pursuing the IBC-NCLT route to recover bad loans and nursing banks back to health? Can the bankruptcy route offer a way out? Is a return to an era of bank collapses politically sustainable?

Even in the case of bad assets of the corporates and MSMEs, liquidation is only one of the options and should invariably be the last resort. The most common option is debt restructuring to revive where the bank can negotiate for a better return than the returns from liquidation. Another option is outright sale of the company to new bidder ready to offer the highest bid. But in the case of banks, liquidation should not be an option at all.

Because, under the new law, not only the government abdicates its sovereign commitment, which is treacherous, the depositors too lose even the legal entitlement to get a maximum of Rs.1 lakh for the deposits of any higher amount.

And it is still not clear whether under the new law after the bank is liquidated and all its assets including the bad assets are sold, those who purchase these assets have to go through the legal process prescribed by the IBC and NCLT Rules all over again or they can just auction off the assets of the borrowers like kabbadiwallas, without adhering to any due process of law. The borrowers would thus be affected even more than the depositors under the FRDI Act.

Even under the new law many disputes are bound to arise and the matter would go to higher judiciary and the picture on liquidation of banks might become clear only after years. So no quick fix for NPAs crisis in the near future. Liquidation of banks is thus a ham-handed shortcut non-solution.

The new law as well as the earlier ones at best differentiated only the wilful defaulters from the “genuine” ones. But even the new law has no provisions for identifying fraudulent defaulters and meting out stringent punishment for them or for the corrupt bank bureaucrats who colluded with them.

It provides for the state “defaulting” on its sovereign commitment but doesn’t differentiate among defaulters. For instance, it cannot guarantee that if a bank becomes bankrupt the pensioners, the handicapped, the women and those from SCs-STs background would get full refund on their deposits, underwritten by the state.

The government might think that it would only put in place a law for bankruptcy of banks and financial institutions but never invoke that. But bankruptcy of banks is not entirely in their hands. Prolonged stagnation in the economy itself might trigger another round of financial meltdown or even mere rumours of the government pushing some banks into bankruptcy might trigger a run on the deposits and exodus of bank depositors to other avenues of investment—which to some extent we already see in the booming stock markets amidst a flat economy. It would be a self-fulfilling speculation as bankruptcy of even a single bank might spark off a political earthquake among middle classes, far more severe than what demonetisation and GST caused.

The FRDI Bill 2017 is one indicator that the Modi Government is also considering reversal of Indira Gandhi’s nationalisation but unlike bank nationalisation which was a single-stroke affair, denationalisation would be a complex multi-pronged affair. Gradual disinvestment with private corporates increasing their holding in PSBs, strategic sale and forced insolvency-cum-restructuring, where the borrowers assets would be converted into shares, and fire sale of bad assets by handing them over to some ARCs etc., are the different routes under consideration.

The private banks are also eying takeover of some PSBs. But, ironically enough, Mr. Modi’s denationalisation would inevitably come to acquire an “anti-national” tag as five or the major private banks are foreign controlled—HDFC (where foreign institutions control 49% of the stakes), Axis Bank (62%), ICICI Bank (38%), Kotak Mahindra Bank (55%) and the Yes Bank (74%)!

There are 8.5 lakh bank employees in the country and on 28 February 2017 they went on a nationwide strike demanding recovery of bad loans and action against wilful defaulters. The coal workers have already forced this neo-liberal government to beat a retreat on privatisation of CIL and it remains to be seen whether Mr. Modi has the muscle to take on the combined might of these 8.5 lakh warriors.

In purely macro-economic terms, the bad assets of banks ballooned mainly because the UPA and then the NDA went on building up an inflated huge bubble economy with massive credit expansion from banks and when such expansion could no longer be sustained the NPAs bubble is threatening to burst. When the slowdown set in and there was pressure on the banks from the government to increase lending to sustain the level of investment and growth in the economy. But initially the banks had no surplus funds but after the short-sighted demonetisation, economic growth took a further nosedive, and though banks were flush with money there were no takers!

Now, the FRDI Bill reflects the government’s thinking on forced privatisation of the PSBs, the staggered denationalisation of banks, but if it becomes a reality, in future the government will have to depend entirely on the private sector and the private banks to maintain the level of investment in the economy, which is very risky as the government would lose its major macro-economic financial instrument, viz. PSBs. Denationalisation thus might further derail growth.

Jumping from demonetisation to denationalisation would thus be a jump from the frying pan to the fire! .