Resolution of Stressed Assets in Indian Banks – Recent Legal Developments

Abstract

Indian banks have been plagued with the problem of gigantic accumulation non-performing assets (NPA) over the past few years, thus having a severe impact on the entire economy. An asset is termed as non-performing when it stops generating income for the bank. This paper is concerned with only loans and advances that have become non-performing. As per the definition given by the Reserve Bank of India (RBI), a term loan is declared to be non-performing when the principal amount or the interest payable is overdue for a period of more than 90 days.

Some of the historical events which contributed to the creation of NPAs are bank nationalization in 1969, economic liberalization in 1991 and the sub-prime crisis in 2008. RBI, as the central bank of India is tasked with regulation of banking companies in India. RBI has come up with several steps over the past couple of decades to help banks recover dues in order to reduce the quantum of NPAs in the books of the banks. This paper analyses these various frameworks that RBI has notified from time to time and tries to assess the effectiveness of these measures in curbing the problem of accumulation of NPA.

New laws such as Recovery of Debt Due to Banks and Financial Institutions Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 have been enacted in order to facilitate speedy recovery of debts by banks and financial institutions without intervention of the court. The recent addition to this list is the Insolvency and Bankruptcy Code, 2016 which has allowed creditors to take control of the management and assets of the borrower. This paper concludes in regard to whether IBC will be able to achieve what the previous laws failed to do.