The recent directive from the Indian Government, mandating state-run banks to review their top 20 insolvency cases monthly, marks a significant step in addressing the challenges faced by the banking sector in managing bad debts and insolvency issues. This move is set against the backdrop of rising concerns about the efficiency and speed of resolving insolvency cases in the country.
Key Aspects of the Directive:
- Monthly Reviews of Insolvency Cases: The Indian Finance Ministry has instructed the managing directors of public sector banks to conduct monthly reviews of the top 20 insolvency cases. This directive aims to accelerate the resolution of insolvency cases, which have been experiencing significant delays, especially in the admission stage at insolvency courts.
- Role of NARCL: The National Asset Reconstruction Company Limited (NARCL) plays a crucial role in this context. Established to take over and manage the stressed assets of commercial banks, NARCL’s objective is to clean up banks’ balance sheets and release funds for fostering economic growth. As of November 2024, NARCL has acquired Rs 11,617 crore of bad debt from public sector banks, although it initially targeted Rs 2 lakh crore as per the Union Cabinet’s decision in September 2021.
- Challenges in Recovery: Recovery of bad debts remains a challenge. For instance, by November 30, 2023, NARCL had only recovered a meager Rs 16.64 crore. The difficulty is compounded by the fact that some accounts under NARCL are embroiled in the Insolvency and Bankruptcy Code (IBC) process, where recovery can only happen post the approval of the resolution plan by the National Company Law Appellate Tribunal (NCLAT).
- Delays in Insolvency Resolution: The insolvency resolution process is plagued by delays, often taking over a year for cases to be admitted into tribunals. This situation is far from the intended 360-day timeline set for the resolution process.
- Significant Write-Offs by Public Sector Banks: The scale of the issue is evident in the amount of bad debt written off by public sector banks. Over Rs 7 lakh crore worth of bad debt was written off between 2019 and 2023. However, the recovery rate has been low. In 2023, out of Rs 6.5 lakh crore worth of stuck assets, only about 15% (Rs 94,000 crore) was recovered, with a significant portion coming through the IBC route.
Implications and Potential Outcomes:
- Enhanced Focus on Efficient Resolution: The monthly review mechanism is expected to bring more accountability and focus on the resolution of large insolvency cases, potentially leading to quicker and more efficient resolution processes.
- Strengthening the Banking Sector: By addressing the issue of bad debts and insolvency, this directive aims to strengthen the overall health of public sector banks, crucial for the stability of the financial system.
- Economic Growth: The resolution of these bad debts is essential for freeing up capital and resources that can be redirected towards productive economic activities, thereby aiding in economic growth.
- Challenges Ahead: While the directive is a step in the right direction, the challenges of implementing effective recovery strategies and dealing with the delays in the legal and insolvency framework remain significant hurdles.
In conclusion, the Indian Government’s directive for state-run banks to review their top 20 insolvency cases monthly is a strategic move to tackle the pervasive issue of bad debts in the banking sector. It reflects a concerted effort to streamline the resolution process and strengthen the financial stability of public sector banks, with broader implications for the country’s economic health. However, the success of this initiative will largely depend on the effective execution of these reviews and the ability to overcome the existing challenges in the insolvency resolution framework.