-By Pratyut Prakash
During the Covid pandemic and Russia-Ukraine war the world witnessed failure of numerous banks in the European Union and The United States with the closure of Silvergate, Silicon Valley Bank (SVB) and Signature Bank in the Silicon Valley which triggered banking crisis all across the European Union and United States. Due to which the Swiss National Bank (SNB) was forced to assure emergency liquidity measures. After the 2008 crisis along with all the scams that were happening, India was also witnessing a banking crisis and all of this came to surface in 2018 with the Punjab National Bank Crisis as the Nirav Modi Scam. The question is suddenly from 2018 to 2024 how did India go from facing a banking crisis to becoming an expert in avoiding a banking crisis. While so many banks all across the world were failing, how did Indian Banks stand strong during this period and what did the Reserve Bank of India do to protect the Indian banks. If we analyse from macro perspective, many loans were given when our economy performed well, then when they turned to bad loans, they were hidden by Asset Forbearance Rule due to which Non-Performing Asset started rising to scary levels as the loans which were to be marked as ‘High Risk’ were labelled as ‘Restructured’ and as a result the banks keep on lending and they got into even deeper trouble. This is how slowly India was inching towards a banking crisis. To help the public sector banks get strong financially, firstly the Indian Government and Banks added a huge amount of money to their funds from 2015 to 2019 which stood at ₹3.19 trillion rupees ($38 Billion) so the banks could have real cash to sustain their existence in case of economic slowdown and scams. Secondly the government merge the weak public sector banks with the stronger banks. This is the reason why the number of public sector banks dropped from 27 in 2017 to just 12 banks after the merger. This way the banks could utilise their resources, operate with better efficiency and they are able to reduce their expenses. The government introduced Prompt Corrective Action (PCA) framework. The PCA framework set guidelines based on bank’s financial health indicators which includes capital ratio, asset quality, profitability and leverage. So now if any bank crosses any of these thresholds, then RBI could immediately take action to prevent that bank from failing. The RBI monitors every important bank in the country so that India does not face a banking crisis. RBI issued guidelines for implementation of BASEL III framework. BASEL III is a set of rules which tells a bank that how strong and high their safety wall needs to be. It took India 6 years from 2013 to 2019 for complete implementation of BASEL III. If the BASEL III says that banks need to have 9% of their risky loans in their reserves, the RBI says banks need to have 11.5% of their risky loans in reserves. This way the RBI has a double layer protection for the banks as it regulates banks to have 2.5% more cash in reserves.
We need to note that the banks that failed in the United States did not have a BASEL III framework so because the RBI sets the rule BASEL III rules with some necessary changes for the Indian Banks, our county did not face a banking crisis.
Before 2016 there were three entities the Civil Court for customers and employees, the
Company Law Board for investors, the Debt Recovery Tribunal for banks and there were 7
acts that could be used to solve specific problem in the company. All three entities work
individually in different angles but no entity focus on root cause of problem, which is the
financial distress of the company.
This problem was so critical that it would take about 4.3 years to resolve an insolvency with
the recovery rate of just 26% of the amount and the rest 74% amount just go down the drain.
To address this issue, the union government and RBI came up with Insolvency and
Bankruptcy Code (IBC) in 2016.
The Insolvency and Bankruptcy Code allows the company to be in Moratorium Period of 180
days in which no legal action can be taken against the company, during this period an
Interim Resolution Professional is appointed by the National Company Law Tribunal (NCLT)
presides over the resolution and forms a Committee of Creditors who then appoints
Resolution Professional.
The Committee Creditors and the Resolution Professional make sure that they pay all the
salaries and will keep the operations of the company running so that company keeps on
generating revenue. This proved to be a game changer because since the company is
running, the company could be sold to another company to recover the debts of creditors.
Tata Steel acquiring 72.65% stack in Bhushan Stell for ₹35200 crores in 2017 is a classical
example for this.
The IBC acted as a saviour for banks as now banks will not loose the entire amount they
have given as loans to the companies in case of bankruptcy. With the implementation of IBC,
the recovery rate improved from 26% to 71.6% and the time taken for resolving an
insolvency improved from 4.3 years to just 1.8 years. This not only saved the banks but also
improved the ease of doing business in India.
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