Debt recovery tribunals were set up under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 with the aim of streamlining the mechanism to recover bad debts. This process was earlier handled by civil courts before being shifted to 38 debt recovery tribunals and five debt recovery appellate tribunals across the country. Since their conception, these tribunals have been dogged by concerns about their judicial independence because the Ministry of Finance, which controls public-sector banks, has had significant influence on them.
Almost as soon as its parent statute was passed by Parliament in 1993, the Delhi High Court Bar Association challenged the constitutionality of the debt recovery tribunal on the grounds that its parent statute lacked the judicial independence that is expected of judicial bodies. In 1995, the Delhi High Court struck down the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ruling that it was “unconstitutional as it erodes the independence of the judiciary and is irrational, discriminatory, unreasonable, arbitrary and is hit by Article 14 of the Constitution”. (Article 14 deals with equality before the law). Subsequently, the Gauhati and Karnataka High Courts also struck down the same legislation for being unconstitutional. On appeal, however, the Supreme Court in 2002 over-ruled all of the High Courts and upheld the constitutionality of the legislation.
DRTs were created to help financial institutions recover dues speedily without being subjected to lengthy procedures of civil courts have fallen into the same trap precisely. In the words of Shaswat Sharma, partner, KPMG, India, “The functioning of DRTs needs to improve to ensure banks are able to recover their existing loans and offer fresh advances at cheaper rates…In the current scheme of things there is no mechanism in place to ensure that the tribunal disposes the case in a timely manner. There is a strong case to bring in more accountability for the DRT.” If dealing with the subject matter at hand with speed is the biggest challenge facing DRTs, any number of additional DRTs and Appellate Tribunals should address this problem convincingly as was outlined by the Finance Minister during his Budget Speech 16-17. The under performance is even keeping the RBI worried. In the words of Raghuram Rajan, Governor, RBI, “If bankers cannot get their money back, they are not going to give ou loans at cheap priceSo, making sure DRTs work better, making sure that you don’t have excess number of stays, excess number of appeals, is what needs to be focused on.”
Bankruptcy Code: Now with all the possible means exercised to constrain the rising debts, bad assets of financial institutions, the situation still seems far from under control, and its here that the proposed Bill on Bankruptcy with the vision to consolidate scattered laws relating to insolvency of companies makes a strong point. Recently, Finance Minister reiterated the commitment to introduce the Bill in the upcoming session of the Parliament. As with other mechanisms, the efficacy is still in hypothetical stage, but the Bill at least promises to accelerate the winding-up process of defaulting companies and opening up a quicker exit route for lenders. The draft of the code draws on may parallels to the US Bankruptcy Code, especially allowing companies to carry out businesses while simultaneously going through bankruptcy proceedings, while differing on management control, where, unlike in the US, the management control in India passes over to “insolvency resolution processes”. But, the question remains as to how would this Bill address the issue of NPAs? The impact felt is likely to be in,
a. The time frame of 180-day limit (an extension of a further 90 days in exceptional cases) would help lenders decide on the viability of the business, whereafter a liquidation process sets in.
b. Economic and financial viability of the debtor company is to be discussed in negotiations with the creditors facilitated by “insolvency experts” rather than courts lending the process more credibility.
c. Bill would have ample scope for early recognition of financial distress helping the process of easing out businesses under stress.
The success of the Bill would depend on how well it is implemented and whether setting up of an “insolvency regulator” would have the requisite powers to see its successful implementation. For the RBI, “an early clearance of the proposed insolvency and bankruptcy bill will play an important role in the face of mounting potential losses.”
Despite having a handful of measures to address the issues of NPAs and NPLs, few seem to be working positively, but are heavily relied upon and banked on for lack of a better alternative. What is really the need of the hour is to arm these mechanism to the teeth for results to flow out, and unless such is undertaken, the likelihood of policy paralysis would ensue.