Banking Sector in India: Non-Performing Assets (NPAs)

Non-Performing Assets (NPAs)

Definition: A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
Classification of assets: As per the RBI guideline, banks are required to classify NPAs further into:
- Substandard assets: Assets which have remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset that has remained in the substandard category for a period of 12 months.
- Loss assets: It is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some recovery value.

Insolvency and Bankruptcy Board of India (IBBI)

It was founded on October 1, 2016, under the 2016 Insolvency and Bankruptcy Code (IBC).
It is in charge of putting the IBC into action. The IBC modifies and consolidates the laws governing individual, partnership, and corporate insolvency resolution in a timely manner.
Function:
- The IBBI regulates both professionals and processes.
- It has regulatory authority over insolvency professional agencies, entities, insolvency professionals, and information utilities.
- Under the IBC, it enforces rules for corporate insolvency resolution, individual insolvency resolution, corporate liquidation, and individual bankruptcy.
- It establishes the minimum eligibility standards for the registration of insolvency professional agencies, insolvency professionals, and information utilities, as well as the curriculum for the qualifying examination of insolvency professionals for their enrollment.
- It collects and keeps records about insolvency and bankruptcy cases and disseminates information about them.
Appointment and composition:
- Appointed by the Central Government.
- The Board consists of a Chairperson and three members chosen from among Central Government officers with the rank of Joint Secretary or higher. Each of the three members will serve as an ex-officio representative of the Ministries of Finance, Corporate Affairs, and Law.
- The RBI (Reserve Bank of India) appoints one member as an ex-officio member.
- Five more members are appointed by the Central Government, at least three of whom must be full-time members.
Tenure – The Chairperson and members (other than ex-officio members) serve for five years or until they reach the age of sixty-five, whichever comes first, and are eligible for re-appointment.

Insolvency and Bankruptcy Code 2016

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016, at a time when India’s Non-Performing Assets and loan defaults were building up.
It was enacted to modernize India’s business distress resolution process and to unify previously existing regulations into a comprehensive time-bound mechanism.
In India, insolvency settlement took an average of 4.3 years. The Code strives to encourage entrepreneurship, increase credit availability, and balance the interests of all stakeholders. When the IBC declares insolvency, there are two options: resolution or liquidation.
All efforts are made to remedy the insolvency by devising a restructuring or new ownership plan, and if those efforts fail, the company’s assets are liquidated.
Under the IBC, companies must complete the full insolvency process within 180 days. If creditors do not object to the extension, the deadline may be extended.
Smaller enterprises, including startups, with yearly sales of Rs 1 crore must complete the insolvency process within 90 days.