The former Reserve Bank of India (RBI) governor Dr. Raghuram Rajan in his tenure recognised the rising bad debts within the Public Sector Banks (PSBs) in India and the financial harm these debts posed to the Indian economy. He initiated measures to clean this mess which has been continued by the present Governor as well.

In June, the RBI identified 12 accounts totaling 25 percent of the NPAs of the banking system for insolvency proceedings. Under the Banking Regulation (Amendment) Ordinance, 2017 RBI constituted Internal Advisory Committee (IAC) to tackle the the rising bad debt/non performing assets (NPA) issue."The IAC noted that under the recommended criterion, 12 accounts totaling about 25 percent of the current gross NPAs of the banking system would qualify for immediate reference under IBC (Insolvency and Bankruptcy Code, 2016)," the RBI said in a statement following the IAC's first meeting here. "The IAC recommended for IBC reference all accounts with fund and non-fund based outstanding amount greater than Rs 5,000 crore, with 60 percent or more classified as non-performing by banks as of March 31, 2016," it said. (smetimes.in)

In response to the RBI directive, the state lenders State Bank of India (SBI) and Standard Chartered Bank have initiated the  insolvency proceedings against India's global steel producer, Essar Steel.

This move has been contested by the Essar steel and the steel producer has moved the Gujarat High Court on July 4, alleging that it has been singled out by the lenders.

Essar had argued that it was not given enough opportunity to present its position before the insolvency case was filed at the NCLT. At the time, lenders were already discussing a restructuring plan approved by the company’s board and it required six months to implement it. (moneycontrol.com)

Lawyers representing RBI argued that the company was “misguiding” the court, adding that Essar Steel had been informed before the insolvency case was filed.

The RBI counsel argued that it was well within its powers to pass general or a special order to invoke Insolvency and Bankruptcy Code (IBC) and the notification was “not made on imaginary grounds but based on strong facts”. (moneycontrol.com)

The RBI told the Gujarat High Court that Essar Steel was not singled out for insolvency proceedings and all big defaulters with over Rs 5,000 crore of outstanding loans are being subjected to the process with an aim of resolving the bad loan problem plaguing the Indian banking system.

Arguing before Justice S G Shah, the central bank's counsel Darius Khambatta also said that the non-performing assets (NPAs) of Essar Steel rose from Rs 31,671 crore on March 31, 2016 to Rs 32,864 crore on March 31 this year. (deccanchronicle.com)

The central bank's counsel Darius Khambata told the High Court that it was crystal clear from the minutes of the meeting between the company and its lenders that it was "far from reaching any restructuring settlement".

(firstpost.com)

As for the company's allegation that it was being singled out, the RBI counsel said the insolvency proceedings would actually help the company and added that the objective of the proceedings at the NCLT was to recover "maximum value in a minimum time-bound manner". (firstpost.com)

The State Bank of India on Thursday told the Gujarat high court that Essar Steel had “suppressed facts” while challenging the Reserve Bank of India’s (RBI) directive to lender banks to initiate insolvency proceedings against the company.

SBI counsel Ravi Kadam told the bench of S. G. Shah that Essar Steel had accepted a decision by the joint lenders forum (JLF) of the banks to approach the National Company Law Tribunal (NCLT) for insolvency proceedings against the firm. (livemint.com)

https://youtu.be/_bt8-iuDwqQ

Tweet by EconomicTimes: .@Essar_Steel vs @RBI: #EssarSteel has Rs 45,670 cr of #debt outstanding. Govt wants to recover country's economic… https://t.co/qmvLTsi3t5 - on Wed Jul 12 07:59:27

Tweet by ET NOW: Essar Steel Vs RBI: Going to NCLT protects co's interest and allows timely restructuring. - on Wed Jul 12 07:58:57

Tweet by EconomicTimes: How @Essar_Steel's legal challenge can scupper government's boldest move on #BadLoans
https://t.co/rIC3C02L8f - on Wed Jul 12 16:15:01

The court is likely to pass an order on Monday for the ongoing matter on Essar Steel versus RBI wherein the company has filed a petition challenging the central bank’s 13 June directive.

Growing Debt Problems of PSBs

Earlier this month, the Reserve Bank of India (RBI) released the Financial Stability Report (FSR) and spelt out some stark facts. Between April 2016 and March 2017, while deposits grew by 9 per cent, growth in lending was 0.8 per cent—that is, just a minuscule portion of additional deposits could be deployed by the banks to earn from. For the second year in succession, PSBs ‘recorded negative returns on their assets’. (newindianexpress.com)

Worse, bad loans or gross non-performing assets have gone up from 9.83 per cent as on March 2016 to 12.23 per cent, and the projections of the FSR show these could touch nearly 14 per cent by March 2018. The FSR also cautions: “A severe credit shock is likely to impact capital adequacy and profitability of a significant number of banks”, and that the worst-affected would be PSBs.  (newindianexpress.com)