To deal with the proclivity of banks, especially public sector banks, to routinely push bad loans to National Company Law Tribunals (NCLTs) for resolution, the Prime Minister’s Office (PMO) has suggested that they should only refer cases to a tribunal where the loan amount is at least ₹200 crore. This is aimed at de-clogging the overburdened NCLT ecosystem.

Where the loan amount is less than ₹200 crore, the PMO wants banks to work with the current promoters to find long-term solution (even offering a One Time Settlement scheme) to prevent closure of companies and job losses.

Banks find it a safer option to refer all bad loan cases to NCLT as they fear that resolutions through one-time settlement or sale to an Asset Reconstruction Company could invite scrutiny from investigative agencies.

As a result, most banks, especially public sector banks, are using NCLT as an escape route rather than a tool to empower and keep companies running, the PMO said

“Bankers seem to suggest that when it comes to taking a haircut, they prefer decision-making through NCLT rather than sticking out their neck to endorse a resolution plan outside the court process.

A better solution

“This is ironical since bankers are fully aware that pre-NCLT solutions may clearly work out better in terms of overall recovery. Even in the NCLT, it is the committee of creditors, which is the banks themselves, which are finally taking the call,” the PMO said in a note on the “Prevailing bad loans situation with banks”, which was circulated among banks by the Finance Ministry.

The PMO emphasised that empowering decision making for arriving at a balanced resolution, based on merit and without the fear of being questioned by investigative authorities, is one of the most significant takeaways and can go a long way in terms of de-clogging the NCLT ecosystem.

“Around 19,000 cases have been referred to NCLT and 10,000 have been admitted. While there have been successes in the cases of some large companies and a few smaller accounts as well, majority of the ₹200-crore and below companies are in a very vulnerable position.

“The collapse of so many companies will cause an exponential job loss and thereby accentuate the economic slowdown,” the PMO said.

NCLT infra under pressure

As per the note, the NCLT infrastructure is proving woefully inadequate to deal with the quantum of cases flooding the system. The lack of established legal precedents, which will only build up over time, also makes litigation under the IBC framework elaborate and time consuming (long drawn). There are 15 NCLT benches across the country. In the note, the PMO observed that in the case of smaller companies (loan size of less than ₹200 crore, approximately employing 3,000-4,000 workers), resolution professionals are usually unable to successfully run these companies due to lack of industry and sectoral knowledge. This invariably leads to unit shut downs and job losses, it added.

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