An insight to the functionality of the Banking System

Bank accepts deposits and they give loans to their customers, the interest paid to the depositors are comparatively lesser than the interest charged from the customers and the difference between the interest charged and interest paid is a profit for the bank and this is how the bank generates income and the entire banking model operates. The loans which are already being disbursed to the customer are regarded as assets by the bank. In case of default for 90 days i.e. if the customers don’t pay any of the emi comprises of principal and interest amount or only interest amount as the case maybe than that loan amount will be regarded as Non-Performing Assets (NPA) by the bank. Furthermore, the bank can restructure the loan amount if the party is in a sound position or is willing to pay the dues; if not then the lenders will initiate the legal proceedings as per the provisions of The Insolvency & Bankruptcy Code, 2016 against the defaulters to recover its dues. As the substantial portion of loan amount are being sanctioned to the corporates so a situation may arise that due to the poor performance of the entity or if the business fails then the entity will default in paying the debt or the installments and this is the reason why the Insolvency & Bankruptcy Code, 2016 came into force as earlier the lenders were not given such statutory powers to recover their debts from the debtors in case of any defaults.

The Impact of Covid-19

In the 2nd half of March 2020, as the Covid-19 infection cases were increasing at an alarming rate, the administration implemented a complete lockdown to curb the growing number of cases which was although criticized by the economist considering the economic point of view, still it proves that the well-being of the people of our country is the topmost priority of the administration even if that action had terrible impact on the economy maybe that is why the number of deaths due to covid-19 in India is 1/3rd than that of US even after having more than 4 times the population size of the US where they didn’t execute a complete lockdown. So, the next 6 months starting from the last week of March was catastrophic for the economy as the enterprises were not allowed to function, sales of the various product & services went down (except the healthcare and essential goods), productions were stopped and that had a severe impact on the Cash flows from operating activities of the enterprises which in my opinion acts as a Central Nervous System of a business, without which the business will not survive. Also, there were panic all around; those industries which were dealing with production of essentials goods were facing shortage of labour. As per the International Labour Organization, more than 80% of the Indian Economy operates in the unorganized sectors which basically comprises of micro, small and medium Enterprises and business owners. As the revenue from operations were negligible so it was presumed that the small enterprises most of which doesn’t have enough amount in their General Reserves were about to default on the loan given to them by consortium of lenders. At a time when the Lenders are already suffering from the problem of NPAs so without the intervention of the Administration the scenario would have been considerably worst.

The Rescue by The Finance Minister

In the 2nd half of May 2020 after approximately 2 months of the implementation of Lockdown, The Finance Minister Nirmala Sitharaman introduced certain changes to some of the provisions of The Insolvency & Bankruptcy Code, 2016 keeping in mind the ongoing crisis.

Some of them are:-

• Debts related to the coronavirus pandemic will not be included in default category under the Insolvency and Bankruptcy Code (IBC) for one year.
• The minimum threshold for initiating IBC proceedings was raised from Rs 1 lakh to Rs 1 crore, which largely insulates MSMEs. Other announcements to boost the MSMEs are:- • Rs 1 lakh crore Agri Infrastructure Fund for farm gate infrastructure for farmers and Rs 10,000 crore scheme for the formalization of Micro Food Enterprises (MFEs) under the Rs 20 lakh crore stimulus package.
• Amendments to the Essential Commodities Act to enable better price realization for farmers and said no stock limit should apply to processors or value chain participants.
• ‘One Nation One Ration Card’, free food grain supply to migrants and creation of affordable rental housing complexes (ARHC) in urban areas for migrant workers and poor.

My Analysis

It is inevitable that the number of defaults are directly proportional to the inefficient functioning of the economy and as a developing country it is very necessary for the Administration to protect the organizations which are directly contributing to the growth of the economy; they are the ones who provide jobs to the working class of people, they are the ones who makes a significant contribution to the revenues collected by the Government. The Covid-19 crisis faced by the corporates was basically because of the lockdown rules which were implemented by the Administration and they were being forced to comply with these rules. In my opinion if not compensating the loses directly, the Government’s decision of providing some relaxations to the Corporates as against some strict rules of compliances is absolutely justifiable otherwise we could have witnessed a manifold increase in the number of Bankruptcies filed in the National Company Law Tribunal (NCLT) or suits filed as against defaulters till now. Instead of running the business the small-business owners could have been focusing on various lawsuits which would have been filed by the creditors against them for the recovery of dues, NPAs figure would have been dramatic, banking system could have collapsed, depositors would have lost their faith from the Banks, many employees who were directly or indirectly related to those firms could have lost their jobs and there would have been sharp increase in the unemployment rates and at the same time there would have been sharp decline in the Government revenues such as GST, Tax (Direct & Indirect), etc. -By Achint Kumar Singh