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A Cross-Border Solution to a Domestic Problem: India’s Banks and the Road to Recovering Non-Performing Assets
A key issue within the nation’s present financial crisis has been the Indian banks’ hesitation to lend due to the increasingly large volumes of non-performing assets (NPAs) in their balance sheets...Seven months into Prime Minister Narendra Modi’s landslide victory in the 2019 general elections, the good times have come to an end with ratings agency Moody’s downgrading its...
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A key issue within the nation’s present financial crisis has been the Indian banks’ hesitation to lend due to the increasingly large volumes of non-performing assets (NPAs) in their balance sheets...
Seven months into Prime Minister Narendra Modi’s landslide victory in the 2019 general elections, the good times have come to an end with ratings agency Moody’s downgrading its economic outlook for the country from “stable” to “negative,” pointing to both an economic slowdown as well as an ongoing crisis in the financial sector.
The Rise of Non-Performing Assets in India’s Banks
A key issue within the nation’s present financial crisis has been the Indian banks’ hesitation to lend due to the increasingly large volumes of non-performing assets (NPAs) in their balance sheets. Non-Performing Assets are an outcome when the borrower intentionally defaults on the loan payment or is unable to repay the loan due to poor
economic conditions affecting his business.
What has become clear due to India’s new agreement with
Switzerland (which enables the automatic sharing of tax related information, and prioritizes it above Swiss banking
privacy laws) is that a significant proportion of these funds are hidden rather than unavailable. This is also the case with the Indian tax authorities. It is estimated that there are $82 billion of non-performing assets and $343 billion of undeclared funds which could be taxed. The NPAs are particularly toxic for state-owned banks as they seriously hamper their ability to be profitable: Indeed, the Indian government is consolidating the number of state-owned banks by roughly 60%, perhaps because PSBs (public sector banks) account for approximately 90% of non-performing assets. NPAs are particularly problematic for a rapidly growing economy. This is because when Banks have access to their funds limited, they are less likely to provide funds which are necessary for a growing economy.
The crisis has been accompanied by a sharp decline in investment growth and an economic slowdown. This has
mainly been attributed to the dominance of governmentowned banks in the system, of which poor risk management is commonplace. The above is compounded by the inability of PSBs to recover these loans: there is little incentive and
a major disincentive because taking a haircut early on and closing the loan can put bankers under risk of impropriety.
Building an Aggressive and Global Asset Recovery Strategy
Having said this, there are strategies which can be employed to recover the monies from NPAs, but it requires the banks to be proactive, aggressive and look outside their country’s borders. A necessary pre-emptive step would be a bona fide investigation to ensure that the bank’s internal processes have robust anti-corruption and legal, and compliance departments which are necessary for such an undertaking, and to prevent similar issues arising in the future. For many lenders anxious to regain a sense of order in their own balance sheets, the immediate next step would be putting together a cross-border strategy aimed at targeting the NPAs in question and recovering what is owed to them.
It is worth recognizing that the NPAs are in this situation because they have been obscured by willful debtors. Many of the funds which are owed to the Banks will be hidden in global businesses which employ strong asset protection tools, offshore entities and sophisticated strategies to make sure that their funds are very challenging to reach. In these situations, obtaining a court judgment against a willful debtor is the first and most important step, in a global game of chess in which experience and creativity are essential.
Mapping Out Assets and Identifying the Right Targets
Parties that choose to wait until the date of judgment allow too little time to create a strategy and mobilize for its implementation – especially if an asset recovery campaign is to take place across multiple jurisdictions. Therefore, the key to success in this context is to first form as complete a picture as possible of the debtor’s assets around the globe, and then filing strategic proceedings against any relevant affiliates or other third parties.
When the assets and relevant parties have been laid out, the choice of creditor-friendly jurisdictions is crucial in uncovering obscured funds. For instance, U.S. statute allows parties to non-U.S. proceedings (such as offshore) to bring discovery actions against third parties to obtain documents and testimony. Similarly, in Hong Kong, registers of members can be accessed under the Hong Kong Companies Ordinance.
Once the money has been tracked down, the next crucial step is to obtain a freezing injunction to ensure that the
money stays where it is. A standalone freezing injunction can be used in English common law jurisdictions such as
Cayman, the British Virgin Islands (BVI), and Hong Kong as a quick and effective tool that requires little red tape and would likely be a strong first step in freezing assets from the other end of the world.
Discovery and freezing orders are the “go-to” conventional tools for asset recovery and are often quite effective in domestic cases, but multi-jurisdictional cases are often a bit more complex. When it comes to targeting assets abroad, a creditor might need extra help by deploying additional tools.
Insolvency Proceedings as a Tool for Asset Recovery
One such additional tool for an Indian Bank to recover a NPA will be insolvency proceedings, which take the critical step of establishing the defendant as a judgment debtor and the claimant as an unsecured creditor. This can be an effective strategy as it allows the insolvency practitioner to ‘step into the shoes’ of the judgment debtor to investigate its affairs and realize assets for the benefit of the judgment creditor.
As mentioned earlier, the chances of successful asset recovery can be greatly improved where a judgment creditor is able to move with speed and agility. The EUs’ insolvency framework and the UNCITRAL Model Law which binds the U.S.A., Canada, Singapore, and others can help expedite a campaign by recognizing the original judgment without
requiring reciprocity in the initial jurisdiction.
The procedure to commence insolvency proceedings,
the threshold requirements, and the powers available to insolvency practitioners once appointed will vary from
jurisdiction to jurisdiction. As a general rule, countries tend to use one or both of the standard tests in determining whether insolvency proceedings may be commenced: (i) the judgment debtor’s inability to pay debts; and (ii) where the debtor’s liabilities exceed its assets (also known as the balance sheet test). As a judgment creditor, a bank could point to an unsatisfied statutory demand as evidence of a debtor’s inability to pay their debts.
Beyond insolvency proceedings, there are a number of other strategies both inside and outside the courtroom that can be used in aid of an asset recovery campaign. However, each case is unique depending on the nature of both creditor and debtor, and it takes a keen eye to determine which tailored strategy fits which problem.
A Cross-Border Solution to a Domestic Problem
Ultimately, in order for the Indian banks to monetize the NPAs, they will be forced to act in a way that they have not before: aggressive and globally. However, importance must also be placed on prevention as well as cure. The issues were systemic, and may, indeed, continue to be. As mentioned earlier, an independent investigation is key in (i) stopping the issues from reoccurring and also in (ii) allowing those recovering the assets to do so unhindered and without fear of allegations of corruption which have held up banks in the past. The same approach must be taken to first obtaining judgments and then recovering the assets.
At the end of the day, it is crucial that these financial institutions and other NPA creditors adopt a global perspective in order to solve what appears to be a domestic problem.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.