Position after Nationalisation of Banks: After nationalisation of banks in 1969 and 1980, the banks achieved geographical growth and people could avoid the private lenders. But, banks suffered losses year after year due to low efficiency, low productivity and bad performance of loan portfolio.

Further, the banks were curtailed by the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) which were at high percentages. The banks depended on the share brokers for arranging the call money deposits to meet these ratios. Brokers, in turn, availed overdraft facilities from the banks for collection of high value instruments pertaining to securities transactions with other banks.

Sick Industrial Companies Act (SICA), 1985: The government constituted the T. T. Tiwari Committee in 1981, to deal with sick industrial units. Based on the recommendations of this Committee, the Sick Industrial Companies (Special Provisions) Act (SICA), 1985 was approved by Parliament. SICA dealt with both, private and public companies, with the objective of, “determining sickness and expediting the revival of potentially viable units or closure of unviable units”. Under SICA, the Board of Industrial and Financial Reconstruction (BIFR) was set up to assess the viability of industrial companies and refer unviable companies to high courts for liquidation.

SICA was mostly ineffective in the revival or liquidation of sick industrial units. The lengthy, sometimes even never-ending legal proceedings in BIFR and the high courts rendered the law ineffective. Courts often slowed the liquidation of companies recommended by BIFR and acted outside the remit of SICA to protect the interests of workers. BIFR, and in several cases the high courts, did not take a broader view of the implications of their judgments, which proved counter-productive in protecting workers’ interest or the financial sector and overall business sentiment.

Under the SICA Act, owners/directors remained at the helm of companies during BIFR proceedings. The BIFR Tribunal acquired the reputation of a ‘haven’ for debtor companies to seek shelter from their creditors for decades, with corporate owners-managers siphoning off assets in the interim. This made debt recovery difficult, if not impossible, even if BIFR eventually ordered liquidation of the company concerned. In summary, SICA proved to be a major hurdle in effective implementation of subsequent legislative reforms to address insolvency cases.

The SICA was repealed in December 2016.

Securities Scam and the position thereafter: The securities scam surfaced in 1990-91 wherein sham transactions were found and no physical transfer of securities took place. Due to the same, many banks suffered losses. Further, unscrupulous borrowers took loans and never paid back. The remedy for the banks was with civil courts which took a lot of time.

Narasimham-I Committee: In the aftermath of Securities Scam, Government of India constituted Narasimham-1 Committee to review and suggest the aspects relating to structure, organisation procedures for functioning of the financial system. This Committee was also called the Banking Sector Reforms Committee. The recommendations of the Committee were:

i.              Reduction in rates of SLR and CRR

ii.            Stipulation of capital adequacy norms

iii.           Adopting uniform practices with regard to income recognition, asset classification and provisioning against bad and doubtful debts.

iv.           Setting up special tribunals for recovery of debts

v.            Setting up of Asset Reconstruction Fund to be used by banks to shore up their balance sheets.