June , 2018
India’s NPA-ridden banks find a magic wand in IBC
14:01 pm

Tushar K. Mahanti

If the present government’s biggest structural reform – implementation of Goods and Services Tax – has not yet delivered to its potential; the second big reform in the form of Insolvency and Bankruptcy Code (IBC) has shown visible effect on the financial life of the economy. It has brought significant behavioural changes and has re-written the terms of commitment between lenders and debtors that was largely in favour of big borrowers for years.

After the successful sale of Bhushan Steel, the Insolvency and Bankruptcy Code seems to have appeared as a magic wand to India’s NPA-ridden commercial banks. Bhushan Steel owes close to `48,000 crore to banks and was referred to the NCLT by Punjab National Bank last year.

Look at the fact: Tata Steel’s acquisition of Bhushan Steel alone is estimated to reduce banks’ NPAs by Rs. 35,000 crore. An elated financial services secretary Rajeev Kumar has reportedly, said. “IBC is transforming credit culture in New India. About Rs. 35,000 crore reductions of NPAs of PSBs (Public Sector Banks) in Bhushan Steel case is a major development. Reduction of NPAs in individual PSBs would range from about Rs. 500 crore to over Rs. 10,000 crore, he has said.

Encouraged by the successful conclusion of the Bhushan Steel case, the finance ministry expects banks to write back more than Rs. 1 lakh crore after the resolution of all 12 NPA cases referred to insolvency proceedings by the RBI in its first list. About 40% of Indian banks’ non-performing assets are undergoing resolution under the National Company Law Appellate Tribunal (NCLT), which started in July 2017.

Thirty-five thousand crore rupees are a huge amount but then it seems to be just the tip of the iceberg. The fear of losing control over their companies has prompted promoters, who have defaulted on repayment of loans to banks, to settle their dues of around Rs. 83,000 crore before action was initiated under the newly-enacted Insolvency and Bankruptcy Code. On last count, data compiled by the ministry of corporate affairs showed that over 2,100 companies have cleared their outstanding amounts, a majority of which came after the government amended the IBC. A loan is classified as an NPA if dues are unpaid for 90 days.

The Insolvency and Bankruptcy Code, considered to be the biggest economic reform in India after the Goods and Services Tax (GST) is a rare example of a speedy rollout and implementation of a much-needed law. The Insolvency and Bankruptcy Code, 2016 is a bankruptcy law which aims at providing speedy resolution process to the creditors for recovery of their money due from the debtors.

Basic framework of the IBC

IBC consolidates all the laws related to insolvency in India by creating a single law. Under the law, a bankrupt entity is a debtor who has been adjudged as bankrupt by an adjudicating authority that has passed a bankruptcy order. The adjudicating authority would be the National Company Law Tribunal (NCLT) for companies and limited liability partnerships, and the Debt Recovery Tribunal (DRT) for individuals and partnership firms. 

Under IBC insolvency is defined as a financial condition where a company’s liabilities are far more than its assets so that it is unable to run its business and repay the loan. Bankruptcy is a state where a company is legally declared by a NCLT / DRT as incapable of paying their dues.

How IBC works?

In an insolvency resolution case a notice is first sent to the debtor mentioning the amount of recoverable dues. If there is no reply from the debtor in 14 days, an application is made by the creditor to the tribunal for initiation of insolvency process.

If the tribunal finds that the dues are legit and the debtor is deferring or not intending to make the payment, then within 14 days the matter is admitted by the tribunal and a Insolvency Resolution Professional (IRP) is appointed who takes charge of the debtor company assets, making the company non operational. The IRP has to submit a plan to the tribunal which would lay down a detailed plan to finish the process within 180days (in case of companies) which can be extended by mutual consent of the parties.

If the resolution plan is accepted by the creditors and a go ahead is given by the tribunal, then it is worked out by the debtor company and the creditors to try and clear the dues the resolution plan is not accepted by the parties, the tribunal may pass and order for liquidation of the company and pay off the creditor dues.

Why was IBC 2016 needed?

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. There were, in fact, several laws that deal with insolvency for companies, such as the Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Then there are a couple of laws dating from pre-independence days dealing with individual debtors. But these laws were time taking and often turned judicial, According to the World Bank’s Ease of Doing Business report, it takes more than four years on an average to resolve insolvency in India. The insolvency and bankruptcy code 2016 seeks to cut down the time to less than a year. This will not only improve the ease of doing business in India, but also facilitate a better and faster debt recovery mechanism in the country.

Postscript: After the successful sale of Bhushan Steel India’s commercial banks are happy and are hoping to reduce their NPAs considerably soon. The nation is happy that defaulters are brought to book. RBI is all smile, the process to recover banks’ dues has begun. But in the melee the pains of promoters are forgotten. After all, there would be many who really have failed to repay debts for reasons beyond their control.



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