Insolvency and Bankruptcy Code {IBC} - Game Changer

Insolvency and Bankruptcy Code {IBC}

​This is a game changer for India's banking sector. The IBC gave banks the power they needed.

Earlier, banks had to run after promoters to recover their money. Now promoters are running after banks and looking for solutions.

As per the RBI's financial stability report, more than 4,300 applications were filed in the National Company Law Tribunal (NCLT).

With this, banks have sent out a clear message - pay up...or be ready for bankruptcy proceedings.

The country had a first taste of success after the banks successfully recovered Rs 352 billion following the successful resolution of Bhushan Steel. This implies a haircut of around 37% for banks.

Mind you, most banks had already made provisions for about 50% for Bhushan Steel's loan. Now with the successful resolution (with the recovery rate of ~73%), the proceeds from the sale will directly boost profitability of the banks.

The concerned bank has already made 50% provision and with the successful resolution, it will write-back this loan from the provisioning. This means more profits and more funds available for further lending.

Clearly, the IBC is the biggest reform for the banking sector in a long time.

It's important to keep in mind, the code remains a work in progress. It has some teething troubles and requires constant tweaks, as indeed all new laws do.

We may not achieve Japanese levels of loan recovery. But, we have no doubt, India has made a good beginning of this front.

More importantly, lending in the next credit cycle will be more disciplined as a result.

However, going forward, the IBC framework will change India's position as it is a time-bound process.

Cases once admitted are to be resolved within 270 days; if not, companies go into liquidation.

We already had a taste of success with the successful conclusion of the Bhushan steel case.

Enthused by this success, the finance ministry expects banks to write back more than Rs 1 trillion after the resolution of all 12 big NPA cases that have been referred for insolvency proceedings by the RBI.

We believe, this can be a big boon for the banking sector and the Indian economy. This will not only help banks recover bad loans to an extent but also help bring back credit growth.