Lok Sabha passes Bankruptcy code; Will this change life for Indian banks?

The Lok sabha, on Thursday, passed the Bankruptcy Bill, which promises banks, which promises to enable banks faster winding up of troubled companies and recover money before the value of the underlying assets get eroded fully.

FP Staff May 05, 2016 18:45:56 IST
Lok Sabha passes Bankruptcy code; Will this change life for Indian banks?

The Lok sabha, on Thursday, passed the Bankruptcy Bill, which promises to enable banks faster winding up of troubled companies and recover money before the value of the underlying assets get eroded fully. Earlier an expert panel, headed by former law secretary, T K Vishwanathan, had given its recommendations on the Bill. The Bill now will have to pass through the Rajya Sabha.

Lok Sabha passes Bankruptcy code Will this change life for Indian banks

File photo. PTI

The Bill, once becomes law, will enable the creditors to take most decisions and the law can, thus, help faster rehabilitation of companies. It will thus improve liquidity in the banking sector and credit flow. Banking sector has been lobbying for an effective bankruptcy code for long since the existing mechanisms such as SARFAESI Act and Debt Recovery Tribunals haven’t been helping much for faster recovery.

Indian banks are sitting on a huge pile of bad debts. The total chunk of gross Non-Performing Assets (NPAs) in the Indian banking system is at Rs 4 lakh crore, while there is an equal chunk of restructured loans as well, taking the total chunk of stressed assets in the banking system to about 11 per cent of the total loans given by Indian lenders.

Experts such as Jayesh Shah of Juris Corp has however, raised questions on whether the Bankruptcy Bill can address the functional issues in quickening the recovery process. The problem of dealing with the existing stock of bad debt is clearly a major challenge for banks.

As this article points out, there is a backlog of 70,000 liquidation cases will take time to clear. It typically takes four years to wind up an ailing company in India, twice as long as in China.

“There is a significant amount of work still to be done in creating the insolvency practitioners eco-system, the tribunals and the operating guidelines over the next few months, but board’s of companies will have to start re-examining how they deal with all classes of creditors once the code comes into place,” said Varun Gupta , Partner,Deal Advisory at KPMG in India.

In just 3-years, the NPAs of PSBs more than doubled as a percent of total corporate loans, going by the information provided by Minister of state of finance, Jayant Sinha, in Parliament.

To be more specific, while the total corporate loans of state-run banks grew from Rs 24.11 lakh crore in fiscal year 2013 to Rs 26.95 lakh crore in December, 2015, the bad loans grew from Rs 84,050 crore to Rs 2,23,613 crore.

As a percentage of total loans, the bad loans grew from 3.49 per cent in fiscal 2013 to 8.3 per cent in late 2015. Corporate bad loans constitute 56 per cent of the total bad loans of state-run banks.

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