Rajya Sabha passes Bankruptcy code: Can it help banks address the bad loan issue?

The Rajya Sabha on Wednesday cleared the long-awaited Insolvency and Bankruptcy Code, 2016, that seeks to improve the ease of doing business in the country by enabling banks to wind up companies faster if resolution isn’t feasible. Lok Sabha passed the Bill on last Thursday.

FP Staff May 12, 2016 12:29:00 IST
Rajya Sabha passes Bankruptcy code: Can it help banks address the bad loan issue?

The Rajya Sabha on Wednesday cleared the long-awaited Insolvency and Bankruptcy Code, 2016, that seeks to improve the ease of doing business in the country by enabling banks to wind up companies faster if resolution isn’t feasible. Lok Sabha passed the Bill on last Thursday.

The law enables banks to push for resolution/recovery of the money from a troubled company within a period of 180 days, with a grace period of another 90 days if majority (75 percent) of creditors agrees. If the recovery doesn’t happen even then, the company will be liquidated automatically.

Rajya Sabha passes Bankruptcy code Can it help banks address the bad loan issue

Representational image. Reuters

Presently, recovering money from a defaulted corporate borrower is a nightmare for bankers since it takes years for the Debt Recovery Tribunals (DRTs) to finish the litigation. Promoters typically drag banks to various other courts to delay their payments. By the time, the whole process gets over, there will be nothing left for banks to recover. The underlying value of the assets would have eroded sharply by then. The new law promises a change to this scenario by overhauling the laws regulating insolvency amid a surge in bad loans.

Officials and experts say the passing of the legislation before 31 May can help India improve its rankings in the World Bank's "ease of doing business index". At present on the parameter of resolving insolvency, India is ranked 136 among 189 countries. Once it gets the Rajya Sabha nod, the new law will give the banks "more confidence" to lend for long-term projects such as roads, ports and power plants, officials said.

Can the new law make a difference?

But, as Firstpost highlighted in an earlier article the key point here is the effective implementation of the new law. Even the existing DRT (Debt Recovery Tribunal) mechanism was brought in to make possible faster resolution of banker-borrower disputes since the general judicial platforms lacked the infrastructure and expertise to deal with complex financial litigations between a lender and borrower. But, the DRT has clearly failed to do what it was supposed to do on account of its slow-paced approach.

The point here is that even though the new law is in place, its success depends on how conducive is our legal system to support the execution of the Law and how fast banks can exercise their rights. As the Vijay Mallya-Kingfisher case shows, banks have been fighting this case with the liquor baron in different courts (DRTs, High Courts and Supreme Courts), but even after 4 years of default, there has been no meaningful progress on recovery.

Indian banks are struggling with huge bad debts with a total Rs 4 lakh crore Gross NPAs and an equal amount of restructured loans. Majority of the stressed assets, which constitute 11 per cent of the total loans given by banks, are from loans given to large corporations. This highlights the need for quicker resolution of stressed cases in the banking sector.

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