By Snigdha Kalra
The Insolvency and Bankruptcy Code (IBC), which came into force in India in May 2016, is a law introduced to deal with bankruptcy proceedings. Under this code, a single law has been created for insolvency and bankruptcy, taking the previously existing laws into its ambit. The main features of IBC are that it provides for timely resolution and quick dealing with non-performing assets (NPAs) and sick companies, providing more power to the Reserve Bank of India (RBI) to refer companies it deems fit for insolvency with the National Company Law Tribunal (NCLT). Till now, the RBI has released two lists of such companies, the most recent one being that of 50 companies, released on the 29th of August.
Stuck in a chakravyuh
The Economic Survey of 2016-17 had thrown light upon the difficulties that sick firms face in an exit, by comparing the economy to a chakravyuh, where the entry norms are easy but the exit is very complex, with the result that most firms keep on operating in the eye of heavy losses. One of the suggestions made for the improvement of this situation was direct policy action through the IBC. The reduction in time taken for exit procedure could help these firms to a large extent.
What SBI has to say
A research report published by the State Bank of India (SBI) in August said that the implementation of the Insolvency and Bankruptcy Code (IBC) could give a push to credit growth in India. We believe with the implementation of Insolvency and Bankruptcy Code (IBC), bank credit growth stand to expand sharply as we move closer to find a resolution for stressed companies. , said S K Ghosh, group chief economic advisor, SBI, aiding his claims with international findings. According to SBIs research, credit growth increased ten fold in Germany just after the implementation of such a code.
More on the IBC
Under the current NPA crisis that India is facing, banks have become cautious with lending activities. They have stopped lending leniently to borrowers in risk of default. As such, credit growth has slowed, falling to a sixty-year low of 5.1% in April, before recovering minimally to around 6%. In such a dire situation, the provisions of IBC are bound to aid recovery. Data from World Bank reveals that insolvency resolution in India used to take 4.3 years on an average before IBC was implemented.
However, now, its provisions call for a 180-day insolvency process of stressed assets with banks. This focus on the timely resolution of bad loans will boost the confidence of banks and allow them to lend more leniently, thereby boosting credit growth. International examples also back this trend. In China, the bankruptcy code was implemented in 2006. In three years, it led to a credit growth of 30%. Countries like Poland and Spain also show similar trends.
A positive change
In June 2017, the RBI identified 12 accounts, which accounted for 25% of the total NPAs and referred them to the NCLT for resolution proceedings under the IBC. Now, it has come up with a second list of 50 companies, including big names like Videocon Industries and Asian Colour. It shows that the code is off to a promising start. However, a word of warning by SK Ghoshfactors like demand for credit and investment cycles also impact the rate of growth. While hoping for a recovery, we also need to be cautious about other factors which may prevent a higher growth rate. The two sides of the coin go together.
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