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Bank credit likely to see manifold jump post IBC’s implementation

By DK Aggarwal

In a major step to bring in reforms to India..

By DK Aggarwal

In a major step to bring in reforms to India’s ailing banking system, the apex bank and the government are taking measures to clean-up the balance sheets, with the latest effort being the asset quality review conducted by the RBI in December 2015 and the promulgation of the Insolvency and Bankruptcy Code 2016.

Also the government recapitalisation plan for the public sector banks should help facilitate these banks in writing down bad loans.

The President’s recent assent to the Insolvency and Bankruptcy Code (IBC) ordinance, which bars promoters from bidding for their own distressed companies, could impact lenders as it is expected to bring down the value of distressed companies due to reduced competition.

To note, banks and other creditors can now take the defaulting company to the National Company Law Tribunal to initiate insolvency proceedings. Meanwhile, it is expected that the lower valuation of the distressed companies would attract Private equity (PE) players to bid for stressed assets.

The IBC, which became operational in December 2016, provides a time-bound, monitored resolution to insolvency of a company.

The credibility, financial strength, experience and track record of the bidders are some of the factors that are considered by the committee of creditors in disposing of a stressed asset that is up for sale. On the flip side, the Reserve Bank of India has asked the Indian banks, which are sitting on a mountain of bad debt (i.e around Rs 9 lakh crore), to provide for 50 per cent of the value of assets for all cases referred to the National Company Law Tribunal (NCLT) and this has raised the concern regarding the valuation of the banks as it will severely dent their earnings.

As the Union Budget 2018 is approaching, market participants are hopeful that it would reflect the commitment of the government to improve quality of expenditure. Moreover, they also expect that the government would focus on completing the reforms like the Insolvency and Bankruptcy Code, 2016 (IBC), Universalisation and deepening of banking etc which were undertaken by it in over the last three years.

India currently ranks 103 out of 190 countries in the World Bank's index, on the ease of resolving insolvencies. If as expected all things fall in place, the Indian banks would overcome the issue of swelling of NPA to some extent, which has crippled bank lending and we may rank up in this parameter too.

In the countries like the US and the UK the implementation of the code has been a great success. It could be seen that in most of the countries, the bank credit growth has increased manifold post the implementation of the Code.

(The author is Chairman and MD, SMC Investments and Advisors. Views and recommendations given in this section are his own and do not represent those of Please consult your financial adviser before taking any position in the stock/s mentioned.)

Original Article


ET Markets


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