Reshaping Stability: Strengthening the debt resolution system for banks

In any developing economy, business houses and households play a crucial role in investing their money to foster economic growth, but sometimes these investments do not yield the expected outcomes, and cause a debt burden to overcome this situation we need an effective debt resolution and insolvency frameworks.

In India, many businesses are micro, small, and medium enterprises (MSMEs) based and they face problems in getting loans from the formal banking system. And at the same time, large business houses have all the banking system’s loan exposure. The Insolvency and Bankruptcy Code (IBC), passed in 2016, established insolvency proceedings for people and corporations. Before this, the main concerns were related to the rising level of non-performing assets (NPAs) in public sector banks, a string of high-profile insolvency cases, and the desire to improve the whole business environment led to adopting the Insolvency Bankruptcy Code.

The Insolvency Bankruptcy Code has come up with several improvements to the institutional framework:

1. Insolvency regulator was formed: The Insolvency and Bankruptcy Board of India (IBBI) was established under the Insolvency Bankruptcy Code 2016 which becomes the regulatory body for insolvency and bankruptcy proceedings in the country.

2. Insolvency professionals: The Insolvency Bankruptcy Board of India (IBBI) started allowing insolvency professionals. These insolvency professionals play a vital role in settlement processes during a bankruptcy situation.

3. Specialized commercial courts were formed: The National Company Law Tribunal (NCLT) was established under The Companies Act 2013 to look into cases related to insolvency of companies.

Now after coming up with this resolution Insolvency Bankruptcy Code, the lenders had the power to bring the defaulting companies to court and recover their dues in a specified period. IBC firstly puts a time limit of 330 days within which lenders have to agree on a resolution plan, they could try to save or revive the business by working with the management or they could simply decide to sell it.

An efficient insolvency framework can increase financial stability, it also helps in increasing the free-up capital that financial institutions can use to support new loans and optimize credit availability and growth.

Thank you.

Regards,

Nishant Yadav,

Kautilya, IBS Mumbai.