With the Insolvency and Bankruptcy Code 2016 (IBC) shifting the balance of power, borrowers are making good the amounts in default to the creditors, and this is getting reflected in slower accretion of new non-performing assets (NPAs) in the Indian banking system, according to Crisil Ratings.

The credit rating agency estimated the banking sector’s gross NPA (aggregate) has declined to about 10 per cent in March-end 2019, from 11.5 per cent the year before. Almost ₹2.02-lakh crore of debt pertaining to 4,452 cases were disposed of even before admission into the IBC process, as the borrowers made good the amounts in default to the creditors, the agency said, referring to a report on the website of the Insolvency and Bankruptcy Board of India (IBBI).

Credit discipline

IBC is a key economic reform, which has instilled a significantly better sense of credit discipline. Today, there is a sense of urgency and seriousness among defaulting borrowers because losing their asset is very much a possibility if the resolution process fails, the credit rating agency said.

Emphasising its effectiveness in addressing the logjams it was supposed to – which is faster recovery of stressed assets and quicker resolution timelines – Crisil said recovery through IBC was about ₹70,000 crore in fiscal 2019, or twice the ₹35,500 crore recovered through other resolution mechanisms in fiscal 2018.

The other resolution mechanisms are: the Debt Recovery Tribunal; Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act; and Lok Adalat.

Gurpreet Chhatwal, President, Crisil Ratings, said: “The recovery rate for the 94 cases resolved through the IBC by fiscal 2019 is 43 per cent, compared with 26.5 per cent through earlier mechanisms. What’s more, the recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process.”

“The Supreme Court’s decision to quash the Reserve Bank of India’s February 12 circular (on revised framework for resolution of stressed assets) does provide banks greater flexibility in resolving stressed assets.

But the fact that the apex court also simultaneously upheld the IBC in its entirety is a huge positive. “That said, resolution timelines are still an issue. While the average resolution timeline for cases resolved through the IBC is 324 days, which is much better than the 4.3 years earlier, it is still above the 270 days set out in the code,” the agency said.

It assessed that as on March 31, 2019, there were 1,143 cases outstanding under the IBC, of which, resolution in 32 per cent of the cases was pending for more than 270 days.

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