Effective execution of Insolvency and Bankruptcy Code can possibly release about Rs 25,000 crore currently stuck in bad loans and will lead to surge in growth capital over the next few years.
The code, if executed successfully, can assist India’s banking sector to catch up with or even surpass the recovery rates of 32 per cent and average time taken of 2.8 years in other emerging markets.
The capital released can also be used for other productive lending which may help in the credit growth.
Insolvency and Bankruptcy Code, 2016, seeks to combine and alter laws relating to reorganization as well as insolvency resolution of business persons, partnership firms and individuals in a timely manner.
Under the new law, notified in May, employees, creditors and shareholders would have the authority to start winding up process at the first sign of financial strain such as default in repayment of small business loan. Stressing that the code will cover slippages of such loans into NPAs by creating better credit discipline, the study noted that RBI had tightened rules for wilful debtors, which, together with application of the code would improve retrievals from such borrowers and improve credit discipline.
The study also said that this regulation could improve recovery rate of asset reconstruction businesses which has been low at an average of 36 per cent, with resolution taking around five years.
It also said that the code will help in shielding the creditors’ interest when entrepreneurs or start-ups become bankrupt and wind up their business, as the capital can be moved to efficient businesses. Besides, it will help entrepreneurs in starting insolvency proceedings willingly.
However, the study underlined various challenges like the present bad loan difficulties, time in growth of an insolvency ecosystem, more load on Debt Recovery Tribunals, inter-creditor clashes and restricted market for used industrial possessions like plant and machinery.