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Resolution Process For Non Performing Assets In India Under Insolvency And Bankruptcy Code, 2016

In India, Non-performing assets (NPAs) have posed an enduring challenge for banks, affecting their financial stability and hindering economic growth. To tackle this issue, the Indian government introduced the Insolvency and Bankruptcy Code (IBC) in 2016 with the goal of streamlining and expediting the resolution process for NPAs. This study examines the effectiveness of this process under the IBC in reducing NPAs within Indian banks.

The enactment of the Insolvency and Bankruptcy Code (IBC) aimed to establish a comprehensive legal framework for efficiently resolving financial insolvencies and winding up non-viable businesses. One of its key provisions was the introduction of time-bound processes, such as the Corporate Insolvency Resolution Process (CIRP) to expedite NPA resolution.

Key Features of CIRP:
Under the Corporate Insolvency and Resolution Process (CIRP), creditors have the right to initiate insolvency proceedings against borrowers who default on loan repayment. The responsibility of overseeing these proceedings and appointing an insolvency professional to manage the debtor's assets during the resolution period lies with the National Company Law Tribunal (NCLT).

Impact on NPA Resolution:
  • Time-bound Process:

  • The timelines set by the IBC ensure that resolution plans are formulated within 180 days. If necessary, this period can be extended for an additional 90 days. This time-bound approach has had a significant impact on expediting NPA resolution.
  • Increased Recovery Rates:

  • The IBC places a strong emphasis on extracting maximum value from distressed assets by employing competitive bidding processes. As a result, banks have witnessed higher recovery rates, thereby alleviating the burden of Non-Performing Assets (NPAs) on their balance sheets.
  • Enhanced Credit Discipline:
    The IBC's strict rules and penalties have successfully created a culture of responsible borrowing, discouraging intentional defaults and promoting better repayment habits among borrowers.

Challenges and Limitations:
  1. Operational Bottlenecks:
    The implementation of the Insolvency and Bankruptcy Code (IBC) initially encountered challenges attributed to inadequate infrastructure, limited capacity within the National Company Law Tribunal (NCLT), as well as delays in appointing qualified insolvency professionals. These obstacles significantly hindered the expeditious resolution process.
  2. Haircuts and Recovery Delays:
    The IBC has made progress in improving recovery rates. However, banks often face significant reductions in the amount they can recover from loans during the resolution process. Moreover, legal complexities and prolonged litigation can cause delays in recovering NPAs.
  3. Concentration of resolution professionals:
    Is a pressing issue in insolvency cases. With a limited pool of qualified experts, the workload becomes unevenly distributed among a few individuals. As a result, the overall quality and efficiency of the resolution processes may be compromised.

Impact on Indian Banks:
  1. Strengthened Balance Sheets:
    The resolution process implemented under the Insolvency and Bankruptcy Code (IBC) has played a significant role in facilitating Indian banks' efforts to improve their financial standing by addressing non-performing assets (NPAs). This systematic approach has effectively cleansed their balance sheets, resulting in enhanced financial health. As a result, these banks
  2. Increased Investor Confidence:
    The NPA resolution process outlined in the IBC has significantly bolstered investor confidence in Indian banks. As a result, foreign direct investment (FDI) inflows into the banking sector have experienced substantial growth.
  3. Systemic Stability:
    The IBC plays a crucial role in enhancing systemic stability by reducing NPAs and mitigating risks linked to distressed assets. This, in turn, fosters a robust banking sector capable of driving economic growth.
The resolution process for NPAs
Initiation: Under the Insolvency and Bankruptcy Code (IBC), the process of resolving Non-Performing Assets. The creditor or debtor submits an application to the National Company Law Tribunal (NCLT) for initiating the resolution process. This application includes all the necessary supporting documents and evidence.

Upon acceptance of the application, the National Company Law Tribunal (NCLT) appoints a resolution professional to effectively handle the debtor's affairs and execute necessary measures for resolution.

A moratorium is implemented during the resolution process to grant the debtor protection against legal actions. This period allows for negotiation and restructuring without interference.

Resolution Plan:
The resolution professional requests potential buyers or investors to present their proposals for revitalizing the debtor's business or selling off its assets.

During the evaluation process, the National Company Law Tribunal (NCLT) carefully assesses and grants approval to a resolution plan that aims to maximize value for all stakeholders involved.

Implementation of the resolution plan occurs when it has been approved, and the successful bidder or investor takes charge. This leads to the reorganization or liquidation of assets according to the established plan.

The resolution professional diligently oversees and ensures adherence to the approved plan until its successful completion. This includes effectively resolving non-performing assets (NPAs) by the Insolvency and Bankruptcy Code (IBC) in India

The Insolvency and Bankruptcy Code (IBC) in India has proven to be an effective resolution process for dealing with Non-Performing Assets (NPAs). It has successfully streamlined the procedure, enhanced transparency, and facilitated quicker resolutions. As a result, both creditors and debtors in the country's financial system have benefited greatly from this impact initiative.

  • Insolvency and Bankruptcy Code (IBC) in 2016 Bare act

Written By: Rajdip Das, Techno India University

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