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:
Challenges and Limitations:
- 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.
Impact on Indian Banks:
- 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.
- 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.
- 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.
The resolution process for NPAs
- 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
- 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.
- 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.
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
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.
The resolution professional requests potential buyers or investors to present
their proposals for revitalizing the debtor's business or selling off its
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
Written By: Rajdip Das,
- Insolvency and Bankruptcy Code (IBC) in 2016 Bare act
Techno India University