Introduction
The Insolvency and Bankruptcy Code (IBC) has emerged as a crucial legal framework in India, playing a pivotal role in the identification and targeting of nonperforming assets (NPAs) within the financial sector. Nonperforming assets pose significant challenges to the stability and health of banks and financial institutions, impeding economic growth and hampering the flow of credit. The IBC provides a structured and time-bound mechanism for the identification, resolution, and recovery of NPAs, ensuring a transparent and efficient process for creditors and debtors alike. This article explores the vital role of the IBC in addressing NPAs, examining its key provisions, impact on the banking sector, challenges faced in implementation, and potential future developments in this realm. By delving into the IBC's contribution to the identification and targeting of nonperforming assets, we gain valuable insights into the transformative potential of this legislation in revitalizing the Indian financial landscape.
How IBC Helps Identify and Resolve NPA
The Insolvency and Bankruptcy Code (IBC) provides a mechanism for banks and financial institutions to identify non-performing assets (NPAs) and initiate resolution processes.
Under the IBC, the resolution process for NPAs involves several key steps:
- Identification of NPAs based on a default in loan payments for a specified period.
- Filing an application with the National Company Law Tribunal (NCLT) to initiate the corporate insolvency resolution process (CIRP).
- Appointment of an interim resolution professional (IRP) to take over the management of the corporate debtor.
- Constitution of a committee of creditors (CoC) comprising financial creditors to oversee the resolution process.
- Inviting resolution plans from prospective investors and approval of a resolution plan by the CoC that can revive the corporate debtor.
The IBC framework differs from traditional debt recovery methods as it aims to resolve NPAs through a time-bound judicial process rather than liquidation alone. However, operational challenges such as delays in the admission of cases by NCLT benches and appeals against NCLT orders are being addressed through capacity building and limiting the scope of appeals. Overall, the IBC aims to find a balanced solution that values the interests of all stakeholders.
Key Steps in NPA Resolution Under IBC
To resolve NPA under the IBC, the following key steps must be taken:Identify the NPA and default: The first step is for banks and financial institutions to identify accounts that have become NPA as per RBI guidelines, i.e. principal or interest payments overdue for more than 90 days.
- Initiate resolution process: Once an account is identified as NPA, the bank must initiate the resolution process under IBC within certain timelines. This involves filing an application with the NCLT to classify the borrower as insolvent and appoint an IP.
- Moratorium and public announcement: Upon admission of the application by NCLT, a moratorium is imposed on recovery proceedings, and a public announcement is made inviting claims from creditors.
- Claims submission and verification: Creditors submit their claims with proof of debt to the IP, who verifies and consolidates the claims to determine the borrower's total default amount.
- Resolution plan approval: The CoC approves a resolution plan with at least 66% votes, which is then submitted to the NCLT for approval. If approved, the plan is binding on all stakeholders.
The IBC process aims to resolve NPA in a time-bound manner through a creditor-in-control process. It differs from traditional mechanisms by imposing a moratorium, inviting and consolidating claims from all creditors, and approving a resolution plan with a high voting threshold of 66% that is binding on all parties. Challenges in implementation like delays in the admission of cases and resolution plans are being addressed through amendments to improve the functioning of the IBC.
How IBC Differs From Traditional Debt Recovery
- Expedited Process: The IBC provides a time-bound mechanism for the resolution of NPAs through a regulated insolvency resolution process. Under traditional mechanisms, the process of recovery from defaulting debtors often dragged on for years through litigation and appeals. The IBC mandates that the insolvency resolution process must be completed within 180 days, which can be extended by another 90 days. This fixed timeline ensures quick resolution, either through a resolution plan or liquidation.
- Avoiding Value Destruction: The IBC aims to avoid the value destruction that often results from uncoordinated recovery actions by multiple creditors. The moratorium imposed under the IBC suspends all recovery actions and litigation against the debtor to enable a coordinated resolution process. The resolution professional takes control and management of the debtor as a going concern to preserve value. This facilitates restructuring of the debtor as a going concern by way of a resolution plan.
- Balancing Interests: While the IBC aims to maximize value for creditors through a time-bound process, it also provides safeguards for debtors. The IBC prescribes a fair and transparent insolvency resolution process with decision-making power vested in the committee of creditors based on voting share. The interests of all stakeholders including workers and employees are also considered. Appeals against decisions of the adjudicating authority are allowed on limited grounds. This balanced approach addresses the concerns of all stakeholders.
Cases Where IBC Improved Financial Health of Banks
Successful Resolution of NPAs
Under the IBC, the resolution process has been successfully completed in several cases, thereby improving the financial health of banks. For example, resolution plans for Essar Steel, Bhushan Steel, and Bhushan Power & Steel were approved, providing banks with the recovery of over 50-60% of their outstanding loans.
The IBC has enabled time-bound resolution of large NPA accounts which had been lingering for years. The resolution of 12 large accounts, referred to NCLT at the outset, has already resulted in a recovery of about Rs. 80,000 crores for the banking system. The recoveries done under IBC till now have surpassed those through other channels like Debt Recovery Tribunals (DRTs), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), and Lok Adalats.
The IBC has also brought behavioral changes as the threat of losing control of companies has made promoters more willing to settle dues. Many defaulting promoters have come forward to settle dues to avoid losing their companies to new owners during the corporate insolvency resolution process. This has enabled banks to make reasonable recoveries of their dues outside the IBC framework as well.
Overall, the IBC has been successful in resolving some large and long-pending NPAs, bringing much-needed relief to banks and creditors. With further experience, the law and processes are also being fine-tuned to address various challenges. Continuous efforts are required to further strengthen the institutional infrastructure and address the various constraints in resolution to fully realize the potential benefits of the IBC.
Challenges in Implementing IBC for Identifying NPA
Lack of Coordinated Efforts
The IBC framework requires coordinated efforts across various institutions to achieve optimal outcomes. However, in practice, the adjudicating authorities, insolvency professionals, and creditors have faced challenges in streamlining processes and aligning incentives. For instance, NCLT benches have delivered varied judgments on similar issues, creating uncertainty. Likewise, the limited number of IPAs has led to delays, while their remuneration structure does not adequately incentivize the resolution of NPAs.
Creditors, especially public sector banks, have also lacked coordination in submitting and verifying claims to maximize recoveries. The government and regulators need to issue clarifications on the IBC’s provisions, provide adequate infrastructure to NCLT and IPAs, and encourage creditors to take a coordinated approach toward resolutions. Addressing these challenges will enhance the effectiveness of the IBC framework.
Conclusion
In conclusion, the IBC has brought about a paradigm shift in the resolution of NPAs in India. It provides a time-bound mechanism for the early identification and resolution of NPAs through a fair and transparent process. The IBC aims to protect the interests of all stakeholders involved - the creditors, debtors, and employees. While the law is still evolving and facing some challenges in implementation, the IBC has significantly improved the NPA resolution process in India. With continuous amendments and clarifications, the IBC can emerge as an effective mechanism for tackling the NPA menace and strengthening the credit culture in the country. Overall, the IBC has been a game-changer in enabling faster resolution of NPAs and unlocking capital stuck in non-performing assets.
