BANKRUPTCY CODE TO FREE UP `25K-CR

The effective implementation of the Insolvency and Bankruptcy Code, 2016 can potentially release about `25,000 crore capital currently locked up in non-performing assets over next 4-5 years.

“If implemented successfully, the code will help India’s banking sector catch up with or even exceed the recovery rates of 32 per cent and average time taken of 2.8 years in other emerging markets,” said a joint study done by Crisil and Assocham.

Highlighting that this code will also contain slippages into NPAs by spawning better credit discipline, the study said, “The Reserve Bank of India has already tightened norms for willful defaulters, which, together with implementation of the code, will enhance recoveries from such borrowers and improve overall credit discipline”.

According to it, the legislation could also improve recovery rate of asset reconstruction companies (ARCs), which has been low at an average of 36 per cent, with resolution taking about five years. This is very important since the timely recovery remains key to long-term sustainability of ARCs.

“Effective implementation of the code will help in preserving the value of asset and faster resolution so that ARCs will be able to churn capital faster and enhance returns. The new code along with 100 per cent foreign direct investment in ARCs through the automation route is expected to boost capital flows. It will also attract investments into the distressed assets space, open up new avenues for ARCs and help them participate in the huge market for NPAs,” the study said and added that the released capital can be then deployed for other productive lending, which in turn could help in credit expansion. Another positive impact of the legislation would be on the corporate bond market.

With greater certainty of outcome and faster resolutions, the interest of both domestic and foreign investors in lower-rated paper is expected to increase