Page 46 - Banking Finance November 2024

ARTICLE

reforms, like the introduction of Goods and Services Tax bodies like BIFR and AAIFR, which were dissolved in
(GST), and regulatory changes can also disrupt busi- 2016.
nesses, leading to NPAs. Moreover, sector-specific is-
sues, such as problems in the infrastructure and power Under the IBC, cases pending before BIFR and AAIFR
sectors, exacerbate the NPA crisis. Understanding and are transferred to the NCLT, and cases before DRT or
addressing these macro-economic factors are critical to winding up proceedings under the Companies Act of
tackling the NPA problem effectively. 2013 are eligible for initiation under the IBC. Financial
and operational creditors, including non-banks, can ini-
Besides, political interference in lending decisions, fa- tiate insolvency proceedings under Section 6 of the IBC.
voritism towards certain industries or borrowers, and A 330-day resolution timeline is set, compelling even
delays in policy implementation contribute to the NPA non-bank creditors to seek redressal through NCLT.
crisis. Additionally, weak governance and corruption
enable wilful defaulters to manipulate the system, siphon- Upon acceptance of an Insolvency Resolution Plan (IRP),
ing funds and avoiding loan repayments. These default- a moratorium period begins, staying all ongoing legal
ers exploit loopholes in regulations and engage in fraudu- proceedings against the corporate debtor. A Committee
lent activities, exacerbating NPAs. Addressing political of Creditors (COC) is formed, representing financial
interference and tightening regulations to prevent wilful creditors, which must vote with a 66% majority to approve
defaulters are crucial steps to mitigate the NPA problem the resolution plan. Failure to reach an agreement within
and restore financial stability in Indian banks. 180 days results in liquidation, halting all other recov-
ery processes. Thus, the IBC provides a comprehensive
In addition, even the internal factors significantly contrib- framework for resolving insolvency, streamlining the pro-
ute to the rise in NPAs. Weak credit risk management cess and maximizing recovery for creditors.
practices, including inadequate due diligence in loan
appraisal and monitoring, lead to increased default rates. During the financial year 2022-23, among the various
Inefficient recovery mechanisms and delays in resolving avenues banks employ to address their stressed assets,
NPAs further exacerbate the problem. Additionally, cor- debt recovery tribunals (DRTs) experienced the most
porate governance issues, such as board oversight and significant surge in both the number of cases referred and
risk management practices, play a role in the accumula- the monetary value involved. On the other hand, cases
tion of NPAs. Strengthening internal controls, enhancing
risk management frameworks, and improving governance
structures are essential to mitigate NPAs and restore
financial health in Indian banks.

Role and Impact of IBC in NPA Recov-
ery
Before the enactment of the Insolvency and Bankruptcy
Code (IBC), India relied on a patchwork of statutes to
address debt recovery. The SARFAESI Act of 2002 and
the RDDBFI Act of 1993 empowered banks to pursue
legal action against defaulters. Additionally, the SICA of
1985 and winding up provisions of the Companies Act
of 1956 allowed creditors and debtors to seek resolu-
tion for insolvency collectively. The Tiwari Committee's
recommendations in 1981 led to the creation of SICA and

BANKING FINANCE | NOVEMBER | 2024 | 41