Page 52 - Banking Finance March 2021

FEATURE

not happen within this timeframe, the company heads for access to longterm and short-term financing and to the
liquidation. The resolution process may be initiated either lower cost of credit.
by the debtor or the creditor. More than 3,774 cases have
been admitted into the Corporate Insolvency Resolution We find that, after the IBC reform, distressed firms were
Processes (CIRPs) under the IBC as of March 31, 2020. able to increase their access to long-term and shortterm
debt and reduce their cost of financing as opposed to their
Improving resolution process non-distressed counterparts due to better and faster debt
recovery mechanisms under the IBC framework.
According to the Economic Survey released on January 31,
2020, the IBC has improved resolution processes compared
Moreover, we suggest that distressed firms that benefit
to the earlier mechanisms. It has resulted in recovery of 42.5
per cent of the debt amount involved compared to 14.5 per from both increased access to debt and reduced cost of
borrowing are further able to improve their performance
cent under the SARFAESI Act.
resulting in higher growth opportunities compared to their
non-distressed counterparts.
In terms of duration, the Survey stated that, under the IBC,
it takes 340 days on average compared to 4.3 years in the
earlier system. Furthermore, our evidence shows that the benefits
stemming from the implementation of the IBC policy are
more prominent for those financially distressed firms that
This outcome suggests that, since the IBC is specifically
are larger, younger and more collateralised.
designed for firms in financial distress, the law aims to
prevent corporate failure and has helped maintain creditor We conclude that these results are relevant to the current
rights while limiting hasty liquidation to the debtor’s benefit academic and policy debates on safeguarding and preserving
resulting in increased efficiency only to keep viable firms businesses in the midst of the current Covid-19 crisis, which
alive. is likely to drive many businesses into bankruptcies.

Bose et al. (2021) study shows that after the introduction Given the profound implications of the Covid-19 pandemic,
of the IBC reform, the access to long-term debt increased fostering a deep understanding of the provisions is
by 6.3 per cent, short-term debt increased by 1.4 per cent, paramount to avoid bankruptcy. A strong bankruptcy system
while the cost of borrowing declined for distressed firms. can not only support financially distressed companies to
This is the first study that provides evidence on the impact benefit from a quick and longlasting revival process, but can
of the IBC policy on the “credit channels” of distressed firms. also give lenders more confidence to lend to enable better
The notion “credit channels” is referred to the greater credit access by firms under stressed scenarios. (Source: BL)

RBI drives down 10-yearr bond yields to 6% level

The Reserve Bank of India (RBI) in a way forced the bond market to accept its will by driving down the 10-year bond
yields to the 6 per cent mark once again by giving a strong rate signal at the open market operations (OMO) auction.
Out of the Rs.20,000 crore the central bank wanted to buy from the market through four securities, the RBI bought
Rs.14,654 crore in the 10-year segment alone. While completely leaving out a bond maturing in 2028, and buying
Rs.2,040 crore and Rs.3,306 crore in the 2024 maturity and 2034 maturity respectively.
The market offered bonds worth Rs.89,234 crore for the Rs.20,000 crore OMO. The RBI will be auctioning Rs.22,000
crore of bonds in a special auction, and another Rs.26,000 crore as part of the regular auction. The cut-off of the 10-
year bond was at 6.0034, a result of RBI buying the bonds at more than the prevailing market rate. The central bank
bought the 10-year bonds at 50 paise above the prevailing rate, and brought down the yields from 6.08 per cent to
6 per cent mark. The 10-year bond yields closed at 6.0096 per cent.
"Generally, OMOs purchases are equally distributed across securities. By doing disproportionate buying, RBI is giving
a strong yield signal that it wants to maintain the 10-year at 6 per cent," said Debendra Dash, head of asset-liability
management at AU SFB.

52 | 2021 | MARCH | BANKING FINANCE