Page 45 - Banking Finance July 2024

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Ministry of Finance, the Bank Board Bureau (BBB) has been operations. Despite the introduction of the insolvency code,
replaced with Financial Services Institutions Bureau (FSIB). banks are still reposing their faith in asset reconstruction
Recognizing the severity of the NPA crisis, the Reserve Bank companies (ARCs) and selling them a large chunk of their
of India (RBI) initiated an Asset Quality Review (AQR) in bad loans. Bankers assert that ARCs remain a viable option
2015. Under the AQR, banks were required to classify for recovery due to their ability to consolidate bad loans,
stressed assets as NPAs and make provisions accordingly. save management time, and free up capital. Data from the
This exercise brought greater transparency and revealed the ARC association reveals that the book value of bad loans
true extent of the NPA problem, leading to a surge in acquired by ARCs has risen to Rs 756,090 crore in FY 2023,
reported NPAs. compared to Rs 509,228 crore in FY 2021. The previous
year's figure stood at Rs 577,807 crore.
One of the landmark reforms in the Indian financial sector
was the introduction of the Insolvency and Bankruptcy Code In absolute terms, the book value of bad loans purchased
in 2016. The IBC aimed to expedite the resolution of NPAs by ARCs saw an increase of Rs 178,283 crore during FY 2023,
by providing a time-bound and creditor-friendly process. The representing a 31% growth in the outstanding amount. The
National Company Law Tribunal (NCLT) and the Insolvency ARC association's data also indicates that the average pricing
and Bankruptcy Board of India (IBBI) was established to of non-performing assets (NPAs) sold by banks to ARCs has
oversee the insolvency proceedings. The IBC revolutionized decreased from 35% to 32%, primarily due to the aging of
the way NPAs were resolved, improving recovery rates and NPA portfolios by the time they are sold. FY 22-23 also
reducing the burden on the banking system. It is a big step witnessed an upswing in cases falling under the Insolvency
in the right direction taken by the Government. It is designed and Bankruptcy Code (IBC) as the one-year suspension
to facilitate quick resolution of stressed corporate assets in during the COVID-19 pandemic was lifted, allowing for the
a time bound and structured manner. admission of fresh insolvency cases. In FY 2022, admissions
under the IBC rose by 65%. The RBI's December 2022 report
Since its inception in 2016, IBC has resolved Rs. 3.16 lakh has stated that although the IBC mechanism accounted for
crore of debt stuck in 808 cases in seven years, according the highest amount, the recovery rates from the
to CRISIL. It has resolved a significant amount of stressed Securitization and Reconstruction of Financial Assets and
assets with better recovery rates compared to previous Enforcement of Security Interest Act (SARFAESI) and Debt
mechanisms like the Debt Recovery Tribunal, the Recovery Tribunals (DRTs) were comparable to the IBC
Securitization and Reconstruction of Financial Assets and mechanism.
Enforcement of Security Interest Act, 2002 and Lok Adalat.
IBC has achieved higher recovery rates, with creditors The RBI has taken numerous measures to strengthen the
realizing 32% of admitted claims on average and 169% of regulatory framework for managing NPAs. It introduced the
the liquidation value. In contrast, other mechanisms had Prompt Corrective Action (PCA) framework in 2002, which
recovery rates ranging from 5-20%. IBC's deterrent effect aimed to impose restrictions on banks with weak financial
is evident as borrowers fearing the loss of companies have
proactively settled over Rs. 9 lakh crores in debt before cases
entered the insolvency process. This highlights a significant
behavioral change among borrowers, showcasing the
efficacy of the Insolvency and Bankruptcy Code in
encouraging timely settlements.

Way back in the 20th century, to address the issue of
stressed assets, the RBI has allowed the formation of Asset
Reconstruction Companies (ARCs) in the late 1990s. ARCs
act as specialized institutions that acquire NPAs from banks
at a discounted value and attempt to recover them. The
establishment of ARCs has provided an alternative
mechanism for banks to offload NPAs and focus on their core

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