Page 52 - BANKING FINANCE JANUARY 2016 ONLINE

FEATURE

From non-performing to
performing

T he ministry of finance recently released the As a percentage of total advances, overall stressed ad-
draft Insolvency and Bankruptcy Code (IBC), vances increased from 9.2% to 10.9% between 2013 and
proposed by the Bankruptcy Law Reforms Com- 2015. Average recovery rate for secured debt is as low as
mittee. The government of India greeted this 20%. One factor responsible for all this is a weak legal
bill as among its biggest and most crucial reforms. To a framework for resolving failure. Once debts go bad, credi-
person unconnected with finance, it may be unclear why tors’ ability to realize value is predicated on a robust insol-
this is important or what ails the current framework. vency resolution mechanism.

A well-functioning insolvency resolution framework is fun- Accumulation of bad debts in bank balance sheets has sys-
damental for dealing with business failures that inevitably temic risk implications for the entire economy. As capital
occur in any economy. Additionally, an effective insolvency gets tied up in provisioning for bad debts, banks get inhib-
resolution process is one tool, among others, for banks ited from extending fresh credit, slowing down the real
and other creditors to address low recovery rates. sector. Absence of a well-functioning insolvency frame-
work that protects creditors’ rights also thwarts the de-
This is particularly relevant for India where economic velopment of alternative lenders, such as corporate bond
growth is contingent upon the financial health of the bank- market.
ing sector. Banks in India face acute problems of asset
quality. Perceiving that laws did not sufficiently empower There are admittedly other issues systemic to the banking
secured creditors to activate recovery by seizing security, system and capital market that compound these prob-
the Recovery of Debts Due to Banks and Financial Institu- lems. However, an insolvency law focused on preserving vi-
tions Act, 1993, and Securitization and Reconstruction of able businesses as going concerns and liquidating unviable
Financial Assets and Enforcement of Security Interest ones is the cornerstone of a mature financial system and
(SARFAESI) Act, 2002, were enacted to facilitate the en- India urgently needs one.
forcement of security by banks and financial institutions.
Aparna Ravi highlights in a paper titled The Indian insol-
Asset reconstruction companies were constituted under vency regime in practice—an analysis of insolvency and
SARFAESI to buy bad debts from banks and recover from debt recovery proceedings that the current framework in
defaulters. Domestic banks also have recourse to corpo- India is highly fragmented with decisions frequently stayed
rate debt restructuring and joint lenders forum mecha- or overturned by judicial forums having overlapping juris-
nism to resolve stress in consortium loans. diction.

None of these initiatives seems to have helped. Gross non- There is no clarity on whether the right of secured creditors
performing assets (NPAs) as percentage of total advances initiating recovery under SARFAESI will prevail, or unse-
went up from 3.4% in March 2013 to 4.45% in March cured creditors initiating winding-up under the Companies
2015. The picture is grimmer when volume of restructured Act or the company triggering proceedings under the Sick
assets is also considered in stressed advances. Industrial Companies (Special Provisions) Act, 1985, (SICA).

52 | 2016 | JANUARY | BANKING FINANCE

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