Moody's Analysis on Bankruptcy
Pointing to the limited legal infrastructure at hand, rating agency Moody’s has said banks in India may get limited help from the new Bankruptcy Code to solve current asset quality woes. It said the bankruptcy law was credit positive for Indian banks, but challenges remained.
- According to Moody’s, banks in India would still have limited avenues available to dispose of distressed assets. The lenders would, in general, remain reluctant to make appropriate haircuts to reflect their current weak operating conditions.
Details:
- Moody’s noted, “India’s new Bankruptcy Code would significantly boost the bargaining power of creditors against large debtors for the resolution of distressed assets. However, the current weak legal framework for asset resolution remains a key structural credit weakness for Indian banks.”
- Moody’s has pointed out significant infrastructure constraints to be overcome before the framework could become fully operational. Legal resources and information utilities have to be built to support the new restructuring procedure.
- Another constraint that had to be dealt with was the time required for various stakeholders to accumulate the requisite legal experience and precedents for the new system to be fully up and running.
Background:
The Parliament, in May 2016, passed the Insolvency and Bankruptcy Code Bill, 2016. The code seeks to ensure time-bound settlement of insolvency, faster turnaround of businesses and create a unified data base of serial defaulters.
- The Code will consolidate and amend existing laws related to insolvency resolution and reorganization of corporate persons, partnership firms and individuals in a time bound manner.
- It provides for setting up Insolvency and Bankruptcy Board of India (IBBI) to regulate professionals, agencies and information utilities (IUs) engaged in resolution of insolvencies of companies.
- It also provides for establishment of National Companies Law Tribunal (NCLT) and Debt Recovery Tribunals (DRT) as nodal adjudicating authorities for resolution of insolvency, liquidation and bankruptcy.
- The code seeks to give a push to the ease of doing business in the country.
