Explainer Economy

Nitty-gritty of bankruptcy code

Last week, Reserve Bank of India said its internal advisory committee (IAC) had identified 12 accounts, which account for 25% of non-performing assets of the Indian banking system for immediate resolution under the Insolvency and Bankruptcy Code (IBC).

The gross bad debt in the banking system as on March was ₹7.11 lakh crore, which means the 12 accounts contribute to about ₹1.78 lakh crore.

What does bankruptcy mean?

A company is bankrupt if it is unable to repay debts to its creditors (banks, suppliers etc). The inability to repay debts by some of the Indian firms has resulted in a huge pile of non-performing assets for the banking system. A mechanism to free up the money stuck as bad loans is one of the key for the banking system. IBC is seen as one such.

Which are the most stressed sectors having a problem of non-performing assets?

While the names of the 12 accounts which have been referred have not been made public officially, the RBI had earlier hinted that stress was coming from sectors such as power, telecom, steel, textiles and aviation. Union Finance Minister Arun Jaitley later said the number of highly stressed accounts would be about 40-50.

How the RBI came into the picture of referring accounts for resolution under IBC?

The government had recently amended the RBI Act, which gave powers to the central bank to direct banks to take punitive action against individual accounts under IBC.

How does the process work under IBC?

To being with any creditor including banks can start bankruptcy proceedings against defaulters by filing a petition with the National Company Law Tribunal.

After that, an insolvency professional with significant powers is appointed to take control of the defaulting company and assist the process.

A creditors committee is formed to represent the interest of lenders and any other party that have been affected due to the default by the company.

The committee should come up with a resolution plan (which may include selling off defaulted loans or liquidate the company outright). The resolution would require a nod from 75% of the creditors on the committee.

The insolvency professional gets 180 days to come up with a feasible solution on the default issue. The timeline can be extended by another 90 days. If no solution is found within 270 days, a liquidator is appointed. The company can also opt for voluntary liquidation by a special resolution in a general meeting.

Does IBC resolve the bad assets crisis of the banks?

Only time will tell. The proceedings under IBC are at a nascent and untested stage in India.

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Printable version | May 5, 2021 8:14:11 AM | https://www.thehindu.com/business/Economy/nitty-gritty-of-bankruptcy-code/article19099302.ece

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