Money & Banking

IBC boosts NPA recovery

Our Bureau Mumbai | Updated on December 24, 2019 Published on December 24, 2019

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, paves the way for a smooth takeover of an insolvent company

The recovery of stressed assets by scheduled commercial banks (SCBs) improved during 2018-19, propelled by resolutions under the Insolvency and Bankruptcy Code (IBC), which contributed more than half of the total amount recovered, according to the Reserve Bank of India’s report.

Recovery under IBC accounted for 56 per cent of the total non-performing assets (NPA) recovery (of ₹1,26,085 crore) made by SCBs in 2018-19. SCBs recovered 33 per cent of the total NPA recovery via the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.

These banks recovered 8 per cent and 3 per cent of the total NPA recovery via Debt Recovery Tribunal (DRT) and Lok Adalats, respectively.

Recovery rates (amount recovered/ amount involved) yielded by major resolution mechanisms (except Lok Adalats) declined in 2018-19, especially through the SARFAESI mechanism, the report said. In 2018-19, the decline in the recovery rate in the case of IBC was 42.5 per cent (49.6 per cent in 2017-18); SARFEASI Act (14.5 per cent vs 32.2 per cent); and DRTs (3.5 per cent vs 5.4 per cent).

The recovery rate in the case of Lok Adalats improved to 5.3 per cent from 4 per cent. Cases referred for recovery under various mechanisms grew about 27 per cent year-on-year (y-o-y) in volume to 43,82,569 and tripled in value to ₹8,15,678 crore during the year, leading to a pile-up of bankruptcy proceedings. In this regard, the RBI said this highlights the need to strengthen and expand the supportive infrastructure.

As cases referred for recovery through legal mechanisms shot up, cleaning up of balance sheets via sale of stressed assets to asset reconstruction companies (ARCs) decelerated on a y-o-y basis, and declined as a proportion to gross non-performing assets (GNPAs) at the beginning of 2018-19, the report said.

However, the acquisition cost of ARCs as a proportion to the book value of assets increased further, indicating that banks had to incur lesser haircuts on account of these sales. The share of subscriptions by banks to security receipts (SRs) issued by ARCs declined to 69.5 per cent by June-end 2019 from 79.8 per cent a year ago, in line with the agenda to reduce their investments in SRs and to diversify investor base in SRs.

Published on December 24, 2019
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