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The inclusion of Non-Banking Finance Institutions (NBFIs) in the Insolvency and Bankruptcy Code (IBC) is credit positive for India’s banks and will limit the losses for the creditors, according to Moody's Investor Service.
Underscoring that banks are NBFIs’ largest lenders, the global credit agency reasoned that the IBC rule provides for the orderly resolution of a stressed company. Until now, the only resolution framework for NBFIs was through liquidation.
“We expect an orderly resolution process via the IBC will help limit losses for creditors as compared with liquidation,” said Alka Anbarasu, VP-Sr Credit Officer, and Graeme Knowd, MD-Banking.
Moody's expects the Reserve Bank of India (RBI) to selectively approach the Insolvency and Bankruptcy Code (IBC) to resolve NBFIs with severe liquidity or solvency issues, or to resolve companies whose weak corporate governance is deterring potential buyers.
It also expect banks and the RBI to utilise other debt restructuring options before approaching the IBC.
Under the amended law, the resolution process can only be initiated by RBI. This is a departure from one of the core aspects of the IBC, wherein any creditor to a company can initiate the insolvency process as long as they can prove that there has been a default by the company, Moody's said.
The RBI is authorized to appoint an administrator as well as an advisory committee, that will oversee the resolution process.
“RBI’s close involvement in the process indicates the NBFI sector’s importance to overall financial stability, including the direct effect of any systemically important NBFI’s failure on banks and other credit providers,” the agency said in a statement.
Also read:RBI supersedes DHFL board, appoints an administrator
On 20 November, following the change in the IBC law, the RBI initiated a resolution process of Dewan Housing Finance Limited (DHFL), a stressed housing financing company. The RBI superseded DHFL‘s board because of corporate governance issues and defaults by the company to its creditors.
The RBI also appointed an administrator and an advisory committee to the administrator, who will oversee the resolution process. Moody's said that since July 2019, banks and other creditors to DHFL have been unsuccessful in trying to restructure the company’s liabilities.
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