India’s bankruptcy law positive for banks

Kolkata.Global credit rating agency Moody’s Investors Servicesaid India’s bankruptcy code boosts creditors bargaining power against big borrowers.However, Moody’s also said significant infrastructure constraints have to be crossed for the framework to be fully operational.On May 11, Indian parliament passed the national bankruptcy law, the Insolvency and Bankruptcy Code, 2016, which is now pending for the President’s signature.”The current weak legal framework for asset resolution has been a key structural credit weakness for Indian banks,” said Srikanth Vadlamani, vice president and senior credit officer at Moody’s.

According to the report, the proposed bankruptcy law would; introduce a unified framework to replace the current collection of separate laws drafted in piecemeal fashion across overlapping jurisdictions; reduce threshold for creditors to invoke the insolvency resolution process (IRP); introduce third-party insolvency professionals (IP) as intermediaries to oversee the IRP, replacing the debtor’s existing management and operate the company as a going concern upon initiation of an IRP; give creditors overriding authority to approve terms of any restructuring package; and limit duration of IRP to maximum of 270 days, after which a company will be automatically liquidated.

These features are positive for Indian banks because they will act as an incentive for corporate borrowers to avoid loan default and improve the recovery of assets, the report said.