The country’s bankruptcy law has brought about a positive change in attitude among promoters and banks with regard to proactively resolving debt, said Ashwin Ramanathan, senior partner at corporate law firm AZB & Partners.
He was speaking at News Corp VCCircle’s FinServ 2018 summit held in Mumbai on Tuesday, where various financial services stakeholders came together to discuss the opportunities and challenges of the sector.
At a fireside chat, Ramanathan delved into the changes that have come about since the advent of the Insolvency and the Bankruptcy Code (IBC) and how some of them can trigger deep-rooted reforms within the banking ecosystem.
The government had passed the bankruptcy law in 2016 in a bid to make it easier to force companies into insolvency. The move was part of efforts to cut banks’ bad loans, which have now ballooned to more than $140 billion.
“Over Rs 20,000-30,000 crore of bad debt has been resolved from the pre-IBC phase,” Ramanathan said. “These are companies that would eventually have been taken to the NCLT [National Company Law Tribunal) by the banks. But then the promoters realised that they are staring at a cliff and that they need to do something to address the situation urgently,”
This marks a significant shift in behaviour as until a few years ago promoters saw repayment of debt as an option and not an obligation, he said.
Banks have also realised that postponing the debt problem only creates a bigger problem down the road, so there is definitely a focus on trying to resolve the problem immediately, he said.
Driven by Reserve Bank of India, banks are also proactively trying to resolve their distressed assets before it reaches insolvency.
However, it still remains to be seen if banks can identify problem accounts well in advance. Although bank lending documentation is robust, rarely are these rights exercised, he added.
“Post-credit disbursement discipline is something that needs to come in for banks. I don’t think it is there to the extent that it could be there,” he said.
In contrast, non-banking financial companies (NBFCs) are handling credit disbursement with a lot more discipline, Ramanathan said. They are taking pains to check on inventory, a company's ability to repay and actual cash flows. Banks do not necessarily have these systems intrinsically in place which may hinder their ability to identify signs of of stress in advance, he said.
On the other hand, promoters, driven by the fear of losing their companies to insolvency proceedings, are able to identify stressed situations well in advance and many of them are now tapping NBFCs for short-term financing at a higher interest rate to turn around their companies.
NBFCs are taking higher risk to lend to these promoters, but “they are taking this risk with open eyes”, Ramnathan added.