The government believes that the Insolvency and Bankruptcy Code has started to show positive results as there is improvement in Non-performing Assets (NPAs) problem that the most banks, especially the public sector banks, are facing.
Addressing a press briefing after a performance review of the public sector banks, finance minister Arun Jaitley informed the media that NPAs are on the decline and recoveries have picked up.
Attributing the success to IBC, Jaitley said that the improvement in the NPA situation is partly because of the resolutions that have taken place under the new insolvency and partly because of the fear of Section 29A of IBC, which bars promoters of the defaulting companies to participate in the bidding of their own firms.
"Recoveries are also picking up because those debtors who fear that they are likely to cross the red line are paying up in anticipation that IBC process may start. Because once the IBC process starts, Section 29A comes into force. I have often said that the unintended consequence of (Section) 29A is that potential defaulters would not want to be the potential defaulters," said the finance minister.
As a consequence of resolutions through IBC, and fear of Section 29A, the PSU banks are now expecting to recover loans worth Rs 1,80,000 crore in the current financial year compared to Rs 74,562 crore in the last financial year.
The total bad loans in the system were estimated to be above Rs 12 lakh crore. According to rating agency India Ratings, around 45 per cent of total bad loans of Rs 10.2 lakh crore pertaining to the top 500 debt heavy corporates is likely to be resolved by the end of 2018 under the IBC, while the balance is to be resolved largely during 2019. The agency further expects Rs 4.2 lakh of the total stressed debt to become sustainable as the outcome of the resolution process by the end of 2019.
The quarterly newsletter of the Insolvency and Bankruptcy Board of India (IBBI), says that out of 977 defaulters against which IBC process has been initiated so far, 34 have been resolved and liquidation process against 136 have been started.
Of the 12 cases resolved in the April-June 2018 period, two of which include big cases like Bhushan Steel and Electrosteel, the average recovery as a percentage of financial creditors claim has been 56 per cent.
Meanwhile, the review took note of the continued improvement in banking in terms of highest ever recovery in the last quarter, pick-up in credit growth to 13.5 per cent, growth in MSME lending to 10.5 per cent, the highest Provision Coverage Ratio in over five years, and higher operating profits.