IBC played a key role in helping banks recover from NPA crisis created by UPA government: FM Nirmala Sitharaman

Union Finance Minister Nirmala Sitharaman on Thursday said the Insolvency and Bankruptcy Code, which was introduced by PM Narendra Modi-led Government in 2016, played a key role in helping banks recover from the NPA crisis created by the Congress-led United Progressive Alliance (UPA) government during their regime through ‘phone banking’ and indiscriminate lending. 

She criticised the Congress-led government at the Centre for ignoring corporate distress and said corporate distress proceedings were governed by a patchwork of legislations, which worsened rather than resolving issues.  

"Prior to the Insolvency and Bankruptcy Code (IBC) introduced by PM Shri @narendramodi- led Government in 2016, corporate distress proceedings were governed by a patchwork of legislations, which worsened rather than resolving issues," Sitharaman wrote on social media platform X, previously Twitter.

She added: "Despite the crying need for enacting insolvency laws, the UPA regime consciously sought to reward its cronies at the cost of the banks and operational creditors who had to run from pillar to post for recovering their dues. 

Introduced in 2016, the Insolvency and Bankruptcy Code was enacted by Parliament to address the accumulation of non-performing bank loans and debt resolution delays. In India, insolvency resolution used to take around 5 years on an average, compared to 1 year in the UK and 1.5 years in the US. 

The IBC applies to various entities and offers a time-bound insolvency resolution process where creditors manage debtor assets to resolve insolvency.

FM Sitharaman said: "Introduced by the PM Modi-led government in 2016, the IBC is a landmark reform, introducing a legal unified framework for resolving issues of financially-stressed companies. IBC has brought a paradigm shift in the debtor-creditor relationship and provides a streamlined, one-stop solution for resolving insolvencies."

She added: "The IBC has played a key role in helping banks recover from the NPA crisis created by  @INCIndia
and its allies during the UPA year through ‘phone banking’ and indiscriminate lending. IBC has built trust and transparency in the financial system."

"According to a report of the @RBI, the IBC continued as the key mechanism for banks to recover stressed assets – accounting by far for the greatest recovery among different channels in 2022-23 (43% of the total amount recovered). Post implementation of IBC, the gross non-performing assets (GNPA) ratio of Scheduled Commercial Banks dipped to a multi-year low of 3% and the net non-performing assets (NNPA) ratio to 0.7% (as of December 2023). By laying down governance norms for companies in distress, the IBC has taken corporate governance to new heights in the country," the finance minister noted. 

She noted the need for a modern corporate insolvency regime was highlighted by many expert groups over the years. 

> A report by the Raghuram Rajan-led Committee on Financial Sector Reforms (2008) noted : “…because of the delays (sometimes endless), the system prevents the reallocation of assets to their best use, and greatly wastes asset values of impaired debtors, to the detriment of the economy. Closing a business also takes a long time in India—on average 10 years in India compared to 1.7 years in China.”