Law for bad debts recovery good for Indian banks: Moody's

Moody's said on Monday the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions Bill, 2016, and the Insolvency and Bankruptcy Code, 2016 (bankruptcy), will lead to structural improvements in banks dealing with bad assets.

While the bankruptcy law has been enacted, the Enforcement of Security Interest and Recovery of Debts Bankruptcy Code, 2016, has to be passed by the Rajya Sabha after it was cleared by the Lok Sabha.

The Enforcement of Security Interest and Recovery of Debts Bankruptcy Code, 2016, is a credit positive for the Indian banks as it aims to expedite the recovery and resolution of bad debts, said a statement issued by Moody's Investors Services.

"Weakness in current processes for bad debt resolution has been a key structural credit challenge for Indian banks. There are currently about 70,000 cases pending in debts recovery tribunals (DRTs), and these cases have been pending for many years owing to various adjournments and prolonged hearings," Moody's said.

According to Moody's, the provisions relating to promotion of asset reconstruction companies for banks to off-load their non-performing assets (NPA) and prioritise debt due to secured creditors over all other debts and claims (including government claims) are credit positive features for the Indian banks.

The Enforcement of Security Interest and Recovery of Debts Bankruptcy Code, 2016, proposed electronic filing of all proceedings, time limit for filing appeals against decisions of Debt Recovery Tribunals (DRTs) reduced to 30 days from 45 and debtors to deposit 50 per cent of the amount of debt payable before filing an appeal are positive for Indian banks, said the credit rating agency.