IBC rules for NBFC resolution credit positive for banks, says Moody's

Rating agency Moody's on Monday said the amendments to India’s bankruptcy code enabling the resolution of finance companies are credit positive for banks.

India's banks are largest lenders to non banking finance Institutions (NBFI). The provisions in the IBC provide for the orderly resolution of a stressed company. Until now, the only resolution framework for NBFIs was through liquidation.

"We expect an orderly resolution process via the IBC will help limit losses for creditors as compared with liquidation," Moody's said in a statement.

On November 18, 2019, the government (Baa2 negative) amended the country’s Insolvency and Bankruptcy Code (IBC) 2016. It allows for the resolution of NBFIs, including housing finance companies, with asset sizes greater than Rs 500 crore via the IBC.

Under the amended law, the resolution process can only be initiated by the regulator, the Reserve Bank of India (RBI), which is India's central bank. This is a departure from key aspects of the IBC which allows any creditor to a company to initiate the insolvency process as long as they can prove that there has been a default by the company.

RBI's close involvement indicates the NBFI sector's importance for overall financial stability, including the direct effect of systemically important NBFI's failure on banks and other credit providers. RBI can appoint an administrator and advisory committee to oversee the resolution process, rating agency said.

Moody's said it expected the RBI to selectively approach the IBC to resolve NBFIs with severe liquidity or solvency issues. The central bank can also use a provisio to resolve companies whose weak corporate governance is deterring potential buyers. "We also expect banks and the RBI to utilize other debt restructuring options before approaching the IBC," it added.

On November 20, 2019, following the change in the IBC law, RBI initiated the resolution process of Dewan Housing Finance Limited, a stressed housing financing company. RBI superseded Dewan's board because of corporate governance issues and defaults by the company to its creditors.

RBI has also appointed an administrator and an advisory committee to the administrator, who will oversea the resolution process. Since July 2019, banks and other creditors to Dewan have been unsuccessful in trying to restructure the company's liabilities.