Enabling resolution of finance companies under IBC credit positive for banks: Moody's

Inclusion of non-bank finance institutions (NBFIs) in the Insolvency and Bankruptcy Code (IBC) 2016 is credit positive for banks, Moody's Investors Service said on Monday.

Until now, the only resolution framework for NBFIs was through liquidation. On November 18, the government amended the IBC to allow for resolution of NBFIs, including housing finance companies with asset sizes greater than Rs 500 crore, via the IBC.

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

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

RBI's close involvement in the process indicates the NBFI sector's importance to overall financial stability, including the direct effect of any systemically important NBFI's failure on banks and other credit providers.

The central bank is authorised to appoint an administrator as well as an advisory committee that will oversee the resolution process.

"We expect the RBI to selectively approach the IBC to resolve NBFIs with severe liquidity or solvency issues, or to resolve companies whose weak corporate governance is deterring potential buyers. We also expect banks and the RBI to utilise other debt restructuring options before approaching the IBC," said Moody's.

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 RBI superseded DHFL's board because of corporate governance issues and defaults by the company toits creditors.

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