- The promoters of the company who owed billions of dollars to the banks dragged insolvency resolutions for years using loopholes in the Indian judicial system.
- The Insolvency & Bankruptcy code successfully solved this problem, and the result of this change is now visible in the system.
- While banks in many countries in the world are losing due to fintech, Indian banks are increasing their efficiency using the same technology.
For almost the last four years, TFI has maintained that Insolvency & Bankruptcy Code (IBC) is the Modi government’s biggest reform on the financial side, even bigger than the milestones like GST. And there is a very solid argument behind why we say so, and that is – IBC creates a culture of ‘creative destruction’ in the Indian political economy that was previously absent.
The promoters of the company who owed billions of dollars to the banks (especially public sector ones) dragged insolvency resolutions for years using loopholes in the Indian judicial system. Billions of dollars of taxpayer’s money were used to bail out these companies and their promoters, and there was no fear of losing control once the enterprise fails.
Failure is part of entrepreneurship, but when you treat failed entrepreneurs on par with successful ones – the incentive to succeed gets demolished. And this is the worst thing for any rule-based capitalist economy.
The Insolvency & Bankruptcy code successfully solved this problem, and the result of this change is now visible in the system. A report by RBI on the financial performance of banks captured and acknowledged this change. As per the RBI report, there has been a secular decline in gross non-performing assets (NPAs) in the last few years.
The RBI report also acknowledged that proving the cynics wrong, the banks (especially PSBs) posted their best performance in FY 21 (the pandemic year). “The fall (interest income) was cushioned by a sizable increase in income from investments. Income from trading also accelerated, as banks booked profits on falling G-Sec yields,” reads the report.
“Profitability of banks, measured in terms of the spread between return on funds and cost of funds, improved with the decline in the latter exceeding that in the former,” the report said. Profitability or margin improvement was especially evident in the case of PSBs.
In the last few years, the banks made a very good recovery on the NPAs by using IBC. Assets of many defaulters including people like Vijay Mallya, Nirav Modi were sold by the consortium of lenders.
Insolvency proceedings normally used to take around 4.3 years on an average in India, which is way slower than 1 year in the United Kingdom and 1.5 years in the USA. The IBC has not just reduced this time period, but also made India a friendlier destination for companies looking to invest in India.
Apart from IBC, the government’s push for consolidation also improved the efficiency of PSBs significantly. Amid the ongoing wave of digitalization, the Indian banks have successfully adopted financial technology thanks to platforms developed by organizations like iSPIRT Foundation in collaboration with the government.
Thus, while banks in many countries in the world are losing due to fintech, Indian banks (especially PSBs) are increasing their efficiency using the same technology.
Owing to initiatives like Aatmanirbhar Bharat, Make-in-India, and schemes like Startup India and standup India introduced by the government, more and more companies are propping up. But we have to acknowledge that not every company will be successful and only a few will turn out to be unicorns.
IBC’s most significant feature is that it provides flexibility for companies that are on the verge of failure to undergo bankruptcy resolutions, while also making sure that they do not end up dragging the lenders in the infinite web of the Indian judiciary.
The banking sector is the backbone of any economy and the Indian banking sector has been a laggard compared to other countries since independence.
However, in the last few years, the government has focused on the banking sector (financial inclusion, IBC, adoption of fintech through IndiaStack) and this will ensure that the Indian banking sector takes a leading role in the development of the country.