India’s Bankruptcy Bill to help creditors, state-owned entities: Fitch Ratings

The newly passed Bankruptcy and Insolvency Bill passed in the Rajya Sabha on Thursday is believed to help steer investor confidence amid improving the environment for creditors and other public entities. Banks, especially state-owned entities are expected to reap the maximum benefits from this initiative.

"The bill, which was cleared by both houses of Parliament within one week, reflects the government's sense of urgency in improving the resolution process," Fitch Ratings said in a research comment.

The bill is aimed at bringing a set of regulations that would foster changes to build a better insolvency resolution mechanism, besides, establishing an Insolvency and Bankruptcy Board of India. The code's proposed 180-day time frame for recovering bad debts (and extendable by 90 days) is ambitious but nonetheless a critical step if India wants to improve investors' confidence in the insolvency regime, given its poor record of bad debt resolution, Fitch reported.

However, Fitch believes that implementation will remain the key driver and the passage will take time to build an ecosystem for implementing the process. Setting up a new regulator for a new category of insolvency professionals, and building robust information utilities/repositories, will be time consuming. At the same time, the use of available infrastructure (of National Company Law Tribunals and debt-recovery tribunals) may not be optimal, with over 70,000 liquidation cases already pending as per a recent press report, the rating agency reported.

"We expect the benefits of the code to be visible only over the medium to long term," Fitch added to its comment.

According to Mohit Saraf, Sr. Partner at Luthra and Luthra, since the law ensures time bound recovery, more foreign insvestors will be keen to lend to Indian corporate. Further this will also ease the burden on public-sector banks who are already burdened with a huge pile of bad loans.

The new law is also expected to improve its rankings in the World Bank's 'Ease of doing business' in which India scores a poor 136 on the resolving insolvency matrix. India's overall rank is 130 and the government wants to break into the top 100 within next year, reports confirmed.