November 26, 2019

Provision of bankruptcy proceedings against NBFCs positive for Banks: Moody’s

[ By Kavita Krishnan ]


The newly enacted rules empowering the Reserve Bank of India (RBI) to refer stressed Non-Banking Housing Finance Companies (NBFCs) and Housing Finance Companies (HFC) with assets worth of at least Rs. 500 crore to insolvency courts after notifying Section 227 of the Insolvency and Bankruptcy Code, 2016 (IBC) can be seen as a positive move for banks as its paves the way for orderly resolution of stressed shadow banks, according to a report by credit rating agency – Moody’s. Earlier, the only resolution available for stressed NBFCs was liquidation.

Dewan Housing Finance Corporation (DHFL) is set to become the first HFC to go to insolvency court.

Section 227 of IBC empowers the government to notify, in consultation with financial sector regulators, for insolvency and liquidation proceedings. The section specifies that the Apex Bank can initiate the bankruptcy process for an NBFC/HFC. On November 20, the RBI superseded the DHFL board and appointed an administrator and said it would begin bankruptcy process for the crippled company.

According to the report, it is expected that the RBI selectively approaches the IBC to resolve NBFCs with severe liquidity or solvency issues, or to resolve companies whose weak corporate governance is deterring potential buyers.

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