Union cabinet confirms 6 month IBC holidays for NPAs

Union cabinet confirms 6 month IBC holidays for NPAs; what will be the effect on banks?

• This will apply to NPAs (non-performing assets) after March 25. This was one of the suggestions that Finance Minister Nirmala Sitharaman revealed in her press conference sequence on the Rs 20 Lakh Crore Economic Package.
• The central government cleared the suggestion to suspend insolvency and bankruptcy proceedings for bank defaulters for a period of six months, with a provision to extend the time for up to one year, CNBC-TV18 said in a news flash.
• The move will provide relief to a number of companies that have been battered by the COVID-19 crisis, as these corporations will not be dragged into the IBC proceedings for the time being.
• Even so, the verdict may not be a good one for the banking sector, as banks will have to sit on bad assets for a long time to come. They’re not going to be able to transfer those accounts to IBC for a swift resolution.
• It might lead to possible future stress and lower implementation through the resolution process.
• As per Icra, the outbreak of COVID-19 and the suspension of new procedures under IBC are expected to result in substantially lower realizations of up to 30-40 percent for financial creditors in FY20-21.
• In view of the economic impact of the Covid-19, the Government decided to suspend the IBC proceedings. To fight COVID, the government announced a national lockdown beginning on March 25, which continues with some relaxation even now.
• The extended lockout has had a significant effect on companies and has seriously restricted their ability to repay loans to banks.

In this sense, the IBC holiday was declared

• Section 10 requires a defaulting corporation to seek access to the National Corporate Law Tribunal (NCLT) to find it insolvent.
• The Government had previously decided to grant this relief to companies from being dragged into insolvency proceedings for the next six months, by way of a proposal from the Cabinet, which was cleared on 22 April but did not set a time limit for which the clause should be considered.
• The provision of section — Section 10A — is to suspend sections 7, 9, and 10 for a period of six months or until further notice, with a rule that the amendment clause can not be extended for more than one year and will be a one-time measure.
• The plan approved by the union cabinet is to push the reforms via the promulgation of an ordinance. Sources said that a formal announcement on the ordinance is now expected after the president’s nod comes. It should be remembered that the old prosecutions will continue.

IBC

• The new provision supersedes sections 7, 9, and 10 of the IBC. Section 7 deals with financial creditors initiating insolvency proceedings, Section 9 deals with operational creditors initiating proceedings.

Gross NPA (Non-Performing Assets) % over the last seven years for Scheduled Commercial Banks (SCBs) in India.

Gross Non-Performing Assets Percentages (March-end figures)

summarizing the Gross Non-Performing Assets percentages over the last seven years for Scheduled Commercial Banks in India.

The Gross Non-Performing Assets ratio has consistently declined from 9.08% in FY2019 to 2.58% in FY2025, indicating significant improvement in the banking sector’s asset quality. The fall reflects better credit discipline, recovery through IBC mechanisms, and write-offs of legacy Non-Performing Assets. Public Sector Banks, which earlier had higher stress levels, have shown the most notable improvement, aligning closer to private sector performance by FY2025.

RBI

• Out of 12 cases IBC case reported by the Reserve Bank of India ( RBI) in 2017, only 6 cases a resolution was reached, while liquidation orders were passed against two companies.
• A resolution has occurred in two companies, but the banks have not received payment. In addition, the resolution plan failed in the case of another company and therefore the process has been restarted, according to the report.
• The six companies that have found a resolution are Electrosteel Steels, Bhushan Steel, Monnet Ispat, Essar Steel, Alok Industries, and Jaypee Infratech.
• A resolution has occurred in Jyoti Structures and Bhushan Power and Steel, but payment is still to be obtained.

Government’s initiative began on NPA recovery.

From 2015 to the present, Public Sector Banks have recovered 6.41 lakh crores from NPAs and written-off loans. There is a 2% decrease in net NPA ratio from 8%. From 15.3% to 8.7% of assets were stressed. In 2018, the gross NPA was 14.6%; it is now 7.4%. From a peak of 1.32% in 2014 to 0.05% in the Financial Year 2021–2022, fraud in PSU banks has decreased.

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