- What are the Non-Banking Financial Corporations (NBFCs)?
- What is the Insolvency and Bankruptcy Code?
- What are the factors that led to the crisis in NBFCs?
- What are the benefits of the present move?
- What are the challenges?
- Possible Solutions
[RSTV The Big Picture] NBFCs & IBC
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The Reserve Bank of India (RBI) can now seek resolution of Non-banking financial companies (NBFCs) having assets worth of at least Rs. 500 crore under the insolvency law. The move comes against the backdrop of the ongoing liquidity crisis in theNBFCs that has also sparked concerns about the overall stability of the financial sector.
What are the Non-Banking Financial Corporations (NBFCs)?
A Non-Banking Financial Corporations (NBFCs) lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
NBFCs play a critical role in the economy. They are an alternative source of finance for various industries in the economy.
What is the Insolvency and Bankruptcy Code?
- The Insolvency and Bankruptcy Code, 2016 is a step towards settling the legal position with respect to financial failures and insolvency. The codeapplies to companies and individuals. It provides for a time-bound process to resolve insolvency.
- When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency within a 180-day period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.
What are the factors that led to the crisis in NBFCs?
What are the benefits of the present move?
- Earlier, IBC framework was applicable to the manufacturing sector. With the latest move, the NBFC sector was brought under the Insolvency and Bankruptcy Code (IBC) framework. Experts said that it will eventually pave the way for the resolution of banks also. (Section 227 of IBC law allows the government to notify particular financial sector to be brought under IBC).
- Support the systematically important financial institutions
- The whole idea is to provide an orderly, rule-based, and a market-based mechanism to work out a resolution to the crisis-ridden banks and NBFCs.
- It gives confidence to NBFCs that there is a mechanism available to resolve the crisis.
- Any creditor (even small creditor) can approach the IBC.
- Strengthen RBI’s role as a regulator of NBFCs through:
- Helping in making the resolution process easier.
- Negotiations and resolution would take place at the regulator level.
- More risk-taking by the banks.
What are the challenges?
Bringing NBFCs to IBC will help resolve one particular problem. But it may not help solve the overall problem in the sector.
The move is in the right direction. The IBC has shown many good results in the recent past. And we have to hope that the trend continues as far as the NBFCs are concerned.