Global rating agency Moody’s Investors Service in its latest report has said that the inclusion of Non-banking financial companies (NBFCs) into the Insolvency and Bankruptcy Code (IBC) is credit positive for banks (NBFCs’ biggest source of funds) because IBC provides for the orderly resolution of a stressed NBFC company.
According to the report, the close involvement of the Reserve Bank of India (RBI) in the resolution process indicates the importance of the NBFC sector to overall financial stability, including the direct effect of any systemically important NBFC’s failure on banks and other credit providers. It said “we expect the RBI to selectively approach the IBC to resolve NBFCs with severe liquidity or solvency issues, or to resolve companies whose weak corporate governance is deterring potential buyers.” It also expects banks and the RBI to utilize other debt restructuring options before approaching the IBC.
Recently, the government had empowered RBI to refer stressed NBFCs and housing finance companies (HFCs) having assets worth of at least Rs 500 crore to insolvency courts after notifying Section 227 of the IBC. Prior to this, the only resolution framework available for stressed NBFCs was liquidation. Section 227 of IBC empowers the government to notify, in consultation with financial sector regulators, insolvency and liquidation proceedings. The section specifies that RBI can initiate the bankruptcy process for an NBFC or a housing finance company.