NBFCs, HFCs may be brought under bankruptcy code1 min read . Updated: 07 Nov 2019, 09:31 PM IST
- The move will enable rescue of distressed financial institutions under a court-monitored process
- The law allows the govt to notify financial service providers after consulting the appropriate regulator
NEW DELHI : The government is examining the feasibility of bringing certain types of non-bank lenders and housing financiers under the Insolvency and Bankruptcy Code (IBC) to enable rescue of distressed financial institutions under a court-monitored process.
The government is closely examining a special window for this under the IBC which could be notified soon, a government official said on Thursday on condition of anonymity. The move will help distressed Dewan Housing Finance Corp. Ltd. (DHFL) to tie up a resolution plan under the IBC as potential investors may prefer the protection of the legal process while making an investment into an entity the affairs of which is under investigation.
According to Manoj Kumar, partner at Corporate Professionals, a consultancy, the law allows the government to notify financial service providers or categories of financial service providers, the bankruptcy resolution of which could be conducted under the IBC, after consulting the appropriate regulator. Non-bank lenders and housing financiers are now regulated by the Reserve Bank of India.
According to a 7 June RBI circular, lenders have to review defaulting accounts for a month and decide the strategy, and have six months to take them to the bankruptcy court. But there is no clarity on what will happen at the end of six months as at present non-bank lenders and housing financiers are not covered under the IBC. Reuters reported on Thursday that DHFL is currently classified as stressed account but will slip into becoming a non-performing asset (NPA) by 31 December unless a resolution is found.
“Potential investors would prefer the court monitored IBC process rather than risking a private settlement which offers no protection for the new management," said Kumar. The changes to the IBC may also help other non-bank or cooperative sector lenders which are in distress.