August 30, 2017
Two months after requesting banks to begin bankruptcy proceedings against 12 of the nation’s top loan defaulters, RBI has pulled out names of some 40 more defaulters. The list consists mostly of companies in the infrastructure and power industries. Some of the companies included in the list are Videocon, Visa Steel, East Cost Energy, and Asian Colour.
The initial list of 12 companies that defaulted their loan had an overall outstanding due of over Rs.1.75 lakh crore, constituting to 25% of all the bad debts in India’s banking system. Banks have already begun insolvency proceedings for 11 out of the 12 companies listed and have been asked to take action against the defaulters in the new list within four months, in the event that there hasn’t been a resolution.
Banks will now file suit against the defaulting companies in the National Company Law Tribunal. Subsequently, the board of directors of the company under scrutiny will be dissolved and the management is substituted with a resolution expert. Companies will however have a chance to approach the court with a POA to repay their debt if they wish to revive their company. In the event that none of the plans are satisfactory to the lender, the company will have to be liquidated within 270 days.
This move by the RBI is both a curse and a boon for financial institutions. On one hand, the banks will have diminished profits or will undergo losses due to the hastened closure of the loan. Conversely, the companies are, in a way, obligated to pay up rapidly as they would fear closure of their business.
The Indian financial system is weighed down with a projected amount of Rs.8 lakh crore in bad loans which is radically decelerating the credit flow in the economy. Hopefully, these insolvency proceedings will stabilize the economy to an extent in the coming years.