BANKING AND INSURANCE LAW

TOPIC – IMPACT OF INSOLVENCY AND BANKRUPTCY CODE,

2016 ON BANKING SECTOR: A BRIEF ANALYSIS

SUBJECT – BANKING AND INSURANCE LAW

SUBMITTED BY: SUBMITTED TO

HARSH VIRK PROF. KANCHAN SHUKLA
SAP ID – 81022018031
ROLL NO. C029

KIRIT.P MEHTA SCHOOL OF LAW 1

 BANKING AND INSURANCE LAW

Declaration
I hereby declare that the work reported in this project report entitled “IMPACT OF

INSOLVENCY AND BANKRUPTCY CODE, 2016 ON BANKING SECTOR: A BRIEF

ANALYSIS” submitted on 30th May, 2021. The report is Plagiarism free as per the Author’s

knowledge and the report is attached below.

HARSHDEEP SINGH VIRK

KIRIT.P MEHTA SCHOOL OF LAW 2

 BANKING AND INSURANCE LAW

ACKNOWLEDGEMENT

I, Harshdeep singh virk of B.B.A L.L.B (Hons.), third year student from Narsee Monjee

Institute of Management Studies (NMIMS) Navi Mumbai School of law and have conjointly

worked towards making this paper both meticulously and harmoniously.

Putting forth this research paper has taken me lot of sincere efforts and help and support of

other people. We want to sincerely thank our ‘Banking and insurance law’ faculty of NMIMS

Navi Mumbai, Prof. Kanchan Shukla, who was not only supportive of our work, but also

constantly pestered to move ahead by doing numerous corrections in the paper, rough draft and

structure of the paper as a whole. Therefore, I sincerely thank Prof. Kanchan Shukla for all her

support and help.

KIRIT.P MEHTA SCHOOL OF LAW 3

 BANKING AND INSURANCE LAW

Table of content

Title Page no.

ABSTRACT 5

INTRODUCTION 5

7
REVIEW OF LITERATURE

8
RESEARCH GAP

OBJECTIVES 8

HYPOTHESIS 9

RESEARCH METHODOLOGY 9

ASSIMILATING INSOLVENCY AND BANKRUPTCY CODE, 2016. 9

EMPIRICAL ANALYSIS, RESULTS AND DISCUSSION 11

FINDINGS OF STUDY 13

NEXUS BETWEEN THE IBC, NPA’S & BANKING SECTOR 13

CONCLUSION AND SUGGESTIONS 15

BIBLIOGRAPHY 17

KIRIT.P MEHTA SCHOOL OF LAW 4

 BANKING AND INSURANCE LAW

ABSTRACT

Thei Indiani bankingi sectori hasi seeni variousi changesi overi thei lasti decade.i Ani increasei ini thei
non-i performingi assetsi (NPA)i wasi ai majori reasoni fori worryi fori thei governmenti ofi India.i
Increasedi ratei ofi recoveryi ini Indiai andi highi percentagei ofi NPAi ledi toi issuesi betweeni Banks,i
organizationi andi individualsi (lendersi andi borrowers).i Thei introductioni ofi insolvencyi codei byi
thei governmenti ofi Indiai ini 2016i wasi aimedi toi bringi downi NPAi andi increasei thei recoveryi time.i
Thisi paperi attemptsi toi studyi thei impacti ofi thei IBCi oni thei banksi oni Indiai overi thei lasti 6i years.i
Ai comparativei analysisi wasi performedi betweeni privatei andi publici banks.i Thisi paperi ini
dividedi intoi 2i parts,i thei firsti studiesi thei Advancesi andi NPAi whilei thei lateri explainsi thei impacti
ofi NPAi oni thei profitabilityi ratios.i Thisi studyi hasi usedi secondaryi datai andi analysedi publici andi
privatei banksi usingi correlationi andi regression.i Thei resultsi showi ai significanti impacti ofi thei
introductioni ofi IBCi oni thei recoveryi rate,i profitabilityi andi thei NPA.i Thisi paperi hasi addressedi
changesi ini policiesi fori improvementi ofi thei code.

Key words: IBC, NPA, profitability ratios, recovery rate, private banks, public banks,
insolvency and bankruptcy code, non-performing assets, Advances, regression

INTRODUCTION

Ai statei ofi inactioni isi muchi dangerousi theni thei statei ofi Action.i Thei enactmenti ofi IBC,i 2016i wasi
onei ofi suchi actioni thati wasi thei needi ofi thei hour.i Iti indeedi madei positivei andi requiredi changesi
ini thei insolvencyi proceedings,i nonetheless,i iti alsoi helpedi toi boosti thei bankingi sectori asi well.

“Innovation is an inexhaustible engine for economic development”

- Li Keqiang

Similarly, the innovation was required in insolvency proceedings and its structure and for that
purpose the Insolvency and Bankruptcy Code (IBC), 2016 was enacted in order to regulate the
insolvency procedure of a company. Thei Insolvencyi procedurei wasi structuredi andi systemizedi
afteri thei enactmenti ofi IBCi ini 2016.i Ini Economicsi everyi transactioni andi actioni relatedi toi
moneyi affectsi thei economyi ofi thei country.i Thei IBCi containsi fewi provisionsi thati tangentiallyi
affecti thei Bankingi Sectori ini thei Economy.i Everyi actioni relatedi toi moneyi hasi ai directi impacti oni
thei GDPi (Grossi Domestici Product)i ofi thei country.i For example, during insolvency procedure
under Section 7 of the IBC, 2016, the banks are considered as financial creditor and because

KIRIT.P MEHTA SCHOOL OF LAW 5

 BANKING AND INSURANCE LAW

of insolvencyi banksi losesi somei amounti ofi moneyi isi thei transaction.i Iti isi becausei ai companyi
cannoti settlei thei debti ofi everyi creditori andi that is the reason why company goes into liquidity
process. When the debt of the Banks are not fully paid, it loses crores of money which
tangentially affect the economy1.

Thei fulcrumi ofi ai robusti andi resilienti bankingi sectori isi ai comprehensivei bankruptcyi regime.i Iti
helpsi toi maintaini ai soundi relationshipi betweeni debtori andi ai creditori byi safeguardingi theiri
rightsi ofi both,i byi promotingi predictabilityi andi byi ensuringi efficienti resolutioni ofi indebtedness.i
Ai landmarki developmenti ini thisi regardi isi thei enactmenti ofi Insolvencyi andi bankruptcyi Code,i
2016.i Ai morei focusedi andi amplifiedi viewi wasi oni thei Banki Recapitalisation.i Ini viewi ofi thei
impendingi movei towardsi thei fulli implementationi ofi Baseli three requirements and the need to
meet the credit demands of a growing economy, buffering up the capital position of public
sector banks has assumed priority. Section 2 of the said act analysis the feature of IBC with
regards to insights derived from thei cross-countryi transactionsi andi experiences.i Sectioni 3i ofi
thei saidi Acti addressesi thei Recapitalisationi ofi publici sectori banksi ini lieui ofi thei cross-countryi
comparisonsi andi India’si owni pasti experiencesi withi iti ini 1990s.i

Thei IBCi wasi consideredi ai majori efforti ini resolvingi thei issuesi ofi NPAsi whichi hadi beeni
plaguingi thei Indiani bankingi Industryi andi thei risingi corporatei borrowingi defaults.

The IBC lays down separate processes of insolvency resolution for Companies, individual
borrowers and partnership firms. For effective functioning the code provides for 2 Adjudicating
authorities namely NCLT andi DRT.i Whilei resolvingi Insolvencyi casesi ofi companiesi restedi ini
thei handsi ofi NCLT,i DRTi handledi thei resolutioni processi ofi Insolvencyi casesi ofi individualsi andi
partnershipi firms.IBCi laidi downi stricti timei boundi resolutioni processi andi ini effecti hadi ai targeti
ofi resolvingi insolvenciesi ini ai timei spani ofi 270i days.i Thei codei bringsi abouti 2i optionsi ini thisi
regard:i onei couldi bei restructuringi ofi thei businessi andi anotheri wasi liquidationi in case the
business was not found viable.2

IBBI was rested with the responsibility of regulating the whole process of resolving insolvency.
There were a lot of apprehensions as to the successful implementation of the new code. This

1
Bhasin, D. M. (2017). Unmasking Rising NPAs: Can the Indian Banking Sector Overcome this Phase?
International Journal of Management and Social Sciences Research (IJMSSR), 20.
2
Goel, S. (2017). The Insolvency and Bankruptcy Code,2016: Problems & Challenges. Imperial Journal of
Interdisciplinary Research (IJIR), 8.
KIRIT.P MEHTA SCHOOL OF LAW 6
 BANKING AND INSURANCE LAW

paperi isi ani attempti toi analysei thei effortsi ofi variousi researchersi ini analysingi thei structurali
issuesi ini thei newi codei andi thei problemsi encounteredi ini itsi successfuli implementation.

REVIEW OF LITERATURE

1. Srijan Anant, Aayushi Mishra (2019)3: Thei researcheri opinesi thati IBCi isi onei ofi
thei majori reformsi broughti abouti ini thei legali systemi ini Indiai .Ini thei viewsi ofi thei
authori IBCi isi noti onlyi givingi strengthi toi thei Legali systemi ini Indiai buti isi alsoi
providingi ai newi identificationi andi recognitioni toi Indiai ati thei globali leveli .i Thei
authori opinesi thati thei codei bringsi abouti ai consolidationi ofi thei existingi multiplei lawsi
relatingi toi bankruptcyi intoi ai singlei law.i Thei authori hasi analysedi thei keyi featuresi ofi
thei codei andi thei legali frameworki ofi thei codes.i Thei authori hasi alsoi triedi toi analysei
thei impacti ofi Insolvencyi andi Bankruptcyi codei oni macroi environmenti ofi India.

2. Manoranjan Ayilyath (2019)4: Thei researcheri interpretsi thati thei Insolvencyi andi
Bankruptcyi Codei preventsi thei erosioni ofi enterprisei valuei andi makei iti easei asi
solutioni fori timei boundi insolvencyi resolutioni fori promotingi thei business.i Thei
existingi IBCi isi noti i ablei toi meeti thei financiali marketi andi resolutioni processi duei toi
thei Codei relatedi toi thei Insolvencyi Resolutioni andi Bankruptcyi ofi thei Individualsi andi
thei Partnershipi firmsi isi noti yeti madei effectivelyi operational.i Thisi paperi examinesi
thei variousi factorsi andi challengesi facedi ini thei systemi thati slowsi downi thei progressi
andi iti hasi toi bei rectifiedi asi ani ongoingi process.
3. Dr. P.N.Harikumar & Dr. Susha D,(2017)5 : The researcher analysed that Non-
i performingi assetsi isi thei majori concernsi fori scheduledi commerciali banksi ini Indiai
whichi hadi createdi ai greati impacti oni thei profitabilityi andi liquidityi ofi thei banks.i i Ini
thisi paper,i i ani attempti isi madei toi understandi concepti ofi NPA,i statusi ofi NPAsi ini
Indiani Scheduledi commerciali banksi andi recoveryi ofi NPAsi throughi variousi majori
channels.i Thei authori stronglyi suggestsi thati iti isi necessaryi toi trimi downi thei NPAsi fori
improvingi thei financiali healthi ofi bankingi system.

3
Srijan Anant and et tal, “ A Study Of Insolvency And Bankruptcy Code And Its Impact On Macro
Environment Of India”, International Journal of Engineering Development and Research, Volume 7, Issue 3 |
ISSN: 2321-9939
4
Manoranjan Ayilyath (2019), “ Road Blocks Under Insolvency And Bankruptcy Code, 2016 – Need For
Capacity Building”, Accessed : https://ssrn.com/abstract=3440479, pp 01- 09
5
Dr.P.N.Harikumar and et tal (2017), “Recovery of Non-Performing Assets in SCBs in India”, Indian Journal of
Applied Research, Volume – 7, Issue – 1, January – 2017, ISSN - 2249-555X, pp 720-72
KIRIT.P MEHTA SCHOOL OF LAW 7
 BANKING AND INSURANCE LAW

4. Nakul Sharma, 2 Dr. Rahul Vyas(2017)6 : Thei presenti paperi studiesi thei Insolvencyi
Professionali Agencyi frameworki ini termsi ofi itsi rolei andi scope,i whichi isi thei bulwarki
ofi thei IBCi ini termsi ofi thei procedurali andi regulatoryi ambiti ofi thei code.i Thei IBCi 2016i
isi ai landmarki developmenti ini thei lawi ofi ouri countryi whichi providesi resolutioni ini ai
timei boundi manner,i promotesi entrepreneurshipi whichi willi leadi toi ani improvementi
ini crediti availabilityi andi wouldi balancei interesti ofi alli stakeholders.

5. Pratik Datta(2018)7 : Ini thisi studyi thei researcheri hasi appliedi theoreticali conceptsi toi
analysei thei majori problemsi likei valuei destructioni andi wealthi transferi ini newi codei ofi
Insolvencyi andi Bankruptcy.i Thei authori hasi identifiedi fouri potentiali sourcesi ofi
wealthi transferi underi thei Insolvencyi andi Bankruptcyi Code,i 2016.i Thei Indiani
policymakersi hasi toi revisiti thei fundamentali legislativei designi choicesi embeddedi
withini thei Insolvencyi andi Bankruptcyi Code,i 2016i toi successfullyi addressi thei
contemporaryi concernsi regardingi thei valuei destructioni andi wealthi transferi problems.

RESEARCH GAP

Researchi ini thei bankingi industryi hasi alwaysi beeni ai priorityi fori thei countryi andi hencei manyi
researchersi havei donei ai studyi oni thei differenti regulationsi introducedi byi thei governmenti toi
helpi thei problem.i Thei Insolvencyi andi bankruptcyi codei 2016i arei ai relativelyi newi codei andi
somethingi thati hasi neveri beeni seeni India.i Thus,i noti ai loti ofi researchi hasi beeni donei ofi itsi
impacti oni thei bankingi sector.i Afteri carefuli studyi ofi thei literature,i ai fewi gapsi havei beeni
found.i Thei IBCi hasi hadi ai cascadingi effect,i thati is,i manyi variablesi havei beeni affectedi buti
thisi studyi considersi onlyi twoi andi morei cani bei furtheri studied.i Veryi littlei impacti hasi beeni
seeni ini thei lasti twoi yearsi andi thusi ai fulli impacti hasn’ti beeni studiedi andi cani bei studiedi afteri
ai fewi morei years.

OBJECTIVES

1. Toi Understandi thei concepti ofi Insolvencyi andi Bankruptcyi Codei asi ai remediali tooli fori
Bankingi Industry

6
Nakul Sharma and et tal (2017), The insolvency and bankruptcy code, 2016: Insolvency professional agency,
International Journal of Law, Volume 3; Issue 6; November 2017, ISSN: 2455-2194; Page No. 58-61
7
Pratik Datta (2018), Working Paper series 247: “Value Destruction and Wealth Transfer under the Insolvency
and Bankruptcy Code, 2016, National Institute of Public Finance and Policy, December-2018, Accessed at
https://www.nipfp.org.in/publications/working-papers/1842/
KIRIT.P MEHTA SCHOOL OF LAW 8
 BANKING AND INSURANCE LAW

2. Toi understandi thei Impacti ofi itsi discrepancyi ini thei GDPi ofi thei Country.i
3. Toi analysei thei variousi researchi worksi carriedi outi oni Insolvencyi andi Bankruptcyi Code.
4. Toi studyi thei impacti ofi introductioni ofi IBCi oni Indiani bankingi sector-i bothi longi termi
andi shortiterm.
5. Toi studyi thei trendsi ofi NPAi ini commerciali banksi ofi India.

HYPOTHESIS

H1-i Therei isi ani impacti ofi loansi &i advancesi oni thei Non-performingi assetsi ofi thei Banksi (privatei
andi public).

H2-i Therei isi ani impacti ofi NPAi oni thei profitabilityi ratiosi ofi thei banksi (privatei andi public).

RESEARCH METHODOLOGY

Thisi paperi isi basedi oni exploratoryi researchi techniquei andi datai usedi isi thei secondaryi datai
extractedi fromi viai secondaryi sourcesi availablei likei Graphical/statisticali datai availablei oni
variousi relatedi websites.i Thisi paperi isi basedi oni studyi regardingi thei impacti ofi thei IBC,i 2016,i
oni thei Bankingi Sectori ofi thei country.i Thei periodi ofi studyi isi 5i years.i Thei typei ofi datai usedi fori
thisi researchi isi secondaryi datai collectedi fromi relevanti websitesi suchi RBI,i economici surveyi
articlesi andi journals.i

ASSIMILATING INSOLVENCY AND BANKRUPTCY CODE, 2016.

In India, the extant legal and institutional machinery for dealing with debt default, either
throughi thei Indiani Contracti Act,i 1872i ori throughi speciali lawsi suchi asi thei Recoveryi ofi Debtsi
Duei toi Banksi andi Financiali Institutionsi Act,i 1993i andi thei Securitisationi andi Reconstructioni ofi
Financiali Assetsi andi Enforcementi ofi Securityi Interesti (SARFAESI)i Act,i 2002i hasi noti beeni
utilisedi welli byi banks.i Similarly,i actioni throughi thei Sicki Industriali Companiesi (Speciali
Provisions)i Act,i 1985i andi thei windingi upi provisionsi ofi thei Companiesi Act,i 1956i havei neitheri
aidedi prompti recoveryi byi lendersi nori swifti restructuringi ofi indebtedi firms.i Ini thisi setting,i ai
landmarki developmenti isi thei IBC,i 2016i enactedi andi notifiedi ini thei Gazettei ofi Indiai in May
2016. Introduction of the Insolvency and Bankruptcy Code in 2016 made a major reform in
Corporate Insolvency Resolution Process which made it simpler and faster for the companies
to get liquefied. It also saved the banks from various losses because of its new provisions which
allowed the Operational Creditor to file for the CIRP with the NCLT and declare a company

KIRIT.P MEHTA SCHOOL OF LAW 9

 BANKING AND INSURANCE LAW

as insolvent. This act highlighted the importance of Resolution Professionals and Liquidators
and brought them into the lime lights.

It becomes the single law that deals with insolvency and bankruptcy by consolidating and
amending various laws relatingi toi reorganisationi andi insolvencyi resolution.i Thei IBCi coversi
individuals,i companies,i limitedi liabilityi partnerships,i partnershipi firmsi andi otheri legali entitiesi
asi mayi bei notifiedi (excepti financiali servicei providers)i andi isi aimedi ati creatingi ani overarchingi
frameworki toi facilitatei thei windingi upi ofi businessi ori engineeringi ai turnaroundi ori exit.i Thei IBCi
aimsi ati insolvencyi resolutioni ini ai time-boundi manneri (180i days,i extendablei by another 90 days
under certain circumstances) undertaken by insolvency professionals.

NON-PERFORMING ASSET

In order to understand Non-performing assets, one shall understand the meaning of assets.
Assets are something which yield return or which can be liquefied into money. For example-
A land or any property is an Asset because it provides you with money on the condition it is
sold in the market. Banks also posses Assets in the form of our Deposits. Our deposits are the
Liability of the banks but few portion of our deposits are lend by the banks as Loans and
advances to various partnership firms, companies, sole proprietor etc. Generally bank can lend
the deposits after deducting the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR).

CRR + SLR = Total Deposits to be kept as reserves; E.g.- 5% + 20% = 25% (Rest 75% for
Loans)

In case of Non-performing Asset (NPA), the loans and advances that are lend by the bank to
the companies or other organisations, fails to get repaid by them in the specific time period. It
is common saying in the business sector that “One should do business on loan money instead
of using our own capital”. However, it is imperative for the banks to recover the loans on time
to keep the velocity of money in motion. In simple term, the loans and advances constitute the
assets of a bank and if the asset is not performing then it is termed as a Non-performing asset.
In India, if the Loans and advances are not paid within 3 months of time, the loans and advances
are declared as a Non-Performing Asset. It is a conundrum for bank where it is neither able to
recover the Principal amount and nor the Interest amount. In such a dreadful situation, the
banks have no other options to settle the case or to cease the assets of the Companies which
impedes the process of circulation of money in the market because the large chunk of money

KIRIT.P MEHTA SCHOOL OF LAW 10

 BANKING AND INSURANCE LAW

gets trapped in the market. As we can witness, the banks of no option but to settle the case and
recover 50% of the loan amount which a significant loss to banks and in certain situations the
bank is unable to recover the amount which not only is a loss to the bank but it is a loss to the
GDP as well.

Loans & Asset Shortage of

advances to declared depsoits in
Corporates NPA the bank

Time Period Money Loss faced

of 3 Months blocked- by Banks
passed less
circulation
of money

Fig. - Loss faced by Banks

EMPIRICAL ANALYSIS, RESULTS AND DISCUSSION

Comparative Analysis of public sector banks and private sector banks

• Gross non-performing assets ratio8

AFTER IBC - GNPA BEFORE IBC- GNPA

50000 30000

40000 25000

30000 20000

15000
20000
Mar '16

Mar '15

Mar '14

Mar '13
Dec '15

Jun '15

Dec '14

Jun '14

Dec '13

Jun '13
Sep '15

Sep '14

Sep '13

10000

PSB PVB psb Pvbs

GRAPH 1: GNPA AFTER IBC GRAPH 2: GNPA BEFORE IBC

Fromi thei graphi above,i iti cani bei seeni thati beforei thei introductioni ofi IBC,i therei wasi ai steepi
andi ai continuousi increasei ini thei levelsi ofi thei GNPAi whichi wasnti ai goodi signi fori thei Indiani

8
Mainrai, G. (2017). Digital banking: The game changer. The Journal of Indian Institute of banking and finance,
KIRIT.P MEHTA SCHOOL OF LAW 11
 BANKING AND INSURANCE LAW

economy.i Afteri thei adventi ofi IBCi ini Mayi 2016,i GNPAsi continuedi toi increasei withouti
showingi ani affecti andi surgedi ini Marchi 2018.i Thisi wasi essentiallyi duei toi higheri provisioni
requirementi afteri resolutioni ofi stressedi assets.

• Profitability Ratios9

PSB – public sector banks PVB - private sector banks

BEFORE IBC- PSB BEFORE IBC- PVBs

15 3.2 20 4.4

4.2
10
4
10
3.8
2.6
3.6
2.4
2012-13 2013-14 2014-15 2015-16 3.4
-5 2.2 2012-13 2013-14 2014-15 2015-16

RETURN ON ASSET
RETURN ON ASSET
RETURN ON EQUITY
NIM RETURN ON EQUITY

GRAPH 3 : PROFITBAILITY BEFORE IBC (PSB) GRAPH 4 : PROFITABILITY

BEFORE IBC(PVB)

Thei profitabilityi ratioi hasi showni ai constanti falli ini thei yearsi beforei IBCi wasi introducedi andi
havei showni ai graduali increasei ini thei yearsi followingi IBC.

Recovery Rate

RECOVERY RATE
PERCENTAGE

60

40

20

2018-19 2017-2018 2016-17 2015-2016 2014-2015

From the graph, it can be seen that there is a positive
YEARS trend in the recovery rate of the amount

9
Ibid
KIRIT.P MEHTA SCHOOL OF LAW 12
 BANKING AND INSURANCE LAW

involved in NPAs.

FINDINGS
• From thei abovei regressioni results,i iti cani bei concludedi thati providingi advancesi toi borrowersi
hasi hadi ai significanti impacti oni thei NPAs.i Twoi modelsi werei consideredi ini thisi study.i Thei
resultsi ofi Modeli 1i showedi thati thei Advancesi beingi giveni toi borrowersi hasi ai significanti
impacti oni increasei ini NPAsi ini private.i However,i PSBsi havei noti showni ai significanti impacti
duei toi governmenti policies.i Modeli 2i showedi thati NPAi havei significantlyi affectedi thei
profitabilityi ratios.i Therei isi ai negativei correlationi betweeni NPAi andi thei profitabilityi ratios
which indicates that reduction in NPAs will cause an increase in the profitability ratios. PSBs
however did not show as much impact as the private sector banks.

• From the above data andi graphs,i iti cani bei clearlyi seeni thati NPAsi werei growingi ati ai
fasti ratei duei toi thei improperi lawsi andi thei longeri timei periodi requiredi toi recoveri thei
assetsi beforei thei introductioni ofi IBCi andi prompti correctivei actioni takeni byi thei
government.i Beforei thei introductioni ofi IBC,i NPAi increasedi fromi Rsi 6900i Cri ini 2012i
toi 25000i Cri ini 2016.i Thisi impliedi ai needi fori thei insolvencyi andi bankruptcyi codei
passedi ini Mayi 2016.i Profitabilityi ofi thei banksi measuredi usingi ratios such as ROA,
ROE, and NIM showed the same negative trend as the NPAs

• The profitabilityi ratiosi alsoi showedi ai slighti increasei ofi abouti 0.1%i betweeni 2016-
2018.
NEXUS BETWEEN THE IBC, NPA’S & BANKING SECTOR

It has been said that-

“Sometimes even when there lies no direct provisions, the fear of law is enough to cure the
conundrum”

Insolvency and Bankruptcy Code, 2016 was a trigger point for various amendments into several
acts related to RBI and SEBI which made a colossal impact in recovery of NPA’s from the
defaulters. We have understood the impact of the NPA’s on the profitability of the banks and
thus it is clear that rising in the NPA’s leads to a colossal loss to the banks and the Indian
Economy. Nevertheless, before understanding the impact of IBC on NPA’s let us see the
progress that was possible due to the enactment of IBC, 2016.

KIRIT.P MEHTA SCHOOL OF LAW 13

 BANKING AND INSURANCE LAW

IBC 2016 made a significant progress from the date it was implemented.

❖ Recent data10 and statistics shows that the transactions under the CIRP indicates that
the pace of admitted cases under IBC has elevated up with time.
❖ It evince that the Operational Creditors have been the most aggressive in the initiation
of the CIRP and though the number of financial creditors approaching the Board for
resolution has also been increasing.11
❖ The Insolvencyi andi Bankruptcyi Boardi ofi Indiai notifiedi thei IBBIi (Voluntaryi
Liquidationi Process)i Regulations,i 2017i oni March 2017 which enable a corporate to
liquidate itself voluntarily if it has no debt or if it is able to pay its debt in full from the
proceeds of the assets to be sold under the liquidation. In pursuance of these
Regulations, corporates are also tapping this route for voluntary liquidation.
❖ It has been significantly observed recently that the registration of the trained insolvency
professionals have increased over time. It has gathered a significant pace over the years.
ion
❖ Additionally, the introduction of the IBC in 2016 lead to a triggering point for the RBI
and SEBI toi amendi itsi policiesi ini orderi toi boosti thei insolvencyi process.i Thei Reservei
Banki amendedi thei Crediti Informationi Companiesi (CIC)i Regulation,i 2006i oni Augusti
11,i 2017i thati allowsi thei resolutioni professionalsi to get access to credit information with
CICs on the corporate debtor and further, it also allowed the information utilities to
access information as specified users.
❖ Subsequent to the enactment of the IBC, the Banking Regulation Act, 1949 was
amended12 to empower the Reserve Bank to issue directions to any banking company
or banking companies to initiate insolvency resolution in respect of a default under the
provisions of the IBC.

2015-16 2016-17 2017-18 2018-19 2019-2020

12,23,214 Cr. 15,83,361 Cr. 20,78,465 Cr. 18,71,861 Cr. 15,91,081 Cr.
Table 1

10
Insolvency and Bankruptcy Board of India, Quarterly Newsletter for July-September 2017.
11
Suresha B (2019), A STUDY ON THE IMPACT OF INSOLVENCY
AND BANKRUPTCY CODE, 2016 ON INDIAN
COMMERCIAL BANKS- A PRE AND POST
EVENT ANALYSIS, ISSN-2349-5162, JETIR, Volume 6, Issue 6, JETIRCK06009.pdf, last visited on 2nd
February, 2021.
12
Vide Banking Regulation (Amendment) Ordinance, 2017 (the Ordinance), subsequently enacted as Banking
Regulation (Amendment) Act, 2017.
KIRIT.P MEHTA SCHOOL OF LAW 14
 BANKING AND INSURANCE LAW

Gross NPA's (2015-2020)

25,00,000
20,78,465
18,71,861
20,00,000
15,83,361 15,91,081
15,00,000 12,23,214

10,00,000

5,00,000

0 Series 1
2015-16 2016-17 2017-18 2018-19 2019-2020

INTERPRETATION

From the above graph it can be conferred that the NPA’s gathered a significant pace after the
introduction of IBC laws in 2016. Although it declined after the amendments made in IBC law
in 2017. The amendment restricted certain persons from submitting a resolution plan and
specifies certain additional requirements for submission and consideration of the resolution
plan before its approval by the committee of creditors. However, the economy of India in 2015
and 2020 differs drastically and thus one shall not concentrate on specific numbers of NPA’s.
India has gathered a rapid pace in the rising number of start-ups comparative to 2015 and the
business growth has increased in the present scenario which enables the businesses to take
more loans and advances. The NPA’s increased after 2016 but it shall be noted that the NPA’s
also begin to fall after 2017 and it is falling continuously which proves that the new IBC law
was efficient enough to reduce the burden on our banking sector. Comparing the NPA’s of
2015-2016 from 2016-2020 clearly evinces that the NPA’s begin to decline even after
significant business growth in India.

CONCLUSION AND SUGGESTIONS

Thisi studyi mainlyi focusedi oni thei impacti ofi thei insolvencyi andi bankruptcyi codei ofi 2016i oni thei
bankingi industryi ofi Indiai especiallyi thei publici andi thei privatei sectori banks.i Itsi objectivesi
includedi thei effectsi oni thei banksi prei andi posti erai ofi IBC.

Iti cani bei concludedi thati thei introductioni ofi IBCi initiallyi ledi toi ai shocki ini thei industryi andi
causedi ai oppositei impacti thani whati iti wasi aimedi for.i Buti thei lasti financiali yeari hasi seeni ai
changei ini trendi duei toi thei introductioni ofi IBC.i Alsoi duei toi thisi thei long-termi effectsi arei
expectedi toi showi thei much-awaitedi resultsi ofi thei reductioni ofi NPAi levelsi ini bothi publici andi

KIRIT.P MEHTA SCHOOL OF LAW 15

 BANKING AND INSURANCE LAW

privatei sectori banksi andi increasei ini thei profitabilityi ofi thei banks.i Hencei IBCi hasi hadi ai positivei
impacti andi willi continuei toi havei iti oni thei bankingi sectori ofi Indiani andi ini turni thei Indiani
Economy.i Also,i duringi thei study,i ai fewi pointsi ofi problemi werei identified.i Thesei arei thati thei
rivalsi cani purchasei companiesi fori ai veryi smalli amounti andi ini thei absencei ofi ai healthyi
competition,i iti cani bei ai pointi ofi depressioni fori thei economy.i Haircutsi arei stilli big,i andi banksi
needi moneyi toi coveri these.i Also,i therei isi noi guaranteei thati banksi willi havei noi buildi upi fori badi
loansi asi therei isi noi mechanismi ini placei toi preventi it.i Ai changei ini thei policiesi toi addressi thesei
issuesi cani makei ai hugei differencei andi cani improvei thei qualityi ofi thei code.

KIRIT.P MEHTA SCHOOL OF LAW 16

 BANKING AND INSURANCE LAW

BIBLIOGRAPHY
LEGISLATION

❖ Insolvency and Bankruptcy Code, 2016.

❖ Vide Banking Regulation (Amendment) Ordinance, 2017 (the Ordinance),
subsequently enacted as Banking Regulation (Amendment) Act, 2017.

RESEARCH PAPERS

❖ Srijan Anant and et tal, “ A Study Of Insolvency And Bankruptcy Code And Its Impact
On Macro Environment Of India”, International Journal of Engineering Development
and Research, Volume 7, Issue 3 | ISSN: 2321-9939
❖ Manoranjan Ayilyath (2019), “ Road Blocks Under Insolvency And Bankruptcy Code,
2016 – Need For Capacity Building”, Accessed : https://ssrn.com/abstract=3440479,
pp 01- 09

❖ Dr.P.N.Harikumar and et tal (2017), “Recovery of Non-Performing Assets in SCBs in

India”, Indian Journal of Applied Research, Volume – 7, Issue – 1, January – 2017,
ISSN - 2249-555X, pp 720-72
❖ Nakul Sharma and et tal (2017), The insolvency and bankruptcy code, 2016: Insolvency
professional agency, International Journal of Law, Volume 3; Issue 6; November 2017,
ISSN: 2455-2194; Page No. 58-61
❖ Pratik Datta (2018), Working Paper series 247 : “ Value Destruction and Wealth
Transfer under the Insolvency and Bankruptcy Code, 2016, National Institute of Public
Finance and Policy, December-2018, Accessed at
https://www.nipfp.org.in/publications/working-papers/1842/
JOURNALS

❖ Bhasin, D. M. (2017). Unmasking Rising NPAs: Can the Indian Banking Sector
Overcome this Phase? International Journal of Management and Social Sciences
Research (IJMSSR), 20.

❖ Goel, S. (2017). The Insolvency and Bankruptcy Code,2016: Problems & Challenges.
Imperial Journal of Interdisciplinary Research (IJIR), 8.
❖ Mainrai, G. (2017). Digital banking: The game changer. The Journal of Indian Institute
of banking and finance

KIRIT.P MEHTA SCHOOL OF LAW 17

 BANKING AND INSURANCE LAW

❖ Suresha B (2019), A STUDY ON THE IMPACT OF INSOLVENCYAND

BANKRUPTCY CODE, 2016 ON INDIANCOMMERCIAL BANKS- A PRE AND
POST EVENT ANALYSIS, ISSN-2349-5162, JETIR, Volume 6, Issue 6,
JETIRCK06009.pdf, last visited on 21nd MAY, 2021.

WEBSITES

❖ Ease of Doing
Business, http://www.doingbusiness.org/en/data/exploretopics/resolving-
insolvency, last visited on 10th MaY, 2021.
❖ Process of
CIRP,
https://www.taxmann.com/bookstore/bookshop/bookfiles/corporatelawschapter14i
nso lvency.pdf, last visited on 12th MaY, 2021.

MISCELLANEOUS

❖ Notification no. S.O. 1205(E) dated 24th MaY, 2020.

❖ The report of the Bankruptcy Law Reforms Committee Volume
I, https://ibbi.gov.in/BLRCReportVol1_04112015.pdf, last visited on 17th MaY,
2021.

KIRIT.P MEHTA SCHOOL OF LAW 18