NBFCs’ Inclusion In IBC Credit Positive For Banks, Moody’s Says
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NBFCs’ Inclusion In IBC Credit Positive For Banks, Moody’s Says

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The government’s move to allow bankruptcy proceedings against the non-banking financial companies is positive for banks as its paves the way for orderly resolution of stressed shadow banks, a report has said.

Prior to this, the only resolution framework available for NBFCs was liquidation.

The government recently empowered Reserve Bank of India to refer stressed NBFCs and housing finance companies, with assets of at least Rs 500 crore, to bankruptcy courts after notifying Section 227 of the Insolvency and Bankruptcy Code.

Dewan Housing Finance Corporation Ltd. is thus set to become the first housing finance company to undergo bankruptcy proceedings.

"The inclusion of NBFCs into the bankruptcy code is credit positive for banks (NBFCs' biggest source of funds) because IBC provides for the orderly resolution of a stressed NBFC company," Moody's Investors Service said in the report released Monday.

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.

On Nov. 20, RBI superseded the DHFL board and appointed an administrator. The apex bank also said it would begin bankruptcy process for the crippled company saddled with Rs 90,000 debt.

Also Read: SBI Hopes IBC Timeline Be Adhered To In DHFL Resolution

According to the Moody’s report, RBI’s involvement in the resolution process indicates the importance of the NBFC sector for overall financial stability, including the direct impact that the failure of a systemically important NBFC can have on banks and other credit providers.

"We expect 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," Moody’s said in the report. It also expects banks and the central bank to utilize other debt restructuring options before approaching the IBC.

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