The Insolvency and Bankruptcy Code Bill passed in the Lok Sabha is a "watershed" reform that will facilitate ease of doing business by identifying and resolving cases of insolvencies in India, Crisil Ratings on May 11.
The Bill now awaits approval from the Rajya Sabha before coming into effect.
"It will structurally strengthen the identification and resolution of insolvencies in India. While lenders and asset reconstruction companies (ARCs) are immediate beneficiaries, the code will also significantly improve India's 'ease of doing business ranking," Crisil Ratings said in a release.
The code enhances right of a creditor to identify the insolvency and initiate resolution proceedings through an ecosystem including a new regulator and information utilities.
Over the long term, it will enhance creditor rights, boost investor confidence and facilitate deepening of India's corporate bond market.
It attempts to simplify legal processes, preserve value for creditors and provide them with greater certainty of outcome.
"We believe the code will instill far greater financial discipline among borrowers. It can also potentially kindle investor interest in lower-rated (below AA category) corporate bonds, which will help in deepening the market," Pawan Agrawal, Chief Analytical Officer, Crisil Ratings said.
Implementation of the code is critical, but build-out of the ecosystem will take time, Crisil said.
The code, along with 100 per cent foreign direct investment in ARCs, will boost capital flows and make them an important intermediary between lenders and borrowers, it said.
Asset quality challenges faced by banks currently is due to disproportionate exposure to large corporates, it added.
These corporates could continue to take legal recourse to delay recovery proceedings, which would challenge effective resolution within the proposed timeline of 180 days, it said.
"It would also mean that the code is unlikely to alleviate current asset quality problems of banks anytime soon.
"But in the long run, the code will structurally hasten the resolution of weak assets (forecast at nearly Rs 8 lakh crore by March 31, 2017) problems, thereby releasing precious capital for the banking system, which, in turn, will encourage credit expansion," it added.
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