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Topic– Indian Economy – issues
4) Critically analyze whether the process of recoveries from stressed accounts under Insolvency and Bankruptcy Code will have adverse impact both for the banks as well as the stressed accounts?(250 words)
Why this question
The article discusses the problems that are likely to arise as an outcome of the resolution process under IBC. The issue gains criticality as the RBI has come out with strict guidelines for the banks to initiate proceedings under IBC. NPA is the most important economic issue and IBC is widely seen as a panacea for the bad loan and bankruptcy problem faced by India. The question would enable to critically analyze the issue.
Key demand of the question
The question expects us to explain in brief the resolution process under IBC, discuss the RBI circular. Thereafter, we need to bring out the positive and adverse effects of the resolution process of IBC on banks as well as the loan defaulting entities. This is the key demand of the question and a major portion of your answer should be dedicated to analyzing the impact. We need to end with a fair and balanced conclusion on the outcome of the resolution process. Our views should be based on critical analysis of the issue done above.
Critically analyze – When asked to analyze, you have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary. When ‘critically’ is suffixed or prefixed to a directive, all you need to do is look at the good and bad of something and give a fair judgement.
Structure of the answer
Introduction – First of all discuss, why this issue is in news. Highlight the news around NPA and the recently concluded resolution process of Bhushan steel. Discuss the RBI directive and the ensuing court order.
- Explain in brief the objective of IBC and the resolution process of IBC. Its object was to clean up the balance sheets of banks, make the corporate sector pay for its sins, prosecute those who manipulated and conspired to manipulate the banking system and, above all, transfer non-performing assets to more responsible corporate successors.
- Examine the positive and negative impact of IBC on banks – an opportunity to clean their sheets, a chance to salvage some part of the loan through a well defined, time bound process, help them in their adherence to Basel norms etc. Mention that participating banks agreed that the Insolvency and Bankruptcy Code (IBC) had made the recovery process faster and improved the recovery position of banks.Highlight the likely issues that might be faced by the banks such as – the steep haircut that banks might have to take because of the inability of the defaulting parties to raise capital etc
- Examine the positive and negative impacts of IBC for the companies – mention that the conclusion of the sale of Bhushan Steel to Tata Steel via the Insolvency and Bankruptcy Code (IBC) process is confirmation that the insolvency process is working, time bound resolution process etc. Discuss the adverse impact on capital intensive sectors like power sector which has been suffering as a result of several systemic factors, the problems being faced in turning around the companies by the resolution professionals etc. Mention the findings of the report highlighted in the article to substantiate your answer.
- Examine the positive and negative impact on economy – highlight that it has helped India improve its EODB ranking, raise investment levels etc. On the other hand, it is likely to cause issues for crucial sectors like power.
Conclusion – Based on the arguments made above, give your view on the resolution process under IBC.