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Insolvency Windows Soon for NBFCs

There is a likely possibility that NBFCs might soon come under the purview of the Insolvency and Bankruptcy Code (IBC). The move currently being mulled by the Ministry of Corporate Affairs is ostensibly to address the deterioration in financial health of several NBFCs owing to their severe debt exposures.
While persist ting liquidity woes of NBFCs apparently triggered this move, many experts feel that the shenanigans at Dewan Housing Finance (DHFL) and the unprecedented scam at Punjab and Maharashtra Co-operative Bank acted as catalysts.
There might soon be a notification to open a window under existing insolvency laws to bring certain categories of BFSI institutions, specifically NBFCs, under IBC. This would require revisions under Section 227 of IBC. Currently both SEBI and RBI are investigating the market concerns following which the notification is likely to come out.
The government move would benefit the sector as currently resolution of stressed BFSI entities cannot be taken up under IBC. The Financial Resolution and Deposit Insurance Bill has been withdrawn and as long it is pending, at least till then this measure could act as a stop gap mechanism to address financial woes.
Potential investors suffering financial woes in cases like DHFL would rather prefer a court monitored IBC process rather than risking a private settlement which guarantees no ultimate protection. As a result, this move could resolve the crisis for other non-banking and cooperative lenders who might be in distress.
The move also aims to rationalize the anomaly of a new promoter becoming liable for the criminal liability of previous owners while buying stressed assets under the IBC mechanism. The rule will also allow for a period of moratorium over payment obligation of the affected NBFCs.
On the other hand, there is an apprehension amongst regulators like SEBI and RBI as well as public depositors alike that insolvency proceeding against NBFCs might create a fear psychosis leading to a detrimental spiralling effect in the entire financial sector. Consequently depositors and investors could face severe financial woes as the entire sector could come under a severe liquidity crisis. This was exactly what had happened in DHFL and earlier in ILF&S too.

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