It is noteworthy that RBI has given the go-ahead to raise external commercial borrowings (ECB) to bid for assets under resolution as per the Insolvency and Bankruptcy Code (IBC). The significant move would allow resolution applicants (read: bidders for stressed bank assets) to gainfully raise resources abroad at fine rates and, in the process, reduce stress in domestic banking system. It is a fact that in most cases, winning bidders of the several stressed assets resolved since the IBC process began in 2106 have raised funds from domestic banking, internalising the risks involved.
Besides, raising ECBs for bankruptcy resolution would lead to much-needed transparency and third-party vetting in insolvency resolution. Just as important, potential bidders would now be in position to bid aggressively for the stressed assets so as to quickly redeploy capital and other resources for the greater good. And, the higher the prices bidders offer, the smaller the haircuts banks that have lent to the defaulting borrower have to bear.
Banks do need to get back funds stuck in non-performing assets (NPAs) with costs, interest and all, as per a time-bound framework. Note that the ECBs cannot be availed from overseas branches and subsidiaries of Indian banks.
Last month, the central bank rightly expanded the definition of beneficiaries eligible for ECBs to comprise all entities that can receive foreign direct investment, including port trusts, units in special economic zones, and registered societies, cooperatives and NGOs. It is also a fact that while about Rs 3 lakh crore of stressed assets have been purposefully resolved, NPAs in the banking system remain much too high and do need to be proactively reduced with speed. ECBs would fast-forward corporate insolvency resolution.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via External borrowings for IBC bids welcome