The Indian banking sector has seen various changes over the last decade. An
increase in nonperforming assets (NPA) was a major reason for worry for the
government of India. The increased rate of recovery in India and the high
percentage of NPA led to issues between Banks, organizations, and individuals
(lenders and borrowers). The introduction of the insolvency code by the
government of India in 2016 was aimed to bring down NPA and increase the
This paper attempts to study the impact of the IBC on the banks
in India over the last 6 years. A comparative analysis was performed between
private and public banks. The article is divided into 2 parts, the first studies
the Advances and NPA while the latter explains the impact of NPA on the
profitability ratios. This study has used secondary data and analyzed 21 public
and 21 private banks using correlation and regression.
The results show a
significant impact of the introduction of IBC on the recovery rate,
profitability, and the NPA. This paper has addressed changes in policies for the
improvement of the code.
The Indian economy today has emerged as one of the fasted growing economies and
is expected to be among the top three economies in the next decade due to its
strong democracy and ties with a neighboring nation. The Indian economy is a
mixture of all types of economies popularly known as a mixed economy. It is
known to be the world's seventh-largest in terms of nominal GDP. As of 2018,
Indian ranks 122 in per capita GDP with $7783.
In the post-liberalization era,
India managed to achieve annual growth of 6-7% of GDP. The financial system
plays a major role in the development of a country's economy as it aids in
wealth creation by linking a resident's savings to investments. The financial
system of a country enables the movement of funds from households to companies
and helps in the growth of both businesses and households.
The structure of the
Indian financial system can be divided into an organized financial system and an
unorganized financial system. The banks are regulated by the RBI by keeping in
check the CRR, SLR, Repo rate, etc. This ensures that the banks function
properly and they always have a provision of funds in case of emergency. The RBI
regulates the banks and handles any kind of problem that arises.
The increase in
the NPA over the decade led the RBI to introduce the insolvency and bankruptcy
code and take prompt corrective actions to reduce recovery time. The law was
introduced as an effort to merge a large number of laws about insolvency and
bankruptcy. This was an important step taken towards the growth and stability of
the banking sector in India.
Although similar laws are already in existence in
other countries, India's introduction to IBCC put it into the race of growth
with the other major countries such as the US, UK, and Germany. This paper aims
to bring out the changes the banks have seen over the last 3 years after the
introduction of IBC and a pre and post-event analysis.
Motivation of Study
The banking industry of any country plays a key role in the growth and stability
of its economy. India being a developing country continues to see changes every
day. In the last decade banks in India failed to reduce NPA levels despite the
large number of laws introduced for insolvency and bankruptcy separately. After
the introduction of the Insolvency and Bankruptcy code in 2016 which combined
all these laws as one, there was a relief for both borrowers and lenders due to
the promise of reduction of recovery time.
It has been two years since the code
was passed and the right time to analyze its effects. Thus, this study derives
its motivation from the curiosity of the people to know what kind of impact this
law has had on the banking sector of India in the last two years and the need to
improve the quality of the code that has been enforced.
Review of Literature
The Indian banks face many challenges and prospects due to factors such as
transparency, growth of risks such as NPA, global economy, ethical issues, and
customer retention. Goyal and Joshi (2012). It is also suggested that Indian
banks need to come up with better and innovative products to compete with the
growing technological world. A study that discussed the effect of factors such
as NPA and P/E on the Indian banks suggested that NPA in a few banks such as
Punjab national bank showed a fall in NPA till 2012.
PSBs didn't show the same
results and the then government in 2013 ensured that they reduced the lending
rate and cleared stalled projects which in turn led to the rising of NPAs.
(Kajar and Trivedi (2014). Different insolvency laws existed in India before the
introduction of the Insolvency and bankruptcy code in 2016. There exist 10
different laws in 2015 before all of them were combined and amended to form a
single law (Adukia,2015).
An in-depth study of the recent IBC concluded that the
code currently encourages liquidation at the price of financial restructuring.
It was also suggested that the code doesn't provide enough representation to the
stakeholders. (Pandey,2016). NPA was seen to have an impact on the profitability
of the banks which can further lead to the reduction of the banking efficiency
A study done on the challenges and problems related to the IBC
2016 suggested that the code's idea was to not only reduce NPA but to increase
FDI and improve India's rank in the Ease of Doing Business Index (Goel,2017).
But the code, however, is over-ambitious trying to combine more than 11 laws
regarding bankruptcy and aiming to cause major amendments in a short time,
Venkat. P (2016-2017), in his research, pointed out that the IBC was a welcomed
change in the bankruptcy process in India since it took more than 4 years to
resolve a case before IBC was introduced. He believes that if this code is
implemented properly, it would help lenders, borrowers, regulators, and the
government. In his paper, Venkat suggests that IBC will significantly increase
the transparency in the Indian system. He finally says that the IBC will start
showing its effects after a year or two in 2018 when the recovery rate will
Conclusion and Suggestions
This study mainly focused on the impact of the insolvency and bankruptcy code of
2016 on the banking industry of India especially the public and the private
sector banks. Its objectives included the effects on the bank's pre and post-era
of IBC. It can be concluded that the introduction of IBC initially led to a
shock in the industry and caused an opposite impact than what it was aimed for.
But the last financial year has seen a change in trend due to the introduction
Also due to this, the long-term effects are expected to show the
much-awaited results of the reduction of NPA levels in both public and private
sector banks and increase in the profitability of the banks. Hence IBC has had a
positive impact and will continue to have it on the banking sector of Indian and
in turn the Indian Economy. Also, during the study, a few points of the problem
These are that the rivals can purchase companies for a very
small amount and in the absence of healthy competition, it can be a point of
depression for the economy. Haircuts are still big, and banks need money to
cover these. Also, there is no guarantee that banks will have no build-up for
bad loans as there is no mechanism in place to prevent it. A change in the
policies to address these issues can make a huge difference and can improve the
quality of the code.
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