Moodys Says NBFC/HFC Bankruptcy Provisions Positive for Banks

To allow bankruptcy proceedings against non-banking financial companies (NBFCs) is positive for banks as it paves the way for the orderly resolution of stressed shadow banks, says a report.

The Government recently empowered RBI to refer stressed NBFCs and HFCs with assets worth of at least Rs 500 crore to insolvency courts after notifying Section 227 of the Insolvency and Bankruptcy Code. Prior to this, the only resolution framework available for stressed NBFCs was liquidation and with this DHFL is set to become the first HFC to go to a bankruptcy court.

“Inclusion of NBFCs into the bankruptcy code is credit positive for banks (NBFCs’ biggest source of funds) because IBC provides for the orderly resolution of a stressed NBFC company,” rating agency Moody’s said in a report on Monday.

Section 227 of IBC empowers the government to notify, in consultation with financial sector regulators, for insolvency and liquidation proceedings. The section specifies that the Reserve Bank can initiate the bankruptcy process for an NBFC/HFC.