NPA resolution through Insolvency and Bankruptcy Code can spur bank credit growth: Report

Bad loan resolution through the Insolvency and Bankruptcy Code (IBC) can help accelerate bank credit growth that has been abysmally low for the past many quarters, says a report.

In the year to March 2017, bank credit growth had hit a multi-decadal low of 5.08 per cent. This was the second lowest since the Independence after the 1.8 per cent shown in fiscal 1953.

In June, the RBI had identified 12 largest stressed accounts and asked banks to refer them to NCLT for resolution under the IBC, which aims to provide for a time-bound process to resolve insolvency.

"We believe with the IBC, bank credit growth stand to expand sharply as we move closer to find resolution for stressed companies," SBI Research said in a report today.

The time of resolution of the first set of 12 companies should mostly end in the fourth quarter.

The report said in most countries bank credit growth increased manifold post the implementation of the insolvency codes.

For instance in China when such a code was implemented in 2006, bank credit grew by around 30 per cent in the third year (2009) of its implementation. Similar trends were visible in Poland and Spain.

The recent decline in credit growth is due to a number of reasons like slowing economy and shift of loans to the corporate bond market, among others.

Further, deleveraging on the part of corporates to improve their credit ratings have contributed to the slowdown in credit growth.

The report said adoption of the IBC will help in improving the credit growth in the coming years, though not miraculously.

Credit growth also depends on the demand for credit and investment cycle of the economy, that we believe will only improve gradually.

IBC, the report said, is the first step to resolve NPAs by vesting RBI with greater powers.

This IBC will help in realising the quest of the ultimate dream of 40-notch jump in the World Bank's ease of doing business ranking.