Bad loans, the Insolvency Code and demonetisation
Three big money reforms: a strict test for bad loans, a time-bound process for failed firms, and the withdrawal of old notes.
What the paper can ask
- The Insolvency and Bankruptcy Code was drafted by a committee headed by T. K. Viswanathan; the NCLT handles company cases and the Insolvency and Bankruptcy Board of India (IBBI) regulates the process.
- For companies, resolution must finish in 180 days, extendable by 90 days if creditors agree. A 2019 amendment set an outer limit of 330 days including time spent in court.
- Demonetisation withdrew notes that made up 86.4 percent of the value of currency in circulation; an report in 2018 found that about 99.3 percent of their value came back to banks. India had demonetised notes twice before, in 1946 and 1978.
Why exams ask
Setters ask how long a loan can stay unpaid before it is an NPA, when the Insolvency Code came, which notes were withdrawn in demonetisation, and which bodies run insolvency.
The full story
A loan turns into a non-performing asset when the borrower stops paying for longer than the RBI's cut-off. The Insolvency and Bankruptcy Code gave creditors a single, time-bound route to resolve or close down a failed company through the National Company Law Tribunal under a dedicated regulator.
Test yourself
1.A bank loan is classified as a non-performing asset (NPA) when interest or principal remains overdue for more than:
Correct. Under RBI norms a term loan becomes an NPA if interest or instalment is overdue for more than 90 days.
Not quite. Under RBI norms a term loan becomes an NPA if interest or instalment is overdue for more than 90 days. It goes into your error book.
2.The Insolvency and Bankruptcy Code, which provides a time-bound process for resolving failed companies, was enacted in:
Correct. The IBC 2016 consolidated insolvency laws, set up the Insolvency and Bankruptcy Board of India (IBBI) and uses the NCLT as the adjudicating authority.
Not quite. The IBC 2016 consolidated insolvency laws, set up the Insolvency and Bankruptcy Board of India (IBBI) and uses the NCLT as the adjudicating authority. It goes into your error book.