Proposed IBC amendment on guarantees to aid NPA recovery: India Ratings
India Ratings.
This could lead to more responsible financial practices and risk assessments by corporate debtors and their guarantors, promoting a healthier credit ecosystem, it said.
“The amendment is likely to enhance recovery value for creditors,” India Ratings said. “The proposed amendment clears the ambiguity around the liability of guarantors, thus bringing in the much-needed clarity to the resolution process involving guarantors and will significantly reduce the cross litigation on account of varied interpretations.”
The amendments state that a resolution plan does not automatically release guarantors from their liabilities, aligning with the Supreme Court's interpretation in the Lalit Kumar Jain versus Union of India case.
It reinforces creditor’s rights to pursue guarantors even after the approval of a resolution plan. A meaningful impact of the amendment on recovery quantum may be visible in the medium to long term, as the rule of law is actioned upon by creditors. The interpretation of the law by courts would also be a key monitorable.
“38% of the wholesale NPL cases in our rated security receipts portfolio are expected to be resolved under the IBC,” said Jatin Nanaware, Senior Director at the ratings firm. “The present amendment, once enacted, will have a positive impact on security receipt ratings involving personal guarantees. The likely increase in recovery quantum will enhance the recovery value for asset reconstruction companies in the long term.”
Stating that the approval of a resolution plan
