NBFCs with Rs 500 cr assets can go for insolvency resolution

New Delhi: The Reserve Bank can now seek resolution of non-banking financial companies having assets worth of at least Rs 500 crore under the insolvency law, a move that is likely to help in addressing woes in the NBFC sector.

After discussions with the central bank, the corporate affairs ministry on Monday issued a notification specifying the categories of financial service providers (FSPs) that can be taken up for resolution under the “generic framework” of the Insolvency and Bankruptcy Code.

On Friday, the ministry notified the framework for dealing with systemically important FSPs, excluding banks, under the Code wherein sectoral regulators can seek resolution of stressed entities.

The introduction of the “generic framework” comes against the backdrop of the ongoing liquidity crisis in the non-banking financial companies (NBFCs) that has also sparked concerns about overall stability of the financial sector.

“Non-banking finance companies (which include housing finance companies) with asset size of Rs 500 crore or more, as per last audited balance sheet,” can be taken up for insolvency resolution and liquidation proceedings under the Code, the ministry said in a notification. Section 227 of the Code enables the central government to notify, in consultation with the financial sector regulators, FSPs or categories of FSPs for the purpose of insolvency and liquidation proceedings. Significantly, the corporate insolvency resolution process for an FSP would be initiated “only on an application by the appropriate regulator”.

“The rules shall apply to such FSPs or categories of FSPs, as will be notified by the central government under Section 227 from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings,” the ministry said on Friday.

On the same day, Corporate Affairs Minister Nirmala Sitharaman said there would be something similar to the insolvency law for the financial sector and till that time, the new provision would take care of financial institutions.

“In an environment where it may be necessary to invoke something akin to IBC and in absence of IBC like provision for the financial services sector we have brought out this notification under Section 227 within the IBC which can be used. Post this, it is up to the RBI to take a call on this. “Whether we will have something equivalent to IBC for financial sector, we will address that in future. We want to bring something equivalent to IBC for the financial sector. Till such time, this will take care of financial institutions,” she had said.