Public and private sector banks, reeling under huge non-performing assets (NPAs), may soon heave a sigh of relief as Insolvency and Bankruptcy Code, 2015 is likely to see the light of the day in the ongoing Budget session of the Parliament. Commonly known as Bankruptcy Code, the bill was tabled in Parliament on Thursday, discussion on which may take place next week.
V K Vijayakumar, Head Investment Strategist, Geojit BNP Paribas believes if the bankruptcy code is passed into law, that will be a major step in improving the ease of doing business in India.
"The new bankruptcy code will consolidate different complex laws into a simple law that will facilitate a simple and easy process of bankruptcy, giving unviable and sick firms an easier exit option," said Vijayakumar.
The bankruptcy proceedings in India are highly complex and time consuming. There are multiple laws involved in the bankruptcy proceedings like the Companies Act, SARFESI Act, Sick Industrial Companies Act etc. Institutions like the BIFR, Debt Recovery Tribunals and Judicial system also have a say in bankruptcy proceedings. This prevents quick resolution of bankruptcy and liberation of capital blocked in unviable or failed businesses.
The problem grows bigger in the banking system which suffers from acutely high level of stressed assets (NPAs plus restructured assets).
The total stressed assets of the PSU banks are around 14 per cent of the total assets. Many projects became unviable due to cheaper imports caused by dumping, judicial intervention resulting in cancellation of licenses, regulatory issue etc. If closure of business is delayed, the recovery amount also will be low. Therefore, without doubt, the bankruptcy code will strengthen the banking system.
Below are the stocks that will benefit the most if Bankruptcy Code becomes law:
Jimeet Modi, CEO, SAMCO securities
The obvious beneficiaries will be the PSU banks having highest amount of stressed assets. The bill shall make recovery process time bound and penal consequences there in will lead to discipline in the entire banking sector reviving growth in the economy. Bank of India, PNB, Allahabad Bank, Canara Bank and Union Bank would be key beneficiaries.
V K Vijayakumar, Head Investment Strategist, Geojit BNP Paribas
For the Indian banking system, it appears that the worst is behind us. Private sector banks with retail focus should be the first choice of investors. PSU banks, though attractive from the valuation perspective, have lots of constraints like inadequate capital. Very long-term investors with an investment horizon of more than three years can start nibbling at PSU banking stocks. Leading private sector banks are attractive buys for the long-term.