Expanding and Strengthening Credit Markets: Post IBC

Description

Impact of legal systems on financial markets is well debated in academic literature (Hailand Luez, 2006; Miller and Puthenpurackal, 2002). A credit ecosystem that effectivelybalances the rights of creditors and debtors lies at the heart of the developmentprocess of capital markets (Djankov et al., 2008) and enhances entrepreneurial activities(Francis et al., 2009). Bankruptcy procedures ensure rescue of viable businesses and thepreservation of borrowers' repayment incentives (Hart, 1995; Rodano et al., 2016). Due toineffective contract enforcement, banks issue more short-term debt where, lenders reviewtheir lending decisions more frequently and restrict borrower flexibility to increase theriskiness of assets (Diamond, 2004). Qian and Strahan (2007) find that stronger legal rightsresult in loans with longer maturities and lower spreads. While weak creditor rights andpoor enforcement effect credit supply, banks charge higher interest rate spreads and rationsome borrowers as risks increase, instead of increasing interest rates (Stiglitz and Weiss,1981). Better enforceability of contracts increases loan size, lengthens loan maturity, andreduces loan spreads (Bae and Goyal 2009). The enactment and institutionalisation of theInsolvency and Bankruptcy Code, 2016 (IBC/ Code) is a paradigm shift in Indian financialsystem facilitating an effective legal mechanism of creditor protection rights and providesa framework for resolution of distress firms. In this context, the objective of this article is toanalyse the post-IBC trends in credit markets in terms of loan volumes, interest rates, creditrisk and reviews the institutional measures strengthening the ecosystem of credit markets.Finally, the article concludes by identifying issues to be addressed for strengthening thecredit market ecosystem to gain the potential of the IBC institutional system.

Publication Date

1-4-2022

ISBN

978-8194753728

Publisher

Insolvency and Bankruptcy Board of India (IBBI)

Keywords

Insolvency, Bankruptcy, Banking, Banking system

discipline

Business; Finance and Financial Management; Law; Bankruptcy Law

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