The beginning of the months is the best for many reasons! It helps in giving you a fresh start, new events that take place, but most importantly, it is the time when you get your first pay check. The reassuring message that you earn when you see that there is sufficient balance in your savings account is very comforting.
However, you have chosen a particular bank to look after your money. Like most people, you would select a bank based on its reputation and the different types of services it provides. This selection process is not easy, as many banks have been under the scanners of media for the frauds and bankruptcies that they have committed. Not only do such banks lose their market value, but it also affects the financial health of the company.
This law served as a single framework for resolving Insolvency and Bankruptcy. However, the primary purpose of the code was to reduce the insolvency resolution process for individuals, corporations, and partnership firms.
The resolution process is generally carried out by either the debtors or the creditors. After going through a brief description of the code, most people would assume that there is not much of a difference between Insolvency and Bankruptcy. However, there is a clear distinction between these two words. In basic terms, when a company or individual declares that it is insolvent, it means that they are unable to pay their debts.
During insolvency periods, the value of its liabilities is higher than the value of its assets. This type of situation is problematic as the firm does not have enough cash to pay its debtors immediately. When we say that a company is bankrupt, then it is unable to pay its debtors, and the company may also have to face legal proceedings. It is mentioned in the IBC code that there are two separate tribunals for insolvency resolution and debt recovery process.
However, it must be noted that although these two terms are different, they are interrelated with each other. If the corporation or individual is insolvent for a very long period, then it can lead to Bankruptcy. A small timeframe of, let us say, a quarter or a year will not cause a firm or individual to be bankrupt.
YES Bank is one of the largest private sector banks in the country. It has 1.8% of the countries bank deposits. The Bank was founded in 2004 by Ashok Kapoor and Rana Kapoor. The first hint of their financial troubles was in 2015 when UBS, a global financial services company, identified that the Bank had a copious amount of bad assets. The main reason being that the Bank has lent loans to individuals and companies that are unable to pay back the required amount and even the interest. Despite the warnings by UBS, the Bank continued to extend loans to several prominent organizations.
However, the type of firms that “YES Bank” was lending to led to their eventual downfall. According to reports, they were lending at least one-fourth of their loans to Non-banking financial corporations, Real estate firms, and the construction sector. The sectors, as mentioned earlier, are the ones that have struggled the most in the Indian economy for the past few years. Due continuously giving out loans without checking the credit score, the Bank accumulated a vast amount of non-performing assets. On March 5th, 2020, the Reserve Bank of India (RBI) suspended the board members of YES Bank and imposed a 30-day moratorium on its operations.
The business model for most banks generally involves providing loans to firms and individuals, and in return, they get back the loaned amount along with an interest rate. YES Bank was insolvent ever since it has been accumulating the total amount of bad loans. To finance their operations, the Bank relied on other sources to raise capital and sometimes borrowed money from the bank deposits. In this case, the insolvency period of the Bank was when their liquidity (ability to pay immediately) was very less. In case someone is unable to pay a loan, then they provide collateral (a fixed asset like a vehicle or home). After several investigations took place, RBI decided to press legal charges on one of its owners by forcing him to sell the entire stake in YES Bank. Also, the withdrawal limits for customers was at Rs 50,000 a day. These were the legal actions that the company had to face due to Bankruptcy. Hence from the case of YES Bank, we can say that Insolvency can lead to Bankruptcy. However, both terms are not the same.
Although the government has eased down this process, but the Insolvency and Bankruptcy Act deals with a lot of complicated situations and scenarios, we at Solvemint try to solve that very problem of our customers and help them in these cumbersome processes of Insolvency through technology and use of analytics.
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