Lauding the role of IBC, CEA said: "If IBC was not there, the borrower would have no incentive to repay."

The bankruptcy framework of the Insolvency and Bankruptcy Code (IBC) has instilled a credit culture in borrowers' minds and ensures value maximisation out of a distressed asset, which otherwise would have offered nothing, Chief Economic Advisor (CEA) Krishnamurthy Subramanian said on Wednesday.

"Whenever the distress is not taken care of immediately, the value of that asset deteriorates. So the IBC can only help you recover whatever value there is. A lot of the current NPAs (non-performing assets) were legacy issues. In the absense of IBC, these would have continued to fester," the CEA told IANS in an interview.

"Now, the IBC has enabled the retrieval of value, but the process cannot create value. We have to be very clear about the role of IBC. It's about ensuring that if there is some value, the regulation will help you to get the best out of a given situation," he said.

"IBC is an effort to make best out of a not-so-desirable situation. It is not a silver bullet but a measure for ensuring better credit culture. Once an asset is already in stress, IBC will see that the banks get out with least damage", he added.

The CEA was responding to queries on huge haircuts being taken on the NPA, or bad loan, cases resolved under IBC.

Responding to a query on what banks need to do to stem NPAs in the first place, the CEA said "the business of banking is about taking well evaluated risks."

"Banks have to lend where the economy requires, but they have to ensure that the quality of lending is good. The default rates are higher in big ticket loans. On smaller loans, the threat of losing a company is high, so the chance of default is low", he said.

Lauding the role of IBC, Mr Subramanian said: "If IBC was not there, the borrower would have no incentive to repay."

Highlighting the impact of the IBC, the CEA noted that Rs 3 lakh crore of NPAs had been retrieved outside IBC process, because the threat of going into bankruptcy has made borrowers repay.

"One has to keep in mind that changes in credit culture take time.. it's not an overnight phenomena. When you are trying to change the culture, those who were benefiting from the old culture will try to maintain status quo," he said.

According to Corporate Affairs Ministry officials, the IBC has been a "super success" with the 100 cases that have been settled through the process having netted Rs 1.8 lakh crore. The government expects the total recovery amount to touch Rs 2.8 lakh crore.

"It (IBC) is a super success. There should not be any brouhaha over haircuts. Wherever a resolution has taken place, creditors are getting 200 per cent of the liquidation value. So, definitely value maximisation is the context...demand and supply will fix the value", the officials said.