Two years after the Narendra Modi government enacted what was then considered a modern bankruptcy law in 2016, Arun Jaitley, who was the finance minister then, reflected on the Insolvency and Bankruptcy Code or IBC at a function in New Delhi. Expanding on the backdrop to the new law, Jaitley said then that in the past, there was a tendency to create a problem while searching for solutions. That was because “we are never willing to confront the problem, ask the right questions so that we can get the right answers,” the minister said in his signature style four years ago.
In 2018, the chatter was about how the debtor-creditor relationship had been rewritten with bankers flexing their muscles and promoters scrambling to pay up loan dues and to retain control of their companies. In short, the relatively broad success of the insolvency law – one of the fastest legislations to be approved in the country in the first couple of years – was then celebrated as one of the major structural reforms of the NDA government. Since then that euphoria has long turned into disillusionment with the gaming of the system by promoters and others, the huge delays in the resolution process and low realisations for lenders.
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One of Jaitley’s successors, Nirmala Sitharaman, echoed the prevailing sentiment regarding the IBC, saying that the country could not afford to lose the sheen of the insolvency law. So has banker Uday Kotak who headed a government-backed committee to resolve the crisis at IL&FS. In an interview to the Economic Times, he has made a pitch for a public board to resolve cases of big-ticket bad loans or debt, citing the cases of banks losing out due to huge haircuts while selling distressed companies. An industrialist had tweeted last year on the IBC about what he termed as the “new game in town“.
Kotak may have a point, considering how the committee has managed to recover a little over 60 per cent of the assets over the past three years. There is also the successful resolution case of Dewan Housing or DHFL where the administrator – a former state-owned bank chief – – Subramania Kumar managed to recover a considerable amount for the company’s lenders. By taking ownership and coming up with multiple solutions and a huge push- including appealing to the NCLAT for a speedy approval to resolution plans, the recoveries were good and relatively faster. But a public board cannot be an enduring solution.
There are reasons to be downbeat on this. In a consultation paper in April this year, the Insolvency and Bankruptcy Board of India or IBBI said that the average time taken just to admit an application for insolvency by an operational creditor was 650 days in FY 22, up from 468 days the previous year. The IBC mandates a maximum of 14 days for admission of an insolvency application and 330 days for resolution. Coupled with this is the blow to lenders following a Supreme Court ruling on default and granting discretion to the NCLT to reject the insolvency process. The delay or failure to fill up vacancies in NCLT benches across the country will mean that the system can only play catch up, given the huge backlog of cases which has built up.
Indeed, Jaitley, the seasoned lawyer that he was, may have been pragmatic when he spoke on the IBC in 2018. Any institution like the NCLT or NCLAT eventually would function depending on its quality, speed, competence and ability to perform. That is in question now. It can only be addressed jointly by the judiciary and the government by working together, a dim prospect as of now.
India’s central bank and lenders are now pivoting away from the IBC-led resolution process. And rightly so. The RBI has now allowed banks to sell their bad loans before the default classification kicks in, given the IBC experience. Banks will be better off by improving their monitoring of loans and risk management systems and moving swiftly in selling bad loans than investing time in the IBC process.
Sadly, India’s judiciary and the government do not appear to be sensitive to the fact that there is a huge economic cost to delays in resolving cases of bad loans. It spells higher credit costs with a negative impact on credit discipline too. For the Modi government now in the terminal year of its second term, it is a legacy economic reform which is at stake and more importantly the health of the financial sector which is now sporting cleaner balance sheets. The 2023 budget offers an opportunity to take a last stab at getting the missing pieces right on this law.
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