The slow burn of bankruptcy filings may be about to end

Financial services secretary Vivek Joshi said the government is working on a standard operating protocol (SOP) for creditors to speed up admission, as existing procedures lead to delays sometimes stretching to years.

“We are in the process of finalizing guidelines that will provide a template to bankers in which the bankers are supposed to file their bankruptcy application. A template already exists for such applications where less number of documents are required, but banks make lengthy applications, with the application often running into 2,500 pages or more. This delays the process of admission of cases in NCLT (National Company Law Tribunal) as the court also needs to study all documents before admitting a case under IBC (Insolvency and Bankruptcy Code). This is not required. We are preparing an SOP in terms of what needs to be filed and also provide timelines for completing each step," Joshi said in an interview.

Delays in admission of cases of loan default result in banks losing the opportunity to resolve these bad debts and make some recoveries. According to official figures, public sector banks (PSBs) had to write off ₹7 trillion worth of bad debt in five years between 2019 and 2023 in the absence of resolution.

Joshi said banks will be asked to move NCLT first, even if they are talking to borrowers for a one-time settlement (OTS), which often delays NCLT filings and admission. Also, sometimes bankers do not submit all the required information in their insolvency application, delaying admission.

The Department of Financial Services (DFS) has already directed heads of PSBs to conduct monthly reviews of their top 20 cases awaiting bankruptcy admission. The finance ministry is also planning a review meeting soon, where the progress would be mapped in terms of admission and resolution of bankruptcy cases. The government has already received a report from State Bank of India on its progress on NCLT-bound cases, Joshi said.

In December, the DFS conducted a review meeting with managing directors and chief executives of state-run banks and financial institutions including National Asset Reconstruction Co. Ltd to assess the situation on pending bankruptcy applications and the progress made in large cases. The review had become important given that in several cases, over one year was spent just to get the matter admitted in tribunals, while the resolution process itself stretches far beyond the 360-day timeline.

According to official figures, against ₹6.5 trillion worth of stuck assets, ₹94,000 crore, or a mere 15%, was recovered in 2023, with more than half of the recovered amount coming through the IBC route.

The finance ministry’s concerns on rising cases of pendency under IBC comes after the Reserve Bank of India pitched for early settlement of bad loans and directed banks to tighten their lending norms and avoid any exuberance to make lending sustainable and prevent build-up of bad loans.

Till September, of the over 7,058 cases admitted to NCLT, 808 cases have seen resolution under IBC, while 2,249 cases went into liquidation. Much of these are legacy cases. However, the bankruptcy code has led to the settlement of many payment defaults prior to their admission to tribunals.

According to the Insolvency and Bankruptcy Board of India, till August, over 26,500 applications to NCLT involving default of ₹9.3 trillion have been withdrawn.