NEW DELHI: Small borrowers with annual income up to ₹60,000 are likely to get automatic relief for any unsecured loans they are unable to repay, according to a new scheme for personal insolvency resolution that the government has prepared. The new scheme that will replace colonial era laws dealing with personal bankruptcy will also give breathing space to those who can repay loans. It will also protect some of their assets from dues recovery to help in their subsistence.
The scheme prepared by the Ministry Of Corporate Affairs and the Insolvency and Bankruptcy Board of India (IBBI), which oversees the bankruptcy ecosystem, will benefit small informal financial creditors as well as partnerships and proprietorships, the legal form most small and medium enterprises take, according to details of the scheme disclosed by IBBI in its latest monthly bulletin. IBBI Chairperson M S Sahoo described the individual insolvency scheme in the bulletin as the next big thing in bankruptcy reforms.
Small borrowers who do not have a dwelling and are unable to repay unsecured loans up to ₹35,000 can apply for the automatic debt relief if their annual income is up to ₹60,000 and assets are limited up to ₹20,000, as per the scheme. The idea is to give relief to small entrepreneurs and borrowers where the cost of recovery of dues does not justify the amount that may eventually be recovered.
When a defaulting borrower makes an application for relief, the debt recovery tribunal examining it will decide on it after hearing views of lenders. If relief is given, the borrower comes out of bankruptcy and his unsecured loans are waived off subject to an entry in his credit history.
The government wants a simpler, low cost bankruptcy regime based on humanitarian grounds for small borrowers as the new bankruptcy ecosystem rolled out by end of 2016 under the Insolvency and Bankruptcy Code (IBC) is suited for corporate entities and does not cover individuals, partnerships and proprietorships.
Mint had reported on 17 July 2017 that the ministry was working on a simpler version of the bankruptcy code for partnerships and proprietorship firms as well as for individuals with business interests. Unlike corporate bankruptcy, personal insolvency is covered under archaic laws including The Presidency-Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920, which the government wants to address.
Also small entrepreneurs take the risk of doing business without any protection for their personal assets like their house, which may be the only asset they may have. On the other hand, the liability of shareholders in companies is limited to their share capital.
As per the new scheme under consideration, those who can repay loans will get a chance to do so under a reworked payment plan cleared by three-fourth of the lenders by voting share. Those who fail to repay will have their assets liquidated and distributed among claimants. The scheme allows borrowers to come out of bankruptcy and make a fresh start at economic activities.