Why government wants to lend a hand to small borrowers

A new government scheme is set to offer easy bankruptcy resolution for individuals, partnerships and proprietorships, replacing existing colonial-era laws. Mint takes a look at why this is a milestone in the evolution of India’s bankruptcy laws

NEW DELHI : Who will benefit from the proposed scheme?

The individual insolvency regime proposed by the corporate affairs ministry and the Insolvency and Bankruptcy Board of India (IBBI), which oversees the operation of the bankruptcy code, seeks to offer a quick resolution for those micro, small and medium enterprises, mostly incorporated as partnerships or proprietorships, that become insolvent. The scheme also covers personal guarantors to corporate debtors. This is significant as often it is the individual proprietor who stands as personal guarantor for loans taken for the business and risks losing personal assets if the business fails.

Does the scheme offer small borrowers a debt write-off?

Small borrowers who do not have a dwelling, earn up to 60,000 a year and own assets worth 20,000 or less can seek a write-off of unsecured loans of up to 35,000 under a provision called “fresh start". This will be decided on a case-by-case basis by a debt recovery tribunal after hearing the lenders, according to details available in IBBI’s monthly bulletin. The credit history of the borrower will suffer if the write-off is approved. The idea is to offer relief to small entrepreneurs and borrowers, where the cost of recovery of dues does not justify the amount that may be recovered.

Why is it important for small entrepreneurs?

They take the risk of doing business without protection for personal assets such as a house, which may be their only asset. The liability of shareholders in firms is limited to their share capital.

Is the scheme all about debt waiver?

No. The scheme offers breathing space to those who can repay loans. It involves writing off unsecured loans of small borrowers on a case-by-case basis or opting for resolution where they can repay under revised schedules. It also protects some of their assets from being used for recovery of dues. Those who are unable to repay will have their assets liquidated and distributed among claimants. Experts say the individual insolvency law covering personal assets is complex and has deep ramifications for society.

What is the current framework for individual insolvency?

The insolvency and bankruptcy code (IBC) that came into force in 2016 applies to companies but not proprietorships, partnerships and informal individual creditors, which account for a large part of the economic activity in India. IBC administered by the centre covers only firms. Personal insolvency is covered by archaic laws including the Presidency-Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 that the government wants to replace with an easier and efficient regime.