Insolvency: Do not kick this can further along2 min read . Updated: 21 Dec 2020, 08:57 PM IST
India’s Insolvency and Bankruptcy Code should not be kept suspended any longer. Signs of recovery and high capital availability both argue in favour of letting insolvencies play out
With barely a few days to go before the suspension of India’s Insolvency and Bankruptcy Code (IBC) expires, uncertainty looms over what the government plans to do next. Though no clear stance has been articulated yet, the finance ministry is reportedly leaning towards keeping the code suspended for three more months, so that insolvencies amid the extraordinary circumstances created by the covid pandemic can be averted for a little longer. This, however, is not necessarily the best course to take. By doing so, we would simply be kicking the can of bankruptcies further down the road, to be dealt with later. The risks of such a move for banks are also significant. They already have to worry about which way our apex court may rule on interest payments by availers of the central bank’s loan moratorium scheme. Delaying IBC recoveries could add to their already-heavy burden of bad loans and weaken their finances to the advantage of possibly undeserving businesses. This, on principle, would be unfair. While an extension might help keep some enterprises afloat briefly, our commercial environment must regain normalcy at some point, with businesses either servicing their debt or facing action. The original objective of the IBC, we must not forget, was to stem bad loans and shift resources and assets from failing owners into capable hands, thus ensuring greater efficiency overall. This reformist spirit must be upheld.
There is no denying that covid-hit firms deserve protection. But this is about other failures. If an ownership churn ensues, or even all-out liquidations, so be it. An earlier fear was that delinquencies would spurt the moment the IBC is back in force, overwhelming India’s resolution system. The economic damage caused by the pandemic does raise this possibility, but vigorous cost compression pursued by businesses and a sharp recovery in commercial activity suggest that Indian companies have not suffered as badly as feared. Moreover, even if we do see a surge of resolution cases, this is an apt time to let such a scenario unfold. Plenty of capital is available, thanks to a domestic policy of cheap credit and an inward rush of foreign money. Stressed businesses are clearly easier to restructure for survival with several would-be acquirers vying for control.
Yet, we cannot expect quick fixes. Operational and other unsecured creditors are not always pleased to have banks take defaulting firms over, and their interests do count. In some instances, debt-repayment failures may be traceable to polycentric causes; resolving one case can have a ripple effect on others. Often, there are other complexities, too, that would be easier to handle if we gave the resolution process more flexibility. A variety of pre-packaged solutions would help with a wider range of cases. In an interview with Mint, the Insolvency and Bankruptcy Board of India’s Chairperson M.S. Sahoo indicated that plans for flexibility were indeed under consideration. For micro, small and medium enterprises, for example, a special framework that blends the features of corporate and individual insolvency has been proposed. It would also be a good idea to let asset reconstruction companies buy debt that has been identified for stress resolution but has not yet turned bad. In general, a vibrant market for debt of varied quality will lighten banks’ books and allow them to lend more. Like the IBC, that would also accustom the country to a more dynamic form of capitalism.