It’s time our businesses stood on their own now
The suspension of India’s bankruptcy code should not go beyond 24 March. Some companies may still be vulnerable, but the sooner we fix our weak links, the faster we’ll emerge healthy
As India’s year-long suspension of bankruptcy proceedings against defaulters nears an end on 24 March, some anticipation has arisen that it will be extended again. The withdrawal of this covid forbearance measure has already been postponed twice after its initial six months expired last September. Although no formal announcement has been made, authorities seem disinclined to extend it any further. Advisably so. The intent of it was to offer a reprieve to businesses that had suffered a solvency shock on account of the extraordinary circumstances created by the pandemic. Such companies, it was reckoned, deserved protection as they were otherwise healthy and had a good chance of recovery once they got past covid-related disruptions. However, since our Insolvency and Bankruptcy Code (IBC) was held in abeyance for all, it meant that debtors that were flailing about to repay loans even earlier also got shielded. This has been hard on creditors, especially lenders that were called upon to expand their loan books for state-backed credit to small businesses and also restructure past loans given to large entities, with the result that the overall quality of bank assets is now far harder to determine. In effect, we have kicked the can of bad loans down the road. With our economy now in revival mode, as various signs suggest, we must aim for a return to normalcy before the problem of dodgy debt gets unmanageable.
If our re-adoption of the IBC exposes weak borrowers to the prospect of being wound up, so be it. At one level, the purpose of this resolution mechanism for cases of default was to let banks save their assets by taking over insolvent debtors for resale or liquidation. At another, the IBC’s grand goal was to enable a dynamic reallocation of resources within the economy by either placing failed firms in more able hands or releasing their machinery and manpower for productive use elsewhere. This way, nothing would be left in limbo. One practical concern about reviving the Code next week is a possible burst of insolvencies that might overwhelm the system. However, M.S. Sahoo, chairman of the Insolvency and Bankruptcy Board of India (IBBI), recently indicated that this should not be a worry. Insolvency applications, he reckons, will not rise too much as various stakeholders have been using other resolution mechanisms—under the central bank’s prudential framework, for example. There has also been talk of giving small enterprises, if not all, a free pass for longer. Size-wise waivers would pose complications and delay a full sorting out. The sooner we deal with our faltering borrowers, the faster India can clean up balance sheets and minimize risks in a banking sector headed for large-scale privatization.
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While it is true that the IBC has not lived up to its promise since its 2016 debut, banks remain burdened with bad debt, and so the Code could do with some tweaks, its provisions must not end up weakened. The framework needs to be retained even as its rules are modified to hasten the resolution process. In this context, the Centre’s budget declaration of strengthening the National Company Law Tribunal system could help, as also its proposal of e-courts. Of special aid could be the proposed roll-out of pre-packaged deals that may apply to a variety of situations and save time on working out details. Off-the-shelf packs are expected to let insolvency cases be settled without creditors having to approach bankruptcy courts, which could then focus on the ones difficult to resolve. Whatever we do, time is of the essence. So let’s get going.
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