Tracking the progress : Insolvency and Bankruptcy Code (2016)
The Insolvency and Bankruptcy Code (IBC) was passed as a bankruptcy law of India in 2016 which aims at consolidating the existing framework by formulating a single law for both insolvency and bankruptcy. Previously, Bankruptcy code was the only solution for resolving insolvencies which involved long procedures and was not economically viable. This code was implemented to safeguard the interests of small investors and further supplement the ease of doing business in India. By the end of the year, the Corporate Insolvency Resolution Process (CIRP) was integrated to the code.
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About the Code:
The IBC provides for separate insolvency resolution processes for individuals, partnership firms and companies. It can be initiated by either the creditors or the debtors. A maximum duration is set for the completion of the process for different participants.
For companies, the process needs to be completed within 180 days, with a maximum extension of 90 days if the creditors give their assent. For start-ups and other small companies, the process needs to be completed within 90 days, with a maximum extension of 45 days.
The Code has established the Insolvency and Bankruptcy Board of India to regulate and oversee the insolvency proceedings in the country. The proceedings are managed by licensed professionals. The Code also provides for adjudicators for the entities to report to in order to exercise the insolvency process.
- The National Company Law Tribunal (NCLT) for Companies and LLP’s.
- The Debt Recovery Tribunal for partnerships and individuals.
The bill was primarily introduced to resolve all banking issues in the present economy. However, issues like bad loans which has led to merging of banks is not answered by the bill. Thus, it cannot solve all the hustle, but it has stabilized the economy to a great extent.
Procedure for exercising the IBC:
TRACKING THE PROGRESS:
ASSET RESOLUTION FRAMEWORK:
The IBC has proved itself a major success in various aspects in the past 4 years. The figures of March 31st, 2019 exhibited that the resolution of 94 stressed assets achieved about 43% of the debt recovery. The total recovery stood at Rs.75,000 crore by March end against the total claim of Rs.1,75,000 crore by financial creditors. This was reported by Assocham and Crisil in their joint report adding that the asset resolution framework in India is still a “work in progress”.
However, the report stated that the recovery of 43% was commendable and respectable as without the IBC in place, the 94 cases would’ve undergone liquidation and the financial creditors would have recovered only 22%. However, the average timeline recorded to resolve the 94 cases was 324 days which was more than the stipulated insolvency resolution timeline of 270 days. However, there were more than 1,100 cases outstanding under the CIRP and for a few big-ticket companies the resolution had not been finalized for more than 400 days. The report suggested that this was mainly due to the non-digitization of NCLT and NCLAT which the system lacks at present.
LOAN RECOVERIES:
One of the major reasons why IBC was enacted is to help banks recover a higher amount of bad loans when compared to the earlier system.
As of 31st December 2019, 190 companies defaulted on loans which yielded resolution plans with varied degrees of realization. A total claim of Rs. 3.52 trillion worth had been filed by the financial creditors, primarily banks. Out of this, around Rs. 1.52 trillion — 43.1% has been recovered. This is extremely better than the system which prevailed prior to IBC. In 2015–16, the total bad loans which were up for recovery amounted to Rs. 2.21 trillion, of which on 10.3% [Rs. 22,768 crores] was recovered. Thus, the figures explain that IBC has been a huge success when compared to the earlier loan recovery process.
On the face of it, a recovery rate of 43.1% sounds excellent as the recovery rate never crossed 23% in the non-IBC period. However, the in-depth analysis of it does not represent the same results. The biggest recovery made by the banks was when Bamnipal Steel, a Tata Steel unit bought Bhushan Steel. Bhushan Steel had defaulted loans of about Rs. 56,022 crores but Bamnipal Steel paid (63.5%) Rs. 35,571 for the company. This and the recovery of Essar Steel, make up 49.5% of the overall recovery. These have added a lot of weightage to the overall recovery rate and if these two are left out, the recovery rate drops to 30.5% which is substantially low.
The duration of 324 days to resolve the case, although greater than the stipulated time of 270 days it is much lesser than 4.3 years which was the case prior to the IBC implementation.
IMPACT ON NPA’s :
After rising consecutively for a period of 7 years, non-performing assets declined in 2018–19 and the slippage ratio improvised. This was mainly because the entire process of IBC has created fear in the minds of the promoters over their delays and defaults as whatever they establish can be taken away for repayment. This has created a positive credit culture as paybacks are more efficient because the promoters like to refrain themselves from being dragged to the courtroom.
However, since the system needs improvement, Sridhar Ramachandran, CIO, IndiaNivesh Renaissance Fund stated that although the fear in the minds of the promoters is helping banks recover their dues quickly, at the moment there is more proactiveness in vocational training of the prospective judges in order to improve the mechanism.
Since India is hit hard by defaults and NPA’s in the recent years, there is an urgent requirement of the speedy implementation of IBC in the Indian Banking System, says Nirmala Sitharaman. She continues that risk premiums may soar high and cuts in repo rate might not be a solution to lower lending rates. Thus, private investment can be muted which is harmful for the economy.
However, if a resolution plan isn’t agreed upon with a period of 330 days, the company that has defaulted the loan goes into liquidation. Until 31st December 2019 liquidity had been initiated against 780 companies, 40 of which were closed in the process. Many of the recoveries from these 40 companies are close to nil.
The number of companies admitted to CIRP increased from 1,497 in September 2019 to 1,961 in December 2019. This indicates that companies facing insolvency resolution is piling up at NCLT a faster rate than at which it can dispose them. There is however a risk that the IBC system might get overloaded amidst the corporate defaults being brought under CIRP. One of the measures that can be used in order to avoid this overloading is to encourage banks to settle smaller loan defaults, which are less than Rs. 100 crores by themselves and not take it to the NCLT.
References:
- https://www.livemint.com/companies/news/ibc-recovered-rs-75-000-crore-till-march-2019-1556879330649.html
- https://epaper.livemint.com/Home/ShareArticle?OrgId=ebf184fa
- https://www.business-standard.com/article/companies/ibc-recovery-rate-for-cases-in-fy19-races-ahead-of-other-mechanisms-crisil-119051400915_1.html
- https://economictimes.indiatimes.com/industry/banking/finance/banking/close-to-half-of-claims-under-ibc-were-settled-in-fy19-rbi/articleshow/73023705.cms?from=mdr
- https://www.outlookindia.com/newsscroll/pace-needed-in-ibc-to-increase-bank-loans-economic-survey/1722812
- https://www.livemint.com/industry/banking/why-ibc-success-in-recovering-bad-loans-is-middling-1565551101789.html
Written by — Gautam Rathi
Edited by — Khushi Varshney
Instagram (@gautam_rathi_1 @khushii_varshney @myp.club @milanglobal)
