Banks can now hope to recover more from their bad loans, if the Bill to consolidate and amend all laws relating to insolvency resolution is passed in the Lok Sabha. Currently, banks take as long as 15 years in certain cases to recover their money, which substantially erodes the value of the assets.
According to a World Bank report, it takes, on an average, more than four years to wind up a company in India, which is more than twice the time taken in China and in the US (1.5-1.7 years). In the process, creditors in India recover only 25 cents to a dollar, compared to 36 cents in China and a substantial 80 cents in the US.
The proposed legislation — the Insolvency and Bankruptcy Code 2015 — which fixes a time limit of 180 days, for completion of the insolvency-resolution process, can be a huge positive for the banking sector.
The main reason for the delay in the bankruptcy process in India has been the existence of multiple laws governing insolvency According to KV Karthik, Partner, Financial Advisory Services, Deloitte Touche Tohmatsu India LLP, in India, besides the Companies Act, 2013, bankruptcy is dealt with by three major legislations — the Sick Industrial Companies (SICA), the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDB Act) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
Different agencies “As a result, four different agencies — High Courts, Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs) — have overlapping jurisdiction. This tends to cause delays in the process. A well-drafted bankruptcy law can overcome these challenges,” he says.
A resolution time of 180 days, as proposed under the new Bankruptcy Law, should also give banks leeway to secure a significant portion of the receivables. “Most banks prefer to be secured creditors and would have disbursed loans against receivables or inventory.
By the time the recovery proceedings can be initiated by the bank, the value of these receivables/ inventories or assets tend to depreciate significantly in value, leading to poor recovery for the banks under the existing system,” says Karthik.
Under the proposed Bankruptcy Law, lenders also do not have to wait until a loan is declared as stressed or to has turned bad to trigger the process of financial and other re-structuring. “They can take action at the early stages when stress is observed, such as when a financial default occurs,” adds Kathik.
The new resolution process also involves resolution professionals who will work along with a committee of creditors, thereby giving creditors a say in the process.
The other interesting aspect is that the code allows the corporate debtor itself to initiate the insolvency-resolution process once it has defaulted on a debt.
“It is a huge benefit for the economy as a whole. It allows room for shutting down a business if things go wrong. So, an entrepreneur is given a chance to move on and lenders are also paid off,” says Jaideep Iyer, Group President - Financial Management, YES Bank.
Inefficacy of DRTs Often liquidating assets to pay off debt is also delayed because banks are unable to agree among themselves regarding the sale of the assets.
The new code designates the National Company Law Tribunal (NCLT) and DRT as the adjudicating authorities for corporates and individuals, respectively, for resolution of insolvency. This can help reduce conflicts between lenders.
“If there is a bankruptcy code which is properly drafted and allows both lenders and borrowers to ensure that the insolvency resolution happens in 180 days then it is a huge positive for the banking sector. That along with strategic debt restructuring and other tools will help banks reduce the stress on their balance sheets,” says Iyer. He adds that under the existing structure the resolution gets dragged on for infinity. The existing DRTs are also not effective due to lack of expertise and staffing.