Tweak IBC process to focus on revival

| Updated on February 20, 2020

The PMO is right in saying that loan defaults below ₹200 crore should not be referred to IBC

The Prime Minister’s Office has flagged an important issue — of banks using the Insolvency and Bankruptcy Code as an easy way to recover their dues in the case of loans of ₹200 crore or less (BusinessLine, February 14), when they should be working out a restructuring package to bring these units (possibly, many of them MSMEs) back on track. With the economy barely growing at 5 per cent and industry showing signs of contraction, the PMO’s anxieties are understandable. Both fiscal and monetary policies are trying to spur credit growth to MSMEs and specific sectors hit by the downturn; however, bankers remain wary as ever of restructuring loans, fearing that their activities will be investigated.

The RBI’s latest Financial Stability Report points to a possible deterioration in the NPAs from the current levels of 9.3 per cent of loans and advances to 9.9 per cent by September 2020, no doubt due to the macroeconomic environment. To expect banks to be bold in these times would perhaps be unrealistic — unless the Centre gives them an extraordinary sense of reassurance. To be sure, the PMO has said that banks must be given the confidence to undertake loan restructuring without fears of being probed. For the banking sector — which has been under the scanner since the Asset Quality Review process began in 2015, culminating in the so-called February 2018 circular that was distinctly unsparing of any form of loan default — the wheel appears to have come full circle.

However, it would be unfair to blame banks alone for clogging the bankruptcy process with MSMEs. The fault also lies with the operational creditors (OCs), who are empowered under the IBC to drag a firm to court for a default of a mere ₹1 lakh. According to the latest newsletter of the Insolvency and Bankruptcy Board of India, half the 3,312 cases (1,630, to be precise) admitted into the IBC since January 2017 are on account of OCs. Unlike financial creditors, OCs are merely interested in getting their money back, and not in reviving the enterprise. A different yardstick needs to be put in place — something like 10 per cent of the debtor’s overall liabilities or ₹10 lakh, whichever is lower — to activate an insolvency proceeding.

The IBC must be focussed on revival rather than liquidation. The fact that 780 of the 3,312 cases before it have been decided in favour of liquidation, while just 190 are in revival mode, tells a story. This is despite the fact that 72.4 per cent of the liquidation cases were earlier with the BIFR or already defunct. In a weak economy, it is not surprising that the IBC recovery rate is just 35 per cent. With steep haircuts the norm, banks might as well focus on revival of units, big and small.

Published on February 19, 2020

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