Shortage of insolvency professionals may be a challenge

Ever since the RBI identified 12 big defaulters — accounting for a fourth of the system’s bad loans — for insolvency under the bankruptcy code, the focus has been on such large accounts. But the bad loan menace does not stop with large defaulters alone. Given that a default of just more than ₹1 lakh can trigger insolvency under the IBC, the large number of smaller bad loan accounts that could enter the system in the coming months, present a huge challenge for the existing structure.

Currently there are around 900 registered insolvency professionals (IPs). About 260 cases have so far been approved by the NCLT for resolution. Given that these are mainly larger accounts that have been pushed forth for resolution by lenders and the regulator, the existing number of IPs may grossly fall short of the requirement, when large number of small value accounts come up for resolution. Also, the pace at which fresh cases are being filed has been increasing significantly over the past few months. Over the last month alone, around 100 new cases have been approved by the NCLT.

Small, but large in number According to the latest data (as of September 2016) available with the RBI on the loans outstanding of banks according to credit limit size, while high value ticket loans — of above ₹100 crore — constitute 30 per cent of the total loans by value, they are only minuscule in number (less than one per cent). Nearly 70 per cent of the total loan accounts pertain to loans with credit limit of ₹25,000 to ₹5 lakh. Assuming that bad loans in the system mirror the same trend in terms of value and number of accounts, lack of sufficient number of resources in terms of IPs, benches, judicial members, technical members at NCLT— is a cause for worry.

“Even if these cases are small in value, they can be as complex as or more than some of the larger accounts. The limited number of resources to handle such cases is one of the pressing challenges for the IBC currently,” says V Srinivasa Raghavan, Partner, IndusLaw.

There are currently three insolvency professional agencies (IPAs) — Indian Institute of Insolvency Professionals of ICAI, ICSI Insolvency Professionals Agency and Insolvency Professional Agency of Institute of Cost Accountants of India. These agencies enrol and regulate insolvency professionals as its members in accordance with the IBC.

Sunil Pant, CEO of the Indian Institute of Insolvency Professionals of ICAI, says there is a huge challenge ahead to handle small cases. “The USP of IBC is speed. Hence, we need a large number of IPs to tackle the influx of cases in the coming months.”

Given that the IBC process is still evolving, it's capacity to deliver value to stakeholders within a short time frame will be key to its success.

IPs will also need to be incentivised to take on small cases.

“The ones where stakes are low, say a debt of ₹15-20 lakh, IPs may be reluctant to take up such cases. This is something that the insolvency board will have to re-think and encourage people to take up smaller accounts,” says V Srinivasa Raghavan.

Sunil Pant adds that the task of the IPA is also Herculean as it must monitor the activities of its members regularly. “Insolvency professionals have to report to IPAs regularly and the IPA has to ensure that they are adhering to the regulations under the code. At least once in six months IPs will have to report. Given that there are already around 1,000 professionals on board, pouring through hundreds of reports will be a tall task.”

Raising the bar The unique feature of the IBC is that it can be initiated by various parties — financial creditors, operational creditors and borrowers themselves. Most of the cases dealt under NCLT across regions, so far appear to have been filed by operational creditors, who can trigger the process on a default of just more than ₹1 lakh.

“Smaller ticket cases will mostly be filed by operational creditors. It is not mandatory on their part to designate an IP and the burden eventually will pass on to the creditors or insolvency board to appoint the IP,” says V Srinivasa Raghavan.

Some feel that the threshold limit could be raised to avoid cluttering of small cases.

“The government has the power to raise the bar for filing IBC cases from ₹1 lakh up to ₹1 crore. Currently, NCLTs across the country are flooded with insolvency filings, and many of the filings involve small amounts. It is, therefore, appropriate that the Government uses its power to increase the threshold amount to ₹1 crore such that insolvency benches are not bothered with small amounts,” says Vinod Kothari, a financial and legal consultant and an insolvency professional.

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