Better Insolvency and Bankruptcy Code grooming to fix bad haircuts

Banks are reportedly continuing to take steep haircuts in the resolution of bad loans. This is disconcerting. Latest data by the Insolvency and Bankruptcy Board of India (IBBI) for the end of June 30 showed that of the total claims of Rs 7.67 lakh crore in about 517 cases, creditors have realised around Rs 2.35 lakh crore through resolution plans. The haircuts that banks have to take relative to their admitted claims is 69%. This implies an average of Rs 69 going towards losses for every Rs 100 of their claims admitted for resolution under the bankruptcy code. This should improve, as the public policy goal of the insolvency resolution is to maximise the value of the asset being resolved, minimise the haircuts that banks have to take, and reduce the burden on taxpayers.

A key reason for recoveries plummeting is the delay in the process of insolvency. That must change. The legal infrastructure should be more robust to prevent any attempts to block insolvency resolution through stays. There should be no delay either in setting up multiple benches for the adjudicating authority. Banks must report defaults as soon as they happen, and the National Company Law Tribunal (NCLT) must admit the petitions swiftly. The resolution must also be time-bound. Delays could dissuade prospective resolution applicants and also lenders from taking the Insolvency and Bankruptcy Code (IBC) route.

Easing regulation to allow asset reconstruction companies (ARC) to participate as resolution applicants makes sense. The National Asset Reconstruction Co Ltd (NARCL) to acquire bad loans from banks and the India Debt Resolution Co Ltd (IDRCL) to manage and dispose of the assets are in place. There are 28 other ARCs too. Competition among ARCs will also help businesses revive, and protect protective assets of the economy. Any course corrections, if required, in the law to ensure faster progress in resolving the bad loan problem are in order.