Better insolvency and bankruptcy code grooming to fix bad haircuts

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Banks would continue, it seems, to take deep cuts in the resolution of bad debts. It’s disconcerting. The latest data from the Insolvency and Bankruptcy Board of India (IBBI) for the end of June 30 showed that out of the total claims of Rs 7.67 lakh crore in around 517 cases, creditors realized around Rs 2.35 lakh crore through resolution plans. The discount that the banks must take in relation 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 objective of insolvency resolution is to maximize the value of assets being resolved, minimize the haircuts banks must accept, and reduce the burden on taxpayers. .

One of the main reasons for the drop in recoveries is the delay in the insolvency process. This must change. The legal infrastructure should be stronger to prevent attempts to block insolvency resolution through stays. There should also be no delay in setting up multiple benches for adjudicative authority. Banks must report defaults as soon as they occur, and the National Company Law Tribunal (NCLT) must admit claims quickly. The resolution must also be limited in time. The delays could deter potential resolution candidates as well as lenders from going the Insolvency and Bankruptcy Code (IBC) route.

It makes sense to relax the regulations to allow asset reconstruction companies (ARCs) to participate as resolution claimants. The National Asset Reconstruction Co Ltd (NARCL) to acquire bad debts from banks and the India Debt Resolution Co Ltd (IDRCL) to manage and dispose of assets are in place. There are also 28 other ARCs. Competition between CRAs will also help businesses revive and protect the protective assets of the economy. Any course corrections, if necessary, in the law to ensure faster progress in resolving the problem of bad debts are in order.

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