After trying out several mechanisms to recover bad loans, like Lok Adalats and Debt Recovery Tribunals, the RBI’s Insolvency and Bankruptcy Code recovery process has met with significant success. It basically focuses on helping sick firms to either restructure or advises their sale within a stipulated timeframe. Since speed is of the essence, firms don’t collapse while waiting for restructuring. The IBC holds high hope for the banking sector, which is burdened with non-performing assets totalling nearly Rs 10 lakh crores.
Hopefully the IBC won’t go the way of Lok Adalats, where the number of cases that came before it started piling up. The government must heed the call for the induction of more professionals to lighten the NCLT’s burden. This body appoints insolvency professionals taken from the RBI or the finance or law ministries to run a sick company till the case is resolved.
The IBC is, however, a doubled-edged sword for the banks — while it ensures some recovery of the loan amount, it’s at the cost of haircuts, which in one case was 90 per cent. A “haircut” is the loss the banks bear between the loan amount and the actual value of the collaterised asset. Banks also face a problem as borrowers who were willing to pay are tempted to take the insolvency and bankruptcy route as it would reduce the amount they have to pay. Banks have to guard against this.
There’s also a need to set up a Public Credit Registry swiftly that would offer information on a borrower’s creditworthiness.
