Bankruptcy law can be a game-changer

The Insolvency and Bankruptcy Code (IBC) meant to smoothen laws and procedures for takeover of the assets of failed debtors by creditors, is certainly a game-changer so far as the Indian banking and financial system is concerned. The Code, which brings to a common platform about a dozen of different laws to resolve insolvency and transfer the assets of the borrowers to the lenders in a time-bound manner sends a clear message that it would not be easy for the bank defaulters to hide behind a web of complex laws and get away with not repaying thousands of crores rupees. The IBC provides for a strong institutional mechanism in the form of empowered board and the tribunals and professionals for cutting losses of the creditors and other stakeholders in case the debtors have not been able to carry out businesses successfully. True, everyone is not a wilful defaulter but not all defaulters are victims of business downturns. Any dynamic system in a fast growing economy with aspirations to be the preferred choice of global investors must provide solutions for both the situations – that of wilful defaults and adverse business cycles.

While it is early days to say with confidence whether or not the IBC would deliver success, its implementation requires setting up of the IBC Board along with other intermediate institutions and agencies, including those with quasi-judicial powers with a great sense of urgency. This is because of the expediency of a debt recovery mechanism in the face of grave crisis that has engulfed the banking sector with its ripples on rest of the economy. In just about 3 years , the non-performing assets of the public sector banks (PSBs) have more than doubled as a per cent of total corporate loans. While the total corporate loans of the PSBs increased  from Rs 24.11 lakh crore in the fiscal  2013 to Rs 26.95 lakh crore in December, 2015, the bad loans went up  from Rs 84,050 crore to Rs 2.24 lakh crore.

It is in this context that some of the tough provisions in the IBC, on the recommendations of the Joint Committee of Parliament, have to be seen. For instance, the provision to bar a bankrupt to seek election to any public office would be a big deterrent to the willful defaulters who can manipulate the system to get even to Parliament. Further, to protect workers’ interests, their salaries up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.