Insolvency Code and banks

The code aims insolvency resolution in a time-bound manner, making the availability of credit easier.

The RBI data indicates alarming increase in gross non-performing advances (GNPAs) ratio of scheduled commercial banks (SCBs) to 9.1% as on September 2016 (7.8% in March 2016) and overall stressed advances ratio to 12.3% from 11.5%.

Despite the increasing NPAs in the recent past, the recovery by SCBs during 2015-16 from legal channels (resolution through Lok Adalats and Debt Recovery Tribunals or DRTs, and  invocation of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (or Sarfaesi) has reduced to Rs 22,700 crore as against Rs 30,700 crore (2014-15).

The loan amount involved was Rs 2.21 lakh crore in about 47 lakh accounts — 45 lakh in Lok Adalat. The deceleration was mainly due to reduction by 52% through Sarfaesi, from Rs 25,600 crore to Rs 13,100 crore.

Steps taken to balance various interests through the Sick Industrial Companies (Special Provisions) Act or the SICA Act, establishment of DRTs and implementation of the Sarfaesi Act 2002 etc, had only marginal impact to control NPAs. The Insolvency and Bankruptcy Code - 2016 (IBC 2016) put in place may help the banks to reduce the pressure on banks in management of NPAs.

One has to evaluate IBC approved/implemented, by repealing two legislations (Presidency Town Insolvency Act 1909 and Provisional Insolvency Act 1920) and amending 13 others, in the backdrop of the financial system. Liberalisation from early 1990s has resulted in more investment/job creation expectations from the private sector and the government is in the process of disinvestment from industrial/ commercial ventures.

The private sector is in a “chakravyuh” — freedom for entry but stringent rules for exit. Further, liquidation/bankruptcy is mainly debtor driven. Even secured creditor is not assured of recovery from security — sovereign dues, labour claims etc, get priority. Delays, multiple/ overlapping laws, judicial intervention, focus on adherence of rules/procedures – not necessarily on commercial values etc,  were seen often. The IBC basically aims insolvency resolution in a time bound manner, maximise value of assets to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders and alter the order of priority of payment of government dues. 

The Insolvency and Bankruptcy Board of India (IBB) is the apex body for promoting transparency and governance in the administration. The National Company Law Tribunal (NCLT), the adjudicating auth­ority, is for disposal of insolvency applications and approval of resolution plans in respect of corporates and limited liability partnerships (for others, adjudicating authority is DRT). The action can be initiated by making an application to NCLT by the banks, being financial creditors, that is to whom a financial debt (secured/unsecured) is owed.

The NCLT appoints Interim Resolution Professional (IRP) for a period not exceeding 30 days, declares stay on debt reco­very, pending suits during IRP period. The IRP is vested with management of corporate debt­or. The financial creditors committee (with 75% voting) can confirm IRP as a resolution professional (RP or Insolvency Professionals-IPs) or replace with another.

The RP conducts resolution process, prepares information memoranda and resolution plan (as a “going concern” or for liquidation) for approval of creditors. The plan is submitted to the NCLT for final approval.

The IPs act as liquidator/ bankruptcy trustee and override the powers of board of directors. The Information Utilities (IUs) (centralised repository of financial and credit information of bo­rrowers) accept, store, authenticate and provide access to financial data provided by creditors. Insolvency process is to be comp-leted within 180 days (can be extended by 90 days) and after 270 days it is deemed for liquidation.

When the assets have been liquidated, the liquidator makes an application to the adjudicating authority for the dissolution. Person aggrieved by an order of NCLT/NCLAT can appeal to the Supreme Court within 45 days.

The order of priority has been changed to: insolvency-related costs, secured creditors and workmen dues up to 24 months, other employees’ salaries/dues up to 12 months, financial debts (unsecured creditors) government dues (up to two years), any remaining dues and equity.

IBC vs banks

The specific benefits to the banks are: stipulation of time limits for the process, resolution professional acts mainly on behalf of the financial creditors, first charge over the collaterals and priority over other operational creditors, less of legal intervention and expedition of recovery process. Improvement in credit culture will reduce the risk premium in pricing of credit and lending rates may marginally come down.

There are challenges during the transmission of existing cases to NCLT on account of large volume of cases pending with Company Law Board (CLB), DRT etc. Besides, RPs become the CEO of the unit and their capability/integrity/expertise to manage the affairs is a big question mark. Mere academic qualifications alone are not be sufficient to manage a unit in problems.

The IBC may improve the ranking of India in ease of doing business from 130 (out of 189 countries) as per World Bank’s Doing Business Report 2016. However, one has to wait for a couple of years, to see the real impact of IBC on recovery of NPAs of banks.

(The writer teaches banking in ICICI Manipal Academy (IMA), Bengaluru)