Bad Loans: Prevention Is Better Than Cure

Context: The threat of global warming facing the world has opened a new path to growth for India that will only advance its economic prospects.

Various models of insolvency resolution:

• Credit in possession model: Which is the model in the UK, where control over stressed assets passes to creditors. India follows this model.
• In India, creditors decide the future of an insolvent firm with the help of an administrator called the Resolution Professional (RP).
• The idea is that with banks having messed up in a big way, it is better to carry out resolutions under the auspices of independent authorities.
• Debtor- in-possession model, which is the model in the US, where the debtor remains in control.

Issues with the Insolvency and Bankruptcy Code (IBC) in India

• RP is a weak link in the chain: The regulatory authorities have pursued disciplinary actions against 123 RPs in a total of 203 inspections carried out so far.
• Delays in National Company Law Tribunal (NCLT): Its processes are plagued by delays. There are delays of over 180 days in 71 per cent of cases.
• One reason for that is, as, in the judiciary, several positions on the NCLT bench remain unfilled. The NCLT is 34 members short of the sanctioned strength of 62 members.
• The longer the insolvency process takes, the lower will be the value that creditors will realise. Bidders will factor in the delays in the price they quote. Banks will end up losing as a result.
• Ignores to differentiate between wilful defaulters and others: Clause 29 (A) (c) bars promoters from bidding even if they are not wilful defaulters.

Way Forward: The Standing Committee of Parliament attached to the Ministry of Finance has recommended the following – 

• Self-regulations of RPs: The Committee wants a self-regulatory body to oversee professional standards for RPs akin to the Institute of Chartered Accountants of India.
• Reducing the delays in NCLT: The Committee wants cases to be admitted within 30 days.
• Getting the estimation of valuation right: Let there be an independent evaluation of a sample of liquidation values and auction processes.
  • It may be useful to create an Office of Independent Evaluation at the Insolvency and Bankruptcy Board of India (IBBI) similar to the one that obtains at the International Monetary Fund.
• Pre-pack format for corporations too: The Committee suggests that the “pre-pack” for- mat offered to micro, small and medium enterprises be extended to corporations. In “pre-pack”, banks and the firm agree to a resolution before the case is referred to the NCLT.
• Improving bank governance: Risk management at banks needs to improve. This is not a simple matter. It requires, among other things, considerable improvement in bank governance.
  • Addressing the issues like the composition of boards, the selection of independent directors, compensation for independent directors (at public sector banks), the accountability of boards.