IBC delivering results; a reform Modi, Jaitley should be proud of
Despite its flaws and constraints, the insolvency law has given the desired results in the short run and it looks promising in the long term.
- Apr 10, 2019,
- Updated Apr 10, 2019 5:38 PM IST
India rose 23 notches in the Ease of Doing Business rankings to 77 from 100 this year. However, its ranking in resolving insolvency cases, one of the 10 parameters on which these rankings are based has fallen from 103 to 108.
It is surprising that one of the most successfully implemented reforms by the Narendra Modi government -- the Insolvency and Bankruptcy Code (IBC) -- has gone unnoticed by the World Bank, which comes out with these rankings every year.
The rankings, which are based on surveys by corporate executives and entrepreneurs in Delhi and Mumbai, continue to show the rate of recovery (of debt from defaulting businesses) at 26.5 per cent, time of recovery 4.3 years and the cost of recovery 9 per cent of the assets of the debtor. These parameters remain unchanged from 2016, when the new insolvency laws were brought into force.
Gyaneshwar Kumar Singh, Joint Secretary, Ministry of Corporate Affairs, the nodal ministry which oversees the regulatory framework of the new law, appealed to CEOs and promoters in a recent event on IBC, organised by Confederation of Indian Industry (CII) to participate in larger numbers in the survey.
Singh was perhaps right. IBC, despite all its shortcomings, has changed the loan recovery landscape in the country.
Just two years since its launch, IBC has resulted in resolution of 88 corporate loan default cases involving Rs 2.09 lakh crore non-performing assets (NPAs) and facilitated recovery of Rs 1.12 lakh crore as of 25 March 2019. This is a recovery rate of 54 per cent.
Of course, not all cases have been resolved within the stipulated time of 270 days. Some dragged on for much longer such as the Essar Steel Case, which lingered on for over 500 days; yet it is a sharp improvement from the average time of 4.3 years it used to take before the advent of IBC regime. Even the cost of resolution has come down to less than 1 per cent against 9 per cent earlier.
Of the 12 large cases -- including those of Essar Steel, Bhushan Steel and Alok Industries -- which accounted for unrecovered loans of Rs 3.45 lakh crore, six have been resolved. And have led to a loan recovery of Rs 96,000 crore, logging a healthy recovery rate of 56 per cent. These are the cases, which have been resolved.
There were around 4,000 cases involving Rs 2 lakh crore of outstanding loans, which were resolved even before the insolvency proceedings could start.
To the Modi government's credit, it was quick to act on the need to have a new insolvency law. Within three months of coming to power in 2014, the government had formed a committee to draft a new bankruptcy law. The committee submitted its report in November 2015 and the bankruptcy bill was tabled in the Parliament in December that year. By May 2016, the bill was given the President's assent and by December 2016, the new law was in force.
The speed with which the government acted and brought the law was unprecedented and commendable.
Clive Barnard, Partner, Herbert Smith Freehills, a London-based law firm, says, from a foreigner's perspective, it is extremely remarkable how much has been achieved in such a short span of time. "We honestly thought what was being proposed is too ambitious when we looked at the initial proposals; we were really frightened to know what you were going from to what you were going to, and how dramatic and quick that transformation was," admits Barnard.
Herbert Smith Freehills has been engaged with the Bankruptcy Law Reform Committee (BLRC) since February 2015, after it was invited to assist the BLRC and give its input on the draft Code.
RBI will issue fresh circular on bad debt resolution: Governor Shaktikanta Das
India rose 23 notches in the Ease of Doing Business rankings to 77 from 100 this year. However, its ranking in resolving insolvency cases, one of the 10 parameters on which these rankings are based has fallen from 103 to 108.
It is surprising that one of the most successfully implemented reforms by the Narendra Modi government -- the Insolvency and Bankruptcy Code (IBC) -- has gone unnoticed by the World Bank, which comes out with these rankings every year.
The rankings, which are based on surveys by corporate executives and entrepreneurs in Delhi and Mumbai, continue to show the rate of recovery (of debt from defaulting businesses) at 26.5 per cent, time of recovery 4.3 years and the cost of recovery 9 per cent of the assets of the debtor. These parameters remain unchanged from 2016, when the new insolvency laws were brought into force.
Gyaneshwar Kumar Singh, Joint Secretary, Ministry of Corporate Affairs, the nodal ministry which oversees the regulatory framework of the new law, appealed to CEOs and promoters in a recent event on IBC, organised by Confederation of Indian Industry (CII) to participate in larger numbers in the survey.
Singh was perhaps right. IBC, despite all its shortcomings, has changed the loan recovery landscape in the country.
Just two years since its launch, IBC has resulted in resolution of 88 corporate loan default cases involving Rs 2.09 lakh crore non-performing assets (NPAs) and facilitated recovery of Rs 1.12 lakh crore as of 25 March 2019. This is a recovery rate of 54 per cent.
Of course, not all cases have been resolved within the stipulated time of 270 days. Some dragged on for much longer such as the Essar Steel Case, which lingered on for over 500 days; yet it is a sharp improvement from the average time of 4.3 years it used to take before the advent of IBC regime. Even the cost of resolution has come down to less than 1 per cent against 9 per cent earlier.
Of the 12 large cases -- including those of Essar Steel, Bhushan Steel and Alok Industries -- which accounted for unrecovered loans of Rs 3.45 lakh crore, six have been resolved. And have led to a loan recovery of Rs 96,000 crore, logging a healthy recovery rate of 56 per cent. These are the cases, which have been resolved.
There were around 4,000 cases involving Rs 2 lakh crore of outstanding loans, which were resolved even before the insolvency proceedings could start.
To the Modi government's credit, it was quick to act on the need to have a new insolvency law. Within three months of coming to power in 2014, the government had formed a committee to draft a new bankruptcy law. The committee submitted its report in November 2015 and the bankruptcy bill was tabled in the Parliament in December that year. By May 2016, the bill was given the President's assent and by December 2016, the new law was in force.
The speed with which the government acted and brought the law was unprecedented and commendable.
Clive Barnard, Partner, Herbert Smith Freehills, a London-based law firm, says, from a foreigner's perspective, it is extremely remarkable how much has been achieved in such a short span of time. "We honestly thought what was being proposed is too ambitious when we looked at the initial proposals; we were really frightened to know what you were going from to what you were going to, and how dramatic and quick that transformation was," admits Barnard.
Herbert Smith Freehills has been engaged with the Bankruptcy Law Reform Committee (BLRC) since February 2015, after it was invited to assist the BLRC and give its input on the draft Code.
RBI will issue fresh circular on bad debt resolution: Governor Shaktikanta Das