Is Bankruptcy Code the much-needed fix for bad loans?
India's insolvency problem with private and public sectors' NPAs is running a tab of Rs. 6 lakh crore. India stands at 136th spot in the World Bank's resolving insolvency chart and is trying to write off stressed debts, as it did last year by wiping close to Rs. 114,000 crore. Can the Bankruptcy Code put a plug in the drained away money?
Bankruptcy does not necessarily mean the end
One of the preconceived notions is that bankruptcy is the end and, therefore, although things don't look bright over a period of time, enterprises still keep engaging in new ventures and avenues instead of calling it a day. This leads to the debt piling high and elevating the condition to an extent from which recovery becomes almost impossible.
Bankruptcy Code to solve insolvency dead ends
Indian insolvency solutions meant a continuous to and fro effort without reaching any concrete solution. On an average, 4-5 years are taken to initiate and resolve insolvency and then another 4-10 years for the liquidation process to work out itself before parties can breathe a sigh of relief. It is estimated that currently there are 60,000 cases of bankruptcy awaiting resolution.
What does the Bankruptcy Code propose?
The Bankruptcy Code aims to hack down the resolution time, taken in a case of insolvency so that the dues of the creditors can be addressed within an 180 days period with a provision of 90 days extension if agreed by majority of creditors. The Bankruptcy Code constitutes of three elements - institutional infrastructure, provisions relating to corporate insolvency transactions and individual insolvency transactions.
IBC is not a detrimental approach, it's a practical one
Not all business ventures are slated for success and holding on to a failing business gives rise to a financial pothole which deepens further with time. It also gives a security net to entrepreneurs to venture into new enterprises knowing that failures wouldn't mean dragging oneself in a financial nightmare from which there is no way out.
A need for a proper fix than stop gaps
Prior to the Code, there was a severe absence of a proper guideline or a structured single legislation that looked into matters of corporate bankruptcy. Banks tried to tackle the problem at hand with corporate debt restructuring (CDR), strategic debt restructuring (SDR) and other methods which were not too successful in their approach.
