Prior to introduction of the Insolvency and Bankruptcy Code, 2016 (“IBC”/ “Code”), there were multiple legislations in India for recovery of bad loans such as the Recovery of Debts Due to Financial Institutions Act, 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002. However, over time, these legislations proved to be ineffective as borrowers took advantage of their loopholes resulting in massive delays in debt recovery. Post IBC, the process for revival of the borrowers facing stress has been streamlined to a large extent and banks have been provided with a viable option to reduce their bad loans burden in a time-bound manner. However, there is a need to make this system more robust and the revival mechanism swifter and more efficient.
A likely option in the future for resolving stressed assets is a pre-packaged insolvency resolution process. A proposed pre-pack framework has been released by the Ministry of Corporate Affairs for stakeholders’ comments. “Pre-packs” enable the stressed companies to negotiate the restructuring plan with the creditors prior to the formal insolvency filing and court approval. This results in a completion of the resolution process much quickly and discretely with cooperation from the existing management since the management of the company retains control until approval of the resolution plan. Pre-packs are prevalent modes of restructuring in countries like the U.S. and the U.K. If enforced, a statutory pre-pack regime will go a long way in resolving the stressed assets of the banks while giving much needed relief to the corporates.
Lastly and perhaps an often-ignored aspect in the context of bad loans is the lack of an effective cross-border insolvency regime in India. While this may not raise immediate eyebrows as far as resolution of stressed assets is concerned, however, this may be considered as extremely critical and as important as pre-packs and bad banks. Currently, while the relevant provisions of the Code enabling cross-border insolvency have come into force, such provisions cannot be implemented in absence of a bilateral agreement/treaty.
A surge in bad debts in the Indian banking system had reinitiated the discussion on introducing bad banks in India. The Reserve Bank of India governor had indicated that the central bank can consider the idea of a bad bank to tackle non-performing assets and had advised banks and non-banks to adopt appropriate compliance culture and identify risks early. Thus, a bad bank may be in the pipeline and can be another option for offloading and resolving stressed loans for their eventual resolution. A “Bad Bank” is an entity established for the purpose of segregating the stressed assets held by a regular bank from its performing assets. It acts like an asset reconstruction company but is initially funded by the government. It takes over the bad loans of commercial banks, manages them, and finally recovers the money over a period of time to resolve bad loans.
Lastly and perhaps an often-ignored aspect in the context of bad loans is the lack of an effective cross-border insolvency regime in India. While this may not raise immediate eyebrows as far as resolution of stressed assets is concerned, however, this may be considered as extremely critical and as important as pre-packs and bad banks. Currently, while the relevant provisions of the Code enabling cross-border insolvency have come into force, such provisions cannot be implemented in absence of a bilateral agreement/treaty.
It is encouraging to note that the Insolvency Law Committee formed by the Ministry of Corporate Affairs to make recommendations on cross-border insolvency has already recommended adoption of the UNCITRAL Model Law and provided a comprehensive framework of cross-border insolvency based on such Model Law. While the proposed framework is yet to be adopted and implemented, it is important to note that it provides a detailed mechanism of cooperation and coordination among countries, including access by an Indian administrator of the offshore assets of the borrower and vice versa, thereby giving immense comfort to the lenders to effectively recover their debt, irrespective of the geographical location.
To sum it up, while there may be various other ways of resolving bad loans, but if the aforesaid measures are adopted in the Union Budget and implemented effectively (and timely!), it would not be out of place to state that the tally of non-performing assets (NPA) may plummet at an unprecedented pace.
Views are personal. The author is a Partner at Khaitan & Co.
