Analysis of the suspension of the Insolvency & Bankruptcy Act

Post-Lockdown NPA Scenario

Context: Banking and NPA is an important topic under UPSC Mains for Economy and every year around 3-4 Questions come in Prelims related to Banking and terminologies. Hence, Insolvency and Bankruptcy Act, 2016 is important.

What is NPA?

• Money or assets provided by banks to companies as loans sometimes remain unpaid by borrowers. This late or non-payment of loans is defined as Non-Performing Assets (NPA). They are also termed as bad assets.
• In India, the RBI monitors the entire banking system and, as defined by the country’s central bank, if for a period of more than 90 days, the interest or installment amount is overdue then that loan account can be termed a Non-Performing Asset.

Chronology of Insolvency and Bankruptcy news post Lockdown

• Government has decided to suspend the provisions of Insolvency and Bankruptcy Code (IBC), 2016 till March 31, 2021.
• Because of the COVID-19 the government had raised the threshold of loan defaults that would spark off insolvency proceedings from 1 lakh to 1 crore on the day of the lockdown’s announcement — March 24.
• It had indicated that if things did not improve by April end, the suspensions of certain sections of the IBC for six months could be considered to prevent companies at large from being forced into the insolvency process for a ‘force majeure’ default.
• An ordinance, in June, indefinitely barred the initiation of insolvency proceedings both, voluntarily or by creditors, for defaults arising on or after March 25, 2020, for a period of six months that could be stretched to a year. When the initial six months of forbearance under the IBC expired, it was extended till December 25.
• A further suspension, would mean the one­year limit permitted by the law is fully used up.
• The government must make it clear that this is the last such window of respite, even as the necessity for a blanket suspension of IBC at this point in time is not as apparent as it was in the first or second quarter of 2020­21.
• Stretching the IBC’s abeyance, for one,  does not square up with the government’s proclamations of a firm, V­shaped economic recovery.
• Ministry of Finance must know that if the businesses are not competitive, they need no longer be sheltered from exits.
• And if it is concerned about small and medium businesses, it could tweak the default threshold limit a little higher, while letting bankruptcy processes function again for larger loan accounts.
• But a catch­all suspension could burden banks further and does not appear to have enthused industry either. Suspension also cuts off businesses’ ability to voluntarily enter insolvency — for many, post­COVID­19 operations may not seem viable.
• Denying them an exit route so as to cut their losses, while their assets shed value is a lose­lose proposition for both borrower and lender.

Way Forward

• A more nuanced approach would have been better for banks, businesses and the economy.
• Delaying the inevitable would mean greater financial stress ahead, as the restructuring and recovery of bad loans shall get tardier and future growth momentum would be punctured at the cost of understating present systemic stress.