Don't undermine the IBC

Many lenders and several companies, which figure in the Reserve Bank of India’s (RBI) second list for the resolution of non-performing assets (NPAs) are reportedly lobbying with the central bank for more time even as the deadline of December 13 nears. If debt resolution is not finalised by then, the 28 firms in the list will end up in the National Company Law Tribunal (NCLT) for the next step in the insolvency process. At that point, banks will have to provide for losses up to 50 per cent of the loan value, hitting their earnings. This, in turn, will adversely affect their profitability, which is already under stress as more and more NPAs have been formally recognised over the past few years. Apart from the fear of higher NPA provisioning, there are several other reasons – sometimes even contradictory – that have been put forward by the bankers as well as the firms, which face initiation of the insolvency process.  

In some cases, banks want an extension of the deadline as no major progress has been made on debt resolution. In other cases, more time is being asked for because the resolution process has reached an advanced stage of completion. Some others such as the Indian Chamber of Commerce (ICC) have written to the RBI, requesting an extension of the deadline to March 31, 2018 on the ground that the Insolvency and Bankruptcy Code (IBC), under whose aegis these proceedings are being conducted, is a new code and banks need more time to understand the provisions. It is also being argued that finding a bilateral solution to the NPA problem is a better alternative than bankruptcy of firms and its likely impact on unemployment.

Lenders also say the Ordinance amending the insolvency code practically debars a whole host of entities – in particular, the original promoters – from taking part in the resolution process. This has disrupted the debt-resolution process and, consequently, more time is required as greater clarity emerges about the impact of the Ordinance. Some banks, which have NPAs lower than Rs 5,000 crore in individual entities, have also pointed towards the RBI’s intention of coming out with separate guidelines for such NPAs.

However valid these excuses may appear on the surface, the fact is that an extension of the deadline is not warranted. It is more likely to set a bad precedent for the future and open up the RBI to problems of moral hazard by providing it with the discretionary power to tweak common norms and deadlines to suit one firm or bank over another. The regulator should be seen to be fair and not be party to arbitrary tweaks to established norms, putting a question mark over the sanctity of the entire process. In any case, extending the deadline at this stage would be unfair to the RBI’s first list of 12 big companies, which account for 25 per cent of the total NPAs. Lastly, the IBC was put in place after several attempts at resolving NPAs failed. The central idea, and indeed its chief merit, was to provide a time-bound and speedy resolution of bad debt. That goal should not be undermined.

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