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The government should restart the Insolvency and Bankruptcy Code (IBC) process, suspended since March 25, 2020, to revive the economy. Simply extending the moratorium will only add to the stress in the system, without bringing relief to companies or banks. Resuming insolvency resolution would give companies a chance to rehabilitate themselves, when they have worked out plans to that end with creditors and file for voluntary insolvency, without government agencies or utilities throwing a spanner in the works with their efforts to recover their dues. Those that cannot be rehabilitated would have their assets efficiently redeployed.
Speed is of the essence when a company goes into distress, to improve the chances of the company’s turnaround or being sold as a ‘going concern’, maximise the value of the asset being resolved, lower haircuts for lenders and reduce the burden on the taxpayer. All Covid-related debt is exempt now from the definition of default under IBC, and banks will not count the moratorium period for classifying a loan as non-performing. Small enterprises have been fortified on account of an increase in the threshold for invoking insolvency to Rs 1 crore from Rs 1 lakh. So, lifting the moratorium is unlikely to result in a huge surge in the number of fresh insolvency resolution cases — around 4,008 insolvency cases were raised over December 2016-September 2020. Lenders also have other options that include RBI’s prudential framework that gives banks the leeway to draw a resolution.
Prepackaged insolvency resolution, instead of the financial bidding process, makes sense for MSMEs, and will reduce the burden on bankruptcy courts. The government must operationalise the fund of funds schemes to infuse equity in troubled small companies, and find alternative ways to help the vast majority of non-incorporated entities in the MSME universe. It should also quickly operationalise the proposed bad bank, institute third-party valuation of assets to be transferred and stop criminalising actions taken in good faith.
This piece appeared as an editorial opinion in the print edition of The Economic Times.