Govt should now focus on strengthening the NCLT
The government has done well not to extend the Insolvency and Bankruptcy Code (IBC) suspension, which ended on Wednesday. This will enable resuming normal activity under the Code. The corporate insolvency resolution process was suspended in March 2020 for six months because of Covid-19-related disruptions, and was later extended twice for three months each. The idea was to protect firms from being dragged into the insolvency process for potential defaults because of Covid-related shutdowns. A complete halt in operations for months can make debt repayment difficult even for better-run companies. While the government’s initial intention was right, the suspension should not have been extended to a year. Enough safeguard has already been taken to reduce the pain for tiny companies as the government has increased the default threshold for initiating the insolvency process to Rs 1 crore.
Ideally, the process should have started with the resumption of economic activity. The moratorium extended for repaying term loans, for instance, ended in August, though the classification of accounts as non-performing was held up until this week on the Supreme Court’s directions. A blanket suspension of the IBC process for a year has also ended up protecting firms which may have defaulted for reasons other than Covid-related disruption. Such firms would only end up blocking capital and increasing non-performing assets (NPAs) in the banking system. It is also important to recognise that some businesses may not be able to recover from the shock despite all kinds of regulatory forbearance. The system should be prepared to deal with such cases. In fact, as things return to normal, the IBC process could be the best way forward to address the Covid-overhang and improve capital efficiency, which would also enable a faster recovery.
The resumption could lead to an uptick in the number of cases because of Covid-related stress, though experts believe that it will not be very high. Anyway, the focus should now shift to operational issues. To its credit, the government has worked proactively in the context of this law to allow it to serve the intended purpose. It should now aim to increase the capacity in the National Company Law Tribunal (NCLT) for faster resolution. As reported by this newspaper, about 75 per cent of the cases are older than 270 days. It is also clear that benches handling a higher number of cases take more time. The resolution time in Delhi and Mumbai, for instance, is over 475 days, compared to the national average of 440 days. The overall timeline increases significantly if the time taken by the appellate tribunal and courts is accounted for. Clearly, this needs to be brought down to have a meaningful impact. The latest Economic Survey also highlighted the need for improving judicial infrastructure in the NCLT, debt recovery tribunals, and appellate tribunals for a faster resolution of bad loans.
To be sure, the need for strengthening the insolvency resolution framework cannot be overemphasised. It is the most potent tool for lenders to enforce credit discipline. It is also critical for the Indian banking system dominated by public-sector banks. Bankers in the public sector are usually reluctant to adopt other measures to address bad loans due to the fear of investigating agencies. According to the Reserve Bank of India, gross NPAs in the banking system are expected to rise to 13.5 per cent by September. The IBC process will help the banking system deal with the stress.