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Is IBC 2016 is a the right step ?
Before this IBC legislation, the debt recovery system in our country took an average of four years to resolve insolvency. That's far too long and inexcusable, especially given the Prime Minister's and our country's efforts to improve the ease of doing business in India.
Despite the fact that this IBC 2016 is a step in the right step, having magnitude of bad loans, particularly to large enterprises that have borrowed in the three or four digit millions of dollars, I believe it is insufficient for a number of reasons:
- Does not prevent the accumulation of bad loans — banks that require a dozen different sorts of documentation from individuals for a INR 5,00,000/- personal loan are disbursing loans worth 100 crores without enough security. The lending standards process must be tightened, and banks must face rigid consequences if they break them. We haven't done anything to restore the hole in the pipe while trying to wipe up the spilled water with a cloth.
- The timeline is excessively long — the resolution period is 180 days, with the possibility to extend it by another 90 days, for a total of approximately nine months. During this time, we're debating whether or not to liquidate a defaulter's assets. Does a regular person have this luxury if his or her loan EMI is not replayed for past months?
- Bad Loan restructuring is still an option – under the IBC -insolvency process, corporations can persuade lenders to extend loans further. As a result, a kingfisher-style scenario in which someone obtains a fisher 2000 crore loan for the revival of the current 5000 crore debt is even achievable.
- With the magnitude of bad loans that our Indian banks have, if it takes nine months to begin liquidation & another 2-3 months to actually sell the assets, banks are looking at years of negotiation before they can recover any money on their bad books. This is all taxpayer money that has been used to write off or cover losses, which is unjust because banks have no incentive or purpose to change their ways/ behaviour.
- It's past time for rules to be modified to punish company fraud or fraud by businessmen and bank indiscriminate lending — this was my anticipation from this act, but the real result is to a slap on the wrist for a murder.
Our suggestion:
- Before approval of a large corporate loan, banks should obtain collateral from well-known brands/corporations & verifying that the collateral is real and free of encumbrance.
- Banks should not grant loans to businesses that are beyond their ability to repay.
- NPAs (Non-Performing Assets) should be tracked from the start and appropriate action be taken to treat them as soon as possible rather than allowing them to grow to a significant amount/size.
- Insolvency, although being the last resort, should only be used when absolutely necessary and must be accompanied by jail rather than allowing a person to move freely.
