The Bankruptcy Code isn't broken, bit it still needs fixing
The govt needs to make the Insolvency and Bankruptcy Code speedier, more transparent and hazard-free.
Two features of the regulatory regime have been central to the current malaise in India’s financial sector. First, until 2015, contrary to international best practice, RBI rules permitted banks to classify restructured loans as standard assets rather than downgrade them to non-performing status.
Second, until the Insolvency and Bankruptcy Code (IBC) came along in 2016, the process of exit for defaulting firms and recovery of loans from them was cumbersome, costly and protracted.
In good books
Fearful that recovery of loans in default would be partial and take a long time, bank managers preferred to restructure loans before they went into default. Under the rules, restructured loans retained their status as standard assets. The incentive to follow this practice was especially high in public sector banks (PSBs), since any write-downs on loans in the event of default and partial recovery carried the risk of attracting the attention of vigilance agencies. As a result, restructured loans with little prospect of full recovery piled up, especially on the books of PSBs.
Fearful that recovery of loans in default would be partial and take a long time, bank managers preferred to restructure loans before they went into default. Under the rules, restructured loans retained their status as standard assets. The incentive to follow this practice was especially high in public sector banks (PSBs), since any write-downs on loans in the event of default and partial recovery carried the risk of attracting the attention of vigilance agencies. As a result, restructured loans with little prospect of full recovery piled up, especially on the books of PSBs.