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Does India Have Strategy For Its Bankruptcy Policy? – OpEd


It is often said that industries may become sick but the industrialists owning them rarely become sick. While several sick industrial units and commercial establishments default on the loan and interest repayment and owe several thousands of crores of rupees to the banks and other financial institutions , the directors of most of such units lead an affluent life with high salaries and perks, benefits and privileges. Obviously, the sickness of the industries are not reflected on the owners of the units in most cases.

In the past, the government and the banks have been dealing with these sick units with soft gloves, providing them interest waivers, additional loan and revised repayment schedules. Still, in many cases, their financial conditions have not improved and the exposure of the banks to these units have only increased causing more discomfort to the banks.

The demand of farming community

Such scenario has caused heartburn among the people in the vulnerable sections of society such as farmers and fishermen who also default in payment of loans and interests but are harassed by the lending institutions that demand repayment. This scenario explains the recent demand for waiving of farmers’ loans all over India by the farming community. The farmers ask that when huge corporate loans and interest are waived by the banks with the so called objective of reviving these corporate entities, why such “courtesies” could not be applied to the vulnerable farming community too.
On the face of it, this appears to be a legitimate question though the economic pundits will not agree.

Does Modi government have a strategy?

The present decision of the Modi government to implement Insolvency and Bankruptcy Code (IBC ) has been received with much appreciation all over India. President of India had approved an ordinance amending the Banking Regulation Act, 1949, giving more powers to Reserve Bank of India in dealing with the non performing assets (NPA) , which indicate the resolve of the Modi government to sort out the NPA problem once for all.

The extent of the prevailing NPA can be gauged from the fact that around Rs. 10 lakh crore of loans are either non performing or stressed. This is roughly 12% of the total loan extended by the banks and other financing institutions. It is reported that Reserve Bank of India has shortlisted 12 accounts (defaulting companies) each more than Rs. 5000 crore, for resolving via Insolvency and Bankruptcy Code. 60% of the amount has already been recognized as NPAs. Reserve Bank of India is reported to be planning to announce 6 more bankrupt companies soon.

Now, the million dollar question is what will the banks do with these large sick companies after announcing them as bankrupt companies ? In any case, most of these companies are not in a position to repay their debts in the present circumstances for whatever reasons.

Now, that the Modi government has taken the plunge and has implemented the Insolvency and Bankruptcy Code , one is not sure what is up in it’s sleeve and one wonders whether Modi government has any particular strategy in dealing with the defaulting and sick companies.

Can bankruptcy law be implemented without affecting growth?

Will the decision to declare the companies as bankrupt result in their being closed and ceasing operations? This would create several other problems like loss of employment, loss of production and loss of invested resources apart from the loss of investment to thousands of small level equity holders, who may have invested their life long savings and post retirement benefits, in these companies.

Obviously, such issues have forced the governments in the past not to rock the boat too hard when dealing with the defaulting corporate bodies.

The pragmatic method should be to find a way to enforce the Insolvency and Bankruptcy Code without leading to closure of the units. Is it possible in the present situation is the question.

Of course, many of these defaulting companies have huge assets such as land , plant and machinery and infrastructure. The banks may be able to monetize them straightaway to recover part of their loan but this would be a counter productive solution ,that will virtually destroy the units with consequent several problems for the country like loss of employment etc.

While the bankruptcy code will alleviate many of the financial obligations of the defaulting companies, still they may not be enough to revive the companies without additional fund flow and investment. The question is who will invest in such sick companies , some of which may be facing fundamental issues like product or technology obsolescence, faulty basic designs etc.

Of course, by enforcing the bankruptcy code, the banks may try to persuade the creditors to take over the company by converting the debt into equity. But, in many cases, the creditors may not have the expertise or more investment capability to bring about revival of the units.

Alternately, the banks may have to persist with the existing management and promoters and provide them more sops. This will make the banks and financial institutions a laughing stock.

Does Modi government have a forward plan?

The post bankruptcy scenario for the individual corporate unit is hazy and uncertain. This possibility makes one suspect whether the Modi government is moving with it’s much needed bankruptcy policy without a forward plan. If it has one, it has not so far revealed it to the country men in a convincing manner.

One sensitive question

Finally, one sensitive question that Modi government would face is whether the inefficient or dishonest promoters of the sick companies who have brought the companies into such sorry state of affairs would be allowed to go scot-free, without being punished by the bankruptcy law.

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N. S. Venkataraman

N. S. Venkataraman is a trustee with the "Nandini Voice for the Deprived," a not-for-profit organization that aims to highlight the problems of downtrodden and deprived people and support their cause. To promote probity and ethical values in private and public life and to deliberate on socio-economic issues in a dispassionate and objective manner.

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