Insolvency and Bankruptcy Code (IBC) and Long-Term Bulk Lending in India

Executive Summary:

Setting up Development Finance Institutions (DFIs) was and remains one of the ways that the central government has promoted financing of long-term projects. These attempts have included establishing a range of DFIs, including the National Bank for Financing Infrastructure and Development (NaBFID) in 2021 and an Asset Reconstruction Company (ARC) to hive off bad debts from the balance sheets of banks to help them resume long-term lending. The NaBFID has been set up as an unlisted government corporation. Consequently, it will be outside the regulatory purview of the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

Long-term lending in India has been shouldered mostly by banks and large non-deposit taking non banking finance company (NBFCs). Within the banking sector, it is public sector banks which provide a bulk of the loans with longer term maturities, invariably via consortium lending to share unquantifiable credit risk. For the past several decades, some private sector borrowers of large volumes of loans have taken advantage of the interminable delays in resolving debt defaults. Such defaulting borrowers have either stripped assets from their bankrupt firms or used India’s labyrinthine legal processes to wrest back control after obtaining substantial haircuts on the amounts owed by them.

The paper examines the effectiveness of the 2016 Insolvency and Bankruptcy Act (IBC) as the most recent legislation to enable quicker resolution of disputes between borrowers and lenders thus encouraging higher volumes of long-term lending. The Sick Industrial Companies (Special Provisions) Act (SICA) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) were passed by parliament in 1985 and 2002, respectively.

In practice, the mechanisms set up under these two Acts including Debt Recovery Tribunals (DRTs), took a long time, even decades to resolve cases involving bankruptcies and liquidation. The initial sections of the paper provide the context of long-term domestic credit in India and in other large economies, the relative size of the Indian equity market and investments made by institutional long-term investors such as insurance companies.

The overall efficacy of the IBC is examined including whether the time taken to resolve disputes between lenders and borrowers has shortened significantly. The role of the Insolvency and Bankruptcy Board of India (IBBI), set up under the IBC, is reviewed as also that of Insolvency Professionals (IPs) and Committees of Creditors (CoCs).

Between 2010- 2019, the Reserve Bank of India modified its regulations several times to address difficulties faced by banks and other lenders. Despite the continuing efforts of financial sector regulators, it is taking longer than anticipated to arrive at IBC driven court judgements. Delayed court judgements have occasionally resulted from legal stratagems used by borrowers to avoid meeting their contractual obligations even as they resort to asset stripping. Vacancies on the benches of the National Company Law Tribunals (NCLTs) & National Company Law Appellate Tribunals (NCLATs)1 and at times lack of domain knowledge have contributed to delays in resolutions of bankruptcies. Systemic delays in addressing large volume bankruptcies reduces the appetite for term lending, resulting in shortages of funding for infrastructure and other long gestation projects.

This paper suggests that in addition to tightening of banking sector regulations for defaults, court processes need to be expedited since such delays can overwhelm all other efforts to conclude timely resolution of bankruptcies. Lengthy bankruptcy resolution makes bulk long-term project financing unviable for lenders and the Indian economy pays a significant price in terms of foregone growth.

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