The government has finally decided to show some tough love to loan defaulters. The amended Insolvency and Bankruptcy Code, 2016 prevents not just wilful defaulters, but all promoters who missed repayments for over a year from wresting back control. Creditors, loaded with a $150 billion toxic NPA pile, can now resolve cases with a grown-up attitude as opposed to taking baby steps.
Borrowers see it as an iron fist as some defaults could be genuine, and painting them all with the same brush is like asking everyone to drive in second gear irrespective of the road conditions. But there’s no denying that laxity appeals to losers latching onto companies destined for the scrap heap without an effective turnaround plan.
For decades, the system has been doing just that: protecting debtors and allowing assets to rust away. As Asia’s richest banker Uday Kotak pointed out, prior resolution mechanisms were unreasonable, as ‘one had to wait till the cows come home to realise the debt.’ There were no meaningful recoveries, which stood at a dismal 25.7 cents to a dollar as on 2016, as opposed to 89.7 cents in Singapore.
It is perfectly normal for some businesses to fail. Unlike in the past, the Code makes the distinction between insolvency and bankruptcy and between malfeasance and failure. However, its practical implementation is proving to be a challenge. Default resolution is and will always remain unique to each situation and dealing with owner-managers underpins the Code’s success.
The Code in its current form is only a skeletal structure. The flesh and blood will be provided by successful resolution. Rolled out last December, it had a good start, but the battle is half won. One year is probably too short for a verdict and it may have to undergo further changes. Some key details are still hazy, but one thing is clear: For borrowers, the days of cheese-paring debt are over. If a company has to survive, borrowers have to repay or make way for someone else.