Swaminathan J: Resolution of stressed assets and IBC - the future
road map
Speech by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the
Conference on Resolution of Stressed Assets, and IBC, organised by CAFRAL,
Mumbai, 10 January 2024.
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Director, CAFRAL, Shri B P Kanungo; Shri N S Vishwanathan former Deputy Governor
RBI, Smt. Indrani Banerjee, Additional Director CAFRAL, Shri Diwakar Gupta, Senior
Advisor, CAFRAL, distinguished guests from the financial fraternity; and ladies and
gentlemen.
I am delighted to be present here at this very topical Conference on Resolution of
Stressed Assets and Insolvency and Bankruptcy Code - the Future Road Map. The IBC
notified in May 2016 introduced a comprehensive legislation that introduced a paradigm
shift in the landscape of insolvency and bankruptcy proceedings in India, bringing in a
more structured, institutionalised and time-sensitive approach to resolving financial
distress.
The IBC has been in operation for almost eight years now. Although this time frame is
not very significant in the life cycle of a legislation, the IBC has been an evolving law
with several amendments since its enactment. Last year, the Ministry of Corporate
Affairs released a public consultation paper proposing several amendments including
mandatory admission of applications where default is established, increasing reliance
on records submitted by Information Utilities, streamlining the resolution process, etc.
These as well as some other proposals on the IBC have been a subject matter of
discussion among professionals, bankers, legal fraternity, regulators and other
stakeholders. So, it is an opportune time to review the working of the IBC and discuss
its future course. I am happy to note that CAFRAL has assembled an illustrious list of
speakers covering eminent jurists, policy makers, bankers and resolution professionals
who will enrich this seminar with their varied perspectives.
Let me start this series of sessions and discussion by sharing some of my own
perspectives on this landmark legislation and the road ahead.
Paradigm change brought in by the IBC
Before the implementation of the IBC, there existed a fragmented legal framework
which resulted in protracted and inefficient insolvency proceedings. Various laws and
regulations, each dealing with distinct aspects of insolvency and bankruptcy, co-existed,
creating complexities, overlaps, and occasional contradictions. In the absence of a
comprehensive law, the RBI too had attempted to fill the void with a series of schemes
such as Corporate Debt Restructuring (CDR) Scheme, Strategic Debt Restructuring
(SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A), etc. These
schemes, sometimes fondly referred to as an 'Alphabet Soup' in some sections of the
media, attempted to emulate the desirable features of an insolvency legislation.
The IBC was enacted to fill the legal void felt by the absence of a comprehensive
insolvency law. Its salient features included a unified and time-bound resolution
process, establishment of resolution focussed adjudicating authorities such as the
National Company Law Tribunal (NCLT) and the National Company Law Appellate
Tribunal (NCLAT), as well as the establishment of the Insolvency and Bankruptcy Board
of India (IBBI) to ensure effective regulation of insolvency proceedings and
professionals. The IBC also facilitates corporate insolvency resolution through the
formation of a Committee of Creditors (CoC) and a structured liquidation process if
resolution is not achieved within the specified time, thus contributing to a more
streamlined and transparent system.
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In my view, the IBC meets the five principal criteria of an efficient resolution regime,
namely:
i. Firstly, the resolution regime should prioritise going concern status over
liquidation. Resolution on a going concern basis is generally more valuable than
liquidation of the entity.
ii. Secondly, it should force the creditors to come together and work out a resolution
plan that tries to preserve the value by looking at the options to keep the company
as a going concern.
iii. Thirdly, the resolution regime should ensure a time bound resolution so that value
deterioration for the creditors of an insolvent exposure is arrested.
iv. Fourthly, it must provide claw back of questionable transactions that may have
contributed to the financial stress of the defaulting borrower.
v. Finally, an effective resolution regime should protect the majority creditors from
the minority by forcing a 'cramdown' if the majority creditors decision covers a
predefined threshold of approval.
Positive outcomes
The outcomes of the Code have also played out reasonably well so far. This has
brought in substantial efficiency in the resolution process and improvement in recovery
rates for financial creditors.
From a banker's and supervisor's perspective, amongst the various improvements
brought in by the IBC, the fundamental shift from a 'debtor in possession' to a 'creditor
in control' model is perhaps one of the most impactful. There is growing evidence to
suggest that debtors are avoiding defaults due to a credible threat of loss of control of
their businesses. I believe this improved credit discipline has inter-alia also contributed
to the marked decline in the non-performing assets of banks witnessed in the last few
years.
Challenges and Criticism
IBC, while significantly transforming the insolvency landscape, has encountered
challenges and criticisms. Timely resolution, a crucial goal of the IBC, faces obstacles
may be due to certain operational inefficiencies, leading to delays in the resolution
process. Concerns have been raised about the infrastructure, staffing, and overall
capacity of the NCLT and the NCLAT, impacting the effectiveness of the resolution
mechanism. Evolving provisions for cross-border insolvency also contribute to the areas
where the IBC has faced difficulties.
It is also observed that there are certain discussions playing out about the recovery
percentage through IBC process. The point to be noted is that the IBC is a resolution
framework rather than a recovery framework and any commentary based solely on
recovery percentages may overlook the broader objectives and achievements of this
transformative legislation. While recovery may be an essential component, the true
strength of the IBC lies in its objective to resolve corporate financial stress, preserve
enterprise value, protect the interests of various stakeholders, and thereby contribute to
the overall economic stability. Therefore, a nuanced evaluation that considers the
transformative impact on corporate behaviour, the efficiency of the resolution process,
and the preservation of business value is essential for a comprehensive understanding
of the IBC's success and effectiveness.
The Way Forward
India is aspiring to become a developed country by 2047. But, for that to happen, we
need to fully utilise all the available resources in the country, be it the demographic
advantage, or the physical resources. One of the important enablers of faster economic
growth is the ease of doing business.
An orderly resolution framework is closely related to the ease of doing business,
influencing the business environment in several ways. Businesses operate in a dynamic
environment where there may be success or failure. An orderly resolution process
allows for smoother exit. It reduces capital erosion and facilitates efficient recycling of
capital. Further, an orderly resolution mechanism instils confidence in investors by
providing a transparent and predictable process for handling financial distress.
Businesses rely on credit for their operations and expansion. Orderly resolution and
credit cost are interlinked elements within the financial ecosystem. The Expected Loss
is a key factor that determines this credit cost. Expected Loss in turn is driven by the
'probability of default' and more pertinently to today's context on resolution, the 'loss
given default' or LGD. Therefore, there is a need to make resolution process efficient to
minimise the LGD. Further, when lenders have the confidence that they can recover
their money more reliably and in a timely manner, they are more inclined to lend which
boosts the flow of credit in the economy, thereby supporting business and economic
growth.
From a banker's perspective, it starts at the underwriting stage itself. Bankers base their
decision on the viability of the borrower. However, there is a need to also factor in the
possibility of a stress leading to resolution and potential challenges the lenders may
face in realisation of assets, at the underwriting stage itself.
At the resolution stage, as major creditors, banks also participate in the Committee of
Creditors or CoCs which is entrusted with critical decisions regarding the resolution
process. The CoC representation requires a diverse skill set spanning financial
acumen, legal understanding and industry knowledge. Further, given the time bound
nature of the process, the CoCs need to act with a sense of purpose making a
pragmatic assessment of available options and deciding swiftly. Therefore, banks need
to ensure that their nominees are empowered with adequate authority and experience.
Their active involvement in sharing of information, evaluating and approving resolution
plans as well as collaboration with resolution professionals and other stakeholders is
imperative in ensuring timely resolution.
The success of IBC also hinges on the expertise and proficiency of skilled resolution
professionals. They need to be equipped with a thorough knowledge of the law as well
as have a sound understanding of the nuances of finance apart from strong negotiation
and management skills. I believe the Insolvency and Bankruptcy Board of India is
already conducting various programmes to impart the specialised skills and knowledge
required for resolution professionals. The Indian Banks Association and CAFRAL can
also assist and collaborate with IBBI in such initiatives for effective capacity
enhancement.
From the Government and Judiciary's side, there is a pressing need to invest in building
the capacity of adjudicating authorities, such as the NCLT and the NCLAT, to handle an
increasing caseload efficiently. Adequate staffing, training, and infrastructure of these
institutions will go a long way in expediting resolution. In fact, last year the Government
took measures to fill up vacancies and it is understood that proposals to increase the
strength of adjudicating authorities is also under consideration. Efforts could also be
made to reduce delays at the admission stage itself as well as rationalising the
processes. For instance, I understand that one of the proposals in this regard is the
streamlining of data submission to the Information Utilities (IUs) and allowing admission
based on data available with IUs. Innovative technology-based solutions are also being
explored to facilitate faster disposal of cases.
The introduction of new laws often brings about a period of adjustment and
interpretation as stakeholders, legal professionals, and the judiciary grapple with the
intricacies of the legislation. In the context of the IBC, this phenomenon is heightened
due to the significant stakes involved. Parties involved in insolvency proceedings do file
appeals and review petitions challenging lower court decisions. While there is no
objection to any party seeking legitimate legal recourse, these proceedings have often
been used as delaying tactics by defaulting borrowers and has significantly contributed
to delays in the resolution timeline. One hopes that as the law matures, judicial
interpretation and precedents would emerge to help navigate the nuances, ultimately
reducing delays in future. It is conceivable that certain judicial interpretations may
prompt the need for further reforms, aiming to enhance the efficiency and improve the
outcomes of the resolution regime.
From a reform agenda perspective, there are also some aspects of IBC that merit
further legislative consideration. For instance, there is a need to look at resolution of
conglomerates and addressing resolution of corporate groups. Very often such groups
have intricate corporate structure with inter-connected related party relationship that
add to the complexity and become a hurdle in individual entity resolution. Similarly,
there is the unfinished agenda of a comprehensive resolution framework for financial
service providers such as banks, non-banking financial companies and insurance
companies. In the absence of an IBC like legislative framework for resolution of
financial institutions, the IBC has been used for resolution of NBFCs. I would imagine
that this conference will get to debate these and several other measures that can be
thought about to bring in a more efficient IBC process in the days to come.
Conclusion
To conclude, the IBC is a landmark legislation which completely transformed the
insolvency and resolution framework in the country. There is a visible improvement in
the credit culture as evident from the marked decline in NPAs and increased resolutions
even before the admission stage. Further, significant foundational work has been done
by the Government and it is expected that the next set of reforms once legislated by the
Parliament would further strengthen the IBC. However, there is always scope for
improvement, especially with regard to the timeliness of the resolution process.
With these closing remarks, I once again thank CAFRAL for this opportunity to share
my thoughts here today. I am sure the deliberations and insights shared by esteemed
participants will contribute to the wealth of knowledge in the field of insolvency and
bankruptcy, fostering innovative solutions and paving the way for a more robust and
efficient financial landscape. I sincerely hope that the outcomes of this conference will
not only benefit the participants but will also have a far-reaching impact on the broader
economic ecosystem. Wishing the organizers, speakers, and participants a truly
enlightening and successful event ahead. Thank you.
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Resolution of Stressed Assets and IBC, Speech delivered by Shri M Rajeshwar Rao,
Deputy Governor, RBI on April 30, 2022 at the International Research Conference on
Insolvency and Bankruptcy held at IIM Ahmedabad.