Given how dodgy loans (stressed advances) with India’s banks have risen dramatically, from 5.6% in March 2011 to 11.3% in September 2015, it is obvious a quick solution to this is critical for both Indian banks to be able to lend faster as well as for corporate India to be able to borrow to be able to step up investments—if company books are in the red, who’s going to lend to it? Though some companies have, over the past year, been trying to sell off various assets, things haven’t improved much for a variety of reasons. In many cases, for one, sales were made to equally debt-ridden companies; in other cases, since the assets sold were also the most productive, the debt profile of the residual company has worsened. That is why, as the third version of Credit Suisse’s House of Debt series shows, while overall debt of 10 corporate groups has risen seven times in 8 years, the interest cover—ebit-to-interest—has fallen from 0.9 in FY14 to 0.8 in FY15, indicating more defaults can be expected to take place over the year; worse, a large share of this debt is falling due over the next 12 months. Indeed, anywhere between 40-65% of the $120-billion debt of these top 10 stressed corporates—this accounts for 12% of bank loans—has already been downgraded to D, for default, with the ratio at 65% for the Jaypee Group and 38% for Lanco.
Over the years, various governments have come up with various solutions, from the Sick Industrial Companies Act (SICA) of 1985 to the Recovery of Debt Due to Banks and Financial Institutions Act of 1993, the Sarfaesi Act of 2002 and a revamped Companies Act of 2013. The processes, however, take forever. An analysis by Sharma/Tyagi/Garg in this newspaper found that about 50% of the cases referred to the BIFR between 1987 and 2014 took 5.1 years to proceed and the remaining 50% remained stuck—it takes BIFR around 5 years to decide on winding up a firm and more than 7 to decide on a rehabilitation scheme; oddly, while BIFR adjudicates on the viability of a firm, the high courts supervise liquidation. And, as we have seen in the Kingfisher case, it takes years for creditors like banks to get anywhere near the money even after very clear default on loans.
This is what the new Insolvency and Bankruptcy Code seeks to resolve by consolidating all laws and make one body—the National Company Law Tribunal (NCLT) for firms and Debt Recovery Tribunals for individuals—responsible for resolution of insolvency, liquidation and bankruptcy. While a time limit of 180 days has been fixed for deciding on cases, the most important change is that no civil courts will have any jurisdiction on the issue and, if there is any appeal against the order of the National Company Law Appellate Tribunal—this is the appeals court for NCLT rulings—this will be directly to the Supreme Court, and only on a question of law. Since this is not a Constitutional Amendment, it should be possible to pass it in the Rajya Sabha with the help of non-Congress Opposition parties—which is why finance minister Jaitley has done well to refer the Bill to a joint committee of Parliament instead of trying to classify it as a money Bill where the Opposition could not stop its passage. With the Supreme Court upholding the constitutionality of the NCLT, the challenge is to build up the NCLT and its benches across the country.