Insolvency resolution Bad bank to deepen IBC use: IBBI chairman MS Sahoo

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February 9, 2021 12:40 AM

Asked if the so-called bad bank, proposed in the Budget-2021-22, will in any way reduce the attractiveness of the insolvency and bankruptcy code (IBC) as a tool for bad debt resolution, Sahoo said, on the contrary, it will deepen the use of the Code.

The bad bank will specialise in the resolution of stress and will be better placed to choose the best option for resolving bad debt, he said.

The number of insolvency cases is unlikely to jump substantially after the one-year suspension of bankruptcy proceedings against Covid-19-related default is lifted from March 25, Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo told FE.

Asked if the so-called bad bank, proposed in the Budget-2021-22, will in any way reduce the attractiveness of the insolvency and bankruptcy code (IBC) as a tool for bad debt resolution, Sahoo said, on the contrary, it will deepen the use of the Code. The bad bank will specialise in the resolution of stress and will be better placed to choose the best option for resolving bad debt, he said.

Moreover, the bad bank would expedite decision-making by the committee of creditors, as, in most cases, it will have the voting power required for approving the resolution plan (66%), given that various lenders will transfer their toxic assets to it, he suggested.

Even the special insolvency framework for MSMEs, suggested in the Budget, will be “tailor-made” for the resolution of stress among these small businesses in recognition of their unique characteristics, Sahoo added.

“The number of applications for initiating insolvency is likely to increase (once the suspension is lifted), but the increase may not be significant,” he said. It is because stakeholders are not barred from invoking the IBC from resolving pre-Covid stress (defaults that occurred before March 25, 2020).

Similarly, other options for stress resolution, including the scheme of compromise or arrangement under the Companies Act, 2013, and the central bank’s prudential framework, are already being tapped by creditors, Sahoo said.

Moreover, viable companies would witness normal cash flow once the pandemic subsides, so their ability to pay off debt would improve dramatically. Finally, the hike in the default threshold (Rs one crore against Rs one lakh earlier), announced last year, for initiating insolvency proceeding would keep most MSMEs out of it.

“Nevertheless, being fully aware of the need to provide commensurate NCLT capacity, the government has proposed in the budget that NCLT framework will be strengthened and e-Courts system shall be implemented,” Sahoo said.

Commenting on the proposed framework for small businesses, he said: “MSMEs are different from other companies in many ways for the purpose of resolution. They generally have loans from informal sources, which do not have access to resolution frameworks as available to banks. Many of them do not have stamina to sustain a full-fledged CIRP-style resolution process.

Similarly, the value of an MSME often lies in informal arrangements, making it difficult for a third party to harness value through a resolution plan. “The market for resolution plans for an MSME firm is local, while the entire globe is the market for a bigger firm; etc. In recognition of their uniqueness, a special framework, tailor-made for resolution of MSMEs is under consideration,” he added.

As for the bad bank, Sahoo said, it will specialise in the resolution of stress, which, in turn, will “build business acumen to distinguish between financial stress and economic stress and then adopt the right strategy to resolve the stress.” It will also develop the professional capability to evaluate the feasibility and viability of resolution plans to approve the best of them.

“Further, the process of decision-making by the committee of creditors will be smooth as the ‘bad bank’ will have in most cases the voting power required for the decision. Thus, the ‘bad bank’ will be better placed to use the IBC, and this will improve outcomes from IBC processes,” Sahoo said.

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