New law may not hasten debt recovery

A long-awaited Indian bankruptcy code may soon win parliamentary approval, but struggling creditors – above all state banks trying to recover $100 billion in bad loans — shouldn’t start celebrating just yet.

The measure marks a vital step towards completing India’s quarter-century-old transition from socialism to a market economy that has so far been unable to adequately address what to do when companies fail.

For Prime Minister Narendra Modi’s drive to ‘Make in India’, encouraging new investment depends on unburdening creditors of old ones that have failed. The stakes are high: India has the world’s fastest growing big economy, but is not creating enough new jobs.

Bankers back the new bankruptcy code, which would impose debt deadlines on failed firms and foresees up to five years in jail for debtors who conceal property or defraud creditors. “This will speed up the process,” said R.K. Gupta, an executive director at State-run Bank of Maharashtra.

Experts caution, however, that under the British-style bankruptcy code it would take years to train up a new class of insolvency professionals and compile proper debt records. A backlog of 70,000 liquidation cases will take time to clear.

A parliamentary panel has just cleared the bankruptcy bill after a four-month review, recommending amendments to let creditors go after the foreign assets of defaulters who until now have often been able to stay out of reach.

The new law would allow any creditor, in the event of a default, to trigger an insolvency resolution pro-cess that should typically be completed in 180 days. If 75 per cent of creditors agree on a revival plan, that term can be extended by 90 days. Otherwise, a firm would be automatically liquidated.

The accumulated backlog of unsettled loan default cases in debt recovery tribunals has risen by 12 times over three years to $57 billion through March 2015, the latest Reserve Bank of India data shows.