The Haircut in the IBC and CIRP

The background -- 

 The 'haircut' in the context of Insolvency and Bankruptcy Code (IBC) is the amount forgone by the banks or the creditors, out of total amount of outstanding debt, during the process of recovery of bad debt. It is learnt that, in at least 363 major NCLT resolution cases since 2017, banks have taken an average haircut of 80%.  (Source -- Data from the Insolvency and Bankruptcy Board of India (IBBI))

The high level of such ratio is upto 95% or even more than that for a few cases and it is known that the parliamentary panel also had questioned the government for such high ratio agreed upon by the public sector banks. The government's reply was of very less liquidation value in such cases. It was argued that such ratios are a matter of commercial settlement and depend upon the residual value of the assets. So any upper limit for the haircut cannot be fixed in the law.

This much is known to all economists and the concerned commentators. The points that go without discussion and debate are the question as who should bear that loss and why and the fate of the willful defaulters.

 

The main points for debate --

The deposit holders are protected by way of deposit insurance. But there is an upper limit on that, which is now raised from Rs. 1 lakh to 5 lakhs. That is anyway inadequate and improper too, as the risk of loss is pushed to the innocent deposit holders. There should be clear provision in the IBC that the loss arising from such haircut shall not be passed on to the deposit holders. 

The 2nd point is the liability of the willful defaulters (the office bearers) and their eligibility for applying for new debt or for occupying the positions of authority in other enterprises funded by the public sector banks and other bodies. Nothing appears discussed on this topic. The concerned persons should not be allowed to escape. Many people are seen eager in taking objection to the loan waiver for the farmers. The same objection should apply to such haircut also, as it is an indirect form of the loan waiver. It is quite likely that many persons may not be aware of the concept of haircut.


My suggestions --

The 1st suggestion is of introducing some insurance schemes for the office bearers of the borrower companies and other enterprises, as the cover for their personal liability. That will open up new business avenue for the insurance business. 

The 2nd suggestion is of introducing similar insurance schemes for the office bearers of the creditor banks also, as the cover for their personal liability for the shortcomings in conducting the feasibility and subsequent failure in monitoring the performance of the borrowers. That will open up new business avenue for the insurance business. 

The 3rd suggestion is of introducing a mechanism for assessing and monitoring the market value of the ventures and the underlying assets on regular basis, during regular repayment period, till the full debt is repaid. It seems that the banks and other financial institutions fall short of tracking that.

The 4th suggestion is of linking the recommendations of all successive Pay Commissions, for the management and the officers of the public sector banks and financial institutions, to the timely recovery of all debt.


It is highly unlikely that my suggestions will be acceptable to the economists and the policy makers. In spite of that, these should become the subject of wide spread public debate.

Last updated on 2022.07.29. (First uploaded here on 202.07.29.)

 

 

 

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