There is a need to look at resolution of conglomerates as part of IBC reforms agenda: RBI Deputy Governor Swaminathan
There is a need to look at resolution of conglomerates and address resolution of corporate groups as part of the reform agenda for the Insolvency and Bankruptcy Code, according to RBI Deputy Governor Swaminathan J.
“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,” Swaminathan said in a recent speech at the Conference on Resolution of Stressed Assets, and IBC organised by CAFRAL.
The primary objective of the Insolvency and Bankruptcy Code (IBC), 2016, is to provide relief to corporate debtors in distress.
“In India, credit contracts are often embedded with cross obligations and credit risk mitigation covers provided by parent and group companies of the borrower,” he said.
“In such a system, a default by one borrower is likely to spur cross defaults by group companies, thereby increasing the overall credit risk to the financial system,” according to the Report, Trend and Progress of Banking in India 2021-22.
A group resolution framework, in which the resolution of borrowers belonging to the same corporate group if undertaken together, could help in improving the efficacy of the IBC, it added.
Unfinished agenda
The Deputy Governor also underscored that there is an unfinished agenda of a comprehensive resolution framework for financial service providers such as banks, non-banking financial companies (NBFCs) 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, the Deputy Governor said.
He noted that 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,” Swaminathan said.
Given the time bound nature of the (corporate insolvency resolution) process, the Deputy Governor emphasised that the Committee of Creditors (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.
- Also read: Fintechs welcome RBI’s draft norms on SROs
Delaying tactics
Swaminathan observed that 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,” he said.
Resolution vs recovery framework
Referring to certain discussions playing out about the recovery percentage through IBC process, the Deputy Governor underscored 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,” he said.
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.
CRISIL Ratings, in a November 2023 report, said in terms of value, the IBC has helped resolve Rs 3.16 lakh crore of debt stuck in 808 cases in the past seven years. On average, creditors have realised 32 per cent of the admitted claims and 169 per cent of the liquidation value.
Other mechanisms had an average recovery rate of 5-20 per cent, which underscores IBC as the one with higher recovery for lenders.