IBC Tweak to Resolve MSME Bad Loans is a necessary evil, but caveats are in order
If further evidence is required, the modification of the insolvency and bankruptcy code announced yesterday (April 5) through an ordinance shows how the fundamentals always unravel at the edges when they collide with the hard rocks of Indian reality.
The key element of the changes, which will only apply to stressed loans in the micro, small and medium enterprise (MSME) sector, is that the defaulting promoter (partner or board of directors or owner) can propose a resolution by finding a buyer of their choice. without first entrusting the control to a resolution professional (PR).
Although creditors are not obligated to accept the resolution proposal presented by management or the board (they can end this “pre-packaged” pre-IBC resolution plan with a 66% vote), it is likely many banks will opt for resolution when conditions are reasonably good.
It is not appropriate for banks to pursue a resolution process indefinitely using the normal route of the National Company Law Tribunal (NCLT) on small loans that they may already have on their books or have the ability to write off.
This “prepackaged” resolution process essentially mocks a fundamental principle underlying the IBC process, that defaulters are excluded from control of their business once a business files for bankruptcy.
After the changes, the potential for abuse of the system can be enormous, as crooked promoters can then default on purpose and ask the banks to write off a substantial portion of the loan. Or they can use related parties to buy them out, reducing the burden on their loans.
In other words, this so-called resolution may – in practice – become another form of permanent renewal of non-repayable loans, which the regulator has frowned upon in recent years. It might look good on the bank books to have a regular loan, but the rot remains hidden you can try https://oakparkfinancial.com/
The only guarantee is that even this bypass route to resolving MSME bad debts will need the NCLT’s imprimatur, but given the large number of these cases involved, NCLTs are unlikely to throw a wrench into the works. when the creditors agree with it.
Clearly, a fundamental principle of the IBC is violated or stretched by not allowing more fair and open offers for the assets in question.
But we need to ask ourselves a more fundamental question before we dismiss the roughly tolerable workaround in favor of the unattainable ideal of CIB: do we want a solution to the problem of the thousands of stressed small loans, where the economic costs of failure? recovery through the IBC process may well outweigh the moral hazard involved in allowing some unscrupulous promoters to get away with the murder, or should we stick to the principle and leave the process drift into nonsense?
It’s best to swallow the poison of the occasional fraud and let the honest multitudes jumpstart their businesses without being subjected to the time and cost delays of the IBC process.
The MSME sector has been the sector most negatively affected in India due to the Modi regime’s struggle against crony lending, tax evasion and the cash economy.
Formalization and compliance have been the theme of the songs, and small businesses have come under the brunt of demonetization, the goods and services tax, and the economic collapse of Covid. So to hold onto a high principle when almost the entire industry is under some degree of stress makes little sense.
When taxes are not collected, governments adopt voluntary disclosure systems that are blatantly unfair to those who play by the rules. But we sacrifice the principle for the benefit of the practical. We do the same here with the prepackaged resolution process for MSMEs.
The IBC tweak can be defended for practical reasons, but there is a caveat: we must not allow the core principle to be entirely hijacked by slowly expanding the process to all kinds of businesses, large and small. It would be a travesty – and a defeat for one of the most important pieces of legislation of the Modi government. Considering that defaulters pay no cost for their mistakes, this would only encourage more fraud, not less.
It is okay to sidestep certain principles when they are impossible to implement, but neither can we end up like Groucho Marx. He joked, “These are my principles… and if you don’t like them, well I have more.”
IBC can be fine-tuned, but not a formal cremation where the basic principle is sacrificed little by little.