Impacts of suspension of Insolvency and Bankruptcy Code

Context: The government has decided to keep the critical provisions of the Insolvency and Bankruptcy Code (IBC) of 2016 in a state of suspension till March 31, 2021. 

What is the ordinance? 

• The government had raised the threshold of loan defaults that would spark off IBC proceedings from ₹1 lakh to ₹1 crore on the day of the lockdown’s announcement. 

• An order, in June, indefinitely barred the beginning of insolvency proceedings(IBC) for defaults arising on or after March 25, 2020, for a period of six months that could be stretched to a year.  

What are the possible effects of such a move ? 

• On recovery: Since there is a relaxation in IBC, It could act as an hindrance to the government’s proclamations of a V-shaped recovery. 
• On sectors: Businesses in the sectors, which are returning to the pre-COVID levels may not be required to be protected from exits if they are not competitive. 
• On small and medium businesses: If the government is concerned about small and medium businesses, it could squeeze the default threshold limit a bit higher, while letting bankruptcy processes function again for larger loan accounts. 

• On banks: A catch-all suspension may burden the banks further. 
• On the industry: Cutting off the ability of businesses to enter insolvency voluntarily may also act against the interests of the industry. 
• On borrower and the lender: In the absence of an exit-route, the assets of the firm would lose value. Thus, it would negatively affect the lender and the borrower. 

 What is the way forward? 

• A more nuanced approach would have been better for banks, businesses and the economy. Delaying the unavoidable would mean greater financial stress ahead, as the restructuring and recovery of bad loans shall get slower and future growth momentum would be pricked at the cost of understating present systemic stress.