This is an archive article published on January 11, 2024

RBI Governor pushes for group insolvency mechanism, market for stressed assets

On stressed assets, RBI Governor Shaktikanta Das said one major impediment for implementing a successful resolution plan has been the absence of a vibrant market for stressed assets in the country.

In the absence of a specified framework, the group insolvency mechanism has been evolving under the guidance of the courts, said Reserve Bank of India Governor Shaktikanta Das. (Express file)

By: ENS Economic Bureau

4 min readMumbaiJan 11, 2024 07:48 PM IST First published on: Jan 11, 2024 at 07:48 PM IST

Reserve Bank of India Governor Shaktikanta Das Thursday batted for a specified framework for the group insolvency mechanism and a vibrant market for stressed assets in the country to improve the working of the Insolvency and Bankruptcy Code (IBC).

In the absence of a specified framework, the group insolvency mechanism has been evolving under the guidance of the courts, said Das. “Perhaps the time has come for laying down appropriate principles in this regard through legislative changes,” he said at a conference on IBC organised by the Centre for Advanced Financial Learning (CAFRAL).

“There has been quite a bit of brainstorming on this issue in the policy circles for some time now. The task now is to move forward through appropriate legal changes,” Das said.

He also pointed out challenges in this process: intermingling of assets, devising a definition of a ‘group’ and addressing cross-border aspects. “It would still be preferable to see the opportunity here and put in place a workable framework for group insolvency,” Das said.

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On stressed assets, Das said one major impediment for implementing a successful resolution plan has been the absence of a vibrant market for stressed assets in the country. “This effectively limits the pool of prospective resolution applicants for stressed assets under IBC,” he said.

“In fact, this applies to even our regulated entities when they transfer their stressed assets outside the IBC process. A robust secondary market in loans can be an important mechanism for management of credit exposures by the lending institutions,” he said.

Any amendments to the Code and its evolution thereof may continue to lay emphasis on a financial creditor-led resolution framework, in an overarching manner, he said.

Das said creditors have realised Rs 3.16 lakh crore out of the admitted claims of Rs 9.92 lakh crore as of September 2023, which works out to a recovery rate of 32 per cent. “It needs to be emphasised here that significant value destruction would have already happened in these assets prior to their admission under the IBC,” he said.

The RBI Governor said the most interesting outcome of the IBC has been the substantial behavioural shift ushered in by the code. “This is evident from the 26,518 applications for initiation of CIRPs having total underlying default of Rs 9.33 lakh crore which were withdrawn before admission, till August 2023,” he said.

The credible ‘threat of insolvency’ ignited by the code has strengthened the negotiating powers of the creditors, in the absence of which it is most likely that those defaults would have lingered for much longer, resulting in value destruction, he said.

Das said the criticisms of the IBC are on two fronts — the time taken for resolution and the extent of haircuts vis-à-vis the admitted claims.

The code envisages a time-bound process, requiring the completion of CIRP within 180 days, with a one-time extension by up to 90 days in exceptional circumstances.

However, the data published by the IBBI raises certain serious concerns. As of September 2023, 67 per cent of the ongoing CIRP cases have already crossed the total timeline of 270 days including possible extension period of 90 days. “More concerning is the fact that, the average time taken for admission of a case during FY 2020-21 and FY 2021-22 stood at 468 days and 650 days respectively. Such a long degree of delays will substantially erode the value of the assets,” Das said.

On several occasions, the Adjudicating Authorities (AA) have raised concerns regarding the conduct of the Committee of creditors (CoC) in the insolvency proceedings. “This includes lack of participation in the CoC meetings, lack of engagement or effective coordination among creditors, disproportionate prioritisation of individual interest of creditors rather than their collective interest while designing the resolution plans which can be detrimental to the resolution plan itself,” he said.