Infrastructure, not finance

IBC process hampered more by delays than lack of funds

The Reserve Bank of India (RBI) has allowed bidders for stressed assets under the Insolvency and Bankruptcy Code (IBC) to raise funds abroad. The RBI relaxed the end-use restrictions for external commercial borrowings (ECBs). Till last week, funds borrowed abroad could not be used to pay back domestic rupee-denominated loans. However, an exception is being made to this for the IBC process. The argument against using ECB for repayments of domestic loans is that it might, through ever-greening and currency risk, introduce additional risk into the economy. However, if the borrowing is for the IBC process, then that is unlikely to be the case. Thus, the RBI’s move cannot be faulted, especially as it has specified that overseas branches of Indian banks are not eligible under this condition. The aim is clearly to reduce stress in the Indian banking system and clear up funds for general lending that might otherwise have been taken up by the IBC process. Hopefully the greater availability of funds will also allow for Indian creditor banks to take less of a haircut on various stressed assets, thereby also improving the health of the banking system.

It is vital that the RBI and the government stay engaged in tweaking the IBC process in response to the various problems that emerge in its initial years. The biggest problem, however, has not been lack of funds. It is simply that the two-year-old IBC process uses a great deal of capacity and resources. It is, under current conditions, simply not easily scalable. There has been a visible slowdown in how the process has been operating over the past year. The original 270-day timeline is not being adhered to. Even of the first set of 12 big borrowers that were taken to the National Company Law Tribunal, or NCLT — which together owed about a quarter of the initial estimate of ~8 trillion outstanding — less than half have been resolved so far. A report from the credit rating agency ICRA towards the end of last calendar year calculated the delays beyond the 270-day deadline had cost banks about ~4,000 crore in terms of interest income foregone — just for the first set of borrowers. As a consequence, some lenders are now seeking solutions outside the IBC system. The State Bank of India announced in January it would auction its loan portfolio that had an exposure to Essar Steel, nominally worth over ~15,000 crore. The Essar Steel insolvency proceedings had been ongoing for over 500 days at the time of the decision.

The essential problem is a lack of resources within the IBC system. The code, as originally drafted, had also sought to create an ecosystem that would have provided a greater cadre of resolution professionals and helped make the process scalable. However, this aspect of the law was diluted before it was passed. This is now beginning to bite. Even the simple admission of a bankruptcy application, supposed to take 15 days, can take months or even a year. The government needs to invest in physical and human infrastructure to speed up the process if the IBC is to succeed in the long run.