Commentary: What Critics of India’s Insolvency and Bankruptcy Code Get Wrong About the Recovery Model

The Insolvency and Bankruptcy Code (IBC) has completed five years, and critics have focused mainly on two issues: large write-offs of loans by the banks and undue losses to stakeholders like employees and minority shareholders, The Print reported. On both these issues, fears and allegations that the IBC has been a failure are not supported by facts or rationale. Let us see why these are misplaced beliefs. The job of creditors is to generate a return in exchange for the risk arising from the disbursement of loans. So, unless it is too high, loss on loans is not an unusual incident. There are two dimensions of analyzing if the magnitude of loan loss is too high. One is to measure the amount of loss in proportion to the amount of investment, often known as credit cost. This helps us understand whether the creditor is undertaking a profitable lending business vis-à-vis alternative uses of capital. The other dimension is to check if the creditor’s particular approach for recovery of dues helps in a lower loan loss. Most critics focus on the second dimension, that is, whether the IBC is a better recovery mechanism compared to others like Debt Recovery tribunal (DRT) or Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. This is a fair question to ask. Read more.