India's four-year-old Insolvency and Bankruptcy Code (IBC), which has been amended five times since its inception, has scope for further improvements, chief economic advisor (CEA) Krishnamurthy Subramanian on Wednesday said.
Speaking at a FICCI seminar on stressed assets, Subramanian said that while India was already seeing stress build-up before the pandemic hit, there was bound to be some stress that will be added due to COVID-19.
Reserve Bank of India (RBI) estimates that gross bad loans may rise from 8.5 percent in March 2020 to anywhere between 12.5-14.7 percent by March 2021 due to COVID-19 induced stress.
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"Given the stress that had built up in the financial sector before we entered the crisis, we will now have to take care of some stress that will inevitably happen because of COVID-19. The eco-system of creative destruction is a very important part of any economy," he said.
Subramanian noted that while IBC is a step in the right direction, "there is scope for making it far more efficient."
To ensure a more flourishing market for distressed assets market, Subramanian said there was a need to focus on incentives for banks, especially public sector banks, along with establishing a market for price discovery of stressed assets.
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"With the involvement of judgement, there is always a possibility of hindsight bias which can create enormous risk aversion. Judgement and investigation that does not take into account some of these nuances can make it difficult for the bankers to do what is economically efficient," he added.
Speaking about reforms in the insolvency code during the same event, Sudhaker Shukla, whole-time member, Insolvency and Bankruptcy Board of India (IBBI) said they the board was developing a platform for stressed assets, which would eventually have an auction platform as well. Shukla said investors can easily find all information about the investment potential through this platform. "The virtual data room has been launched on October 1 and the auction facility will be available in another six months," he said.
Shukla claimed that recoveries under IBC had improved from 26 cents to a dollar to 71 cents to a dollar and the average time taken for resolution under the code had come down from 4.5-3 years to 1.6 years over the past three years.
