Since the year-long Insolvency and Bankruptcy Code (IBC) suspension was lifted on 25 March, India has not witnessed a surge in fresh bankruptcy filings, said experts.
This comes as a respite to policymakers battling the economic fallout of the pandemic.
The trend is also a breather for businesses grappling with the devastating second wave of covid-19 infections, despite the uncertainties surrounding India’s economic recovery and the financial health of businesses, experts said.
The government’s move to increase the threshold on payment defaults from ₹1 lakh to ₹1 crore in March 2020 for initiating bankruptcy proceedings against companies, and the special resolution scheme for small businesses were key factors to curb the number of bankruptcy cases, they added.
The special scheme allows small businesses and creditors to informally put in place a corporate rescue plan before moving bankruptcy tribunals.
The sentiments surrounding distressed assets, too, discourages creditors from dragging debtors to tribunals. “The pace of filing cases under IBC is same as was earlier and we are not witnessing an increase per se. May be its too early to comment on it. The creditors are also cautious that going through the IBC route may not give them much benefit than exploring other options,” said Daizy Chawla, senior partner, Singh & Associates, a law firm.
While investor sentiment remains muted, lenders, who are facing manpower challenges due to the pandemic, are also not in a hurry to initiate legal proceedings.
Karthik Natarajan, partner, Bhuta Shah & Co. LLP, an accounting firm, said expectations of a surge in fresh bankruptcy filings once the IBC suspension was lifted were high. “But it appears no sharp increase in filings is taking place. One reason is that people prefer out of court settlement in such matters to avoid going through the rigors of insolvency proceedings. Another reason could be the low turnout of personnel at banks and non-banking financial companies owing to the on-off nature of lockdowns. This may be delaying policy decisions,” he added.
Natarajan said there is an element of empathy as in debtor-creditor relations, as creditors understand the genuine hardships faced by businesses during a pandemic. “But we need to wait and watch as there is tremendous stress in the economy.”
With local restrictions on mobility across states disrupting economic activities, and increasing the uncertainties for businesses, on 5 May, the Reserve Bank of India allowed lenders to offer a limited window to small borrowers for restructuring loans while classifying the same as ‘standard’.
According to analysts, the surge in coronavirus infections could delay economic recovery and add to the risk for financial institutions. RBI’s measures will offer some relief to financial institutions for the next few months, but at the expense of deferring the recognition and resolution of underlying asset-quality problems, ratings agency Fitch Ratings Inc. had said last week.
