MUMBAI (Reuters) – Amendments to India’s bankruptcy law should focus on a financial creditor-led framework for resolution of stressed assets, the governor of the country’s central bank said on Thursday.
“It has to be recognised that the financial creditors take the maximum risk and hence their risk needs to be commensurately compensated and with priority,” Shaktikanta Das, governor of the Reserve Bank of India (RBI) said at an event in Mumbai.
“Accordingly, any amendments to the (Insolvency and Bankruptcy) Code and its evolution thereof may continue to lay emphasis on a financial creditor-led resolution framework, in an overarching manner.”
Given certain shortcomings on the part of the so-called committee of creditors, there appears to be a trend in recent years towards balancing the rights of operational creditors with those of financial creditors under the insolvency code, the governor said.
Financial creditors, like banks and other financial institutions, are those that have a financial contract with the debtor, like in case of a loan or a bond issuance.
On the other hand, the insolvent firm owes money to operational creditors because of a good or service that it has availed.
There needs to be some distinction in weightage attributed to different category of creditors, depending upon the degree of risk absorbed by them from the beginning, the RBI governor said.
India’s Insolvency and Bankruptcy Code, introduced in May 2016 and amended multiple times since then, has helped lenders recover outstanding loans.
Since its inception, 7,058 corporate debtors have been admitted into the insolvency process. The recovery rate was 32% as of September, Das said, citing data from the Insolvency and Bankruptcy Board of India.
A “visible impediment” in India’s insolvency process is the absence of a clear framework for group insolvency, RBI’s Das said on Thursday, seeking the laying down of appropriate principles for group insolvency through legislative changes.
Moreover, a robust secondary market for loans could also help lenders manager credit exposures, the governor added.
(Reporting by Siddhi Nayak; Editing by Mrigank Dhaniwala)