Fitch: India Insolvency Code Helps Creditors, Implementation Key

Fitch Ratings expects India's new Insolvency and Bankruptcy Code to improve the environment for creditors over the medium to long term, although effective implementation will be key. The bill - once it becomes law - will replace the multiple laws applicable for insolvency and bankruptcy, and allow speedier and harder deadlines for resolving corporate insolvency, which should help in strengthening creditor and investor confidence in the long term.

The bill, which was cleared by both houses of Parliament within one week, reflects the government's sense of urgency in improving the resolution process. The code's proposed 180-day time frame for recovering bad debts (and extendable by 90 days) is ambitious but nonetheless a critical step if India wants to improve investors' confidence in the insolvency regime, given its poor record of bad debt resolution. This stands at around 4.3 years on average, with a loss-given-default of around 85 cents to the dollar based on data from a recent World Bank report.

Banks, in particular the state-owned entities, are likely to gain the most from this initiative, as timely recoveries would strengthen asset quality and improve their ability to provide credit - which is important as the banks' share in credit intermediation is more than 60%. We expect this to ultimately reduce the time and costs related to litigation, and to result in a widening of funding options and the investor base for Indian corporates - especially the SMEs and corporates with weaker credit profiles.

Fitch believes, however, that the effective implementation of the law will remain key and will take time - given the need to develop the ecosystem for implementing the process. Setting up a new regulator for a new category of insolvency professionals, and building robust information utilities/repositories, will be time consuming. At the same time, the use of available infrastructure (of National Company Law Tribunals and debt-recovery tribunals) may not be optimal, with over 70,000 liquidation cases already pending as per a recent press report.

Ultimately, political will is key to effective implementation which will require concerted efforts from interested parties and reforms in the judicial system. We expect the benefits of the code to be visible only over the medium to long term. But the imperative of the growing capital requirements and the government's increasing keenness to link capital allocation to bank performance (mainly on recoveries) could also mean that effective implementation may be sooner than envisaged.

The new code covers all debtor categories - including individuals, partnerships, limited liability partnerships and companies - and in theory empowers creditors in deciding the fate of an insolvent borrower. It also prevents continuation of management in an insolvent firm, and bars bankrupt individuals from either holding public office or contesting elections.

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