Say no to banks

Suspending IBC for an extended period would destroy it

Indian banks are reportedly planning to suggest to the government that all the pending cases under the Insolvency and Bankruptcy Code (IBC) should be suspended for at least two years in the context of the Covid-19 pandemic. This comes just days after the Union government decided to suspend the IBC provisions for six months, or till the time the government may deem fit. The banks feel that, given the pandemic’s effect on business sentiment, it will not recover for some time, affecting the prices they will get for the distressed assets. Already, it appears, expressions of interest from possible bidders have been disappointing for banks. It is, unsurprisingly, a buyer’s market at the moment for distressed assets, which leaves the banks in an uncomfortable position. Naturally, bidders will want to conserve cash at the moment, given the uncertainties of the situation. Nor is liquidation a pleasing prospect if there are no appropriate bidders, given the valuations all round. Some existing bidders have reportedly asked for legal opinion as to whether they can revise the bids that have been submitted. 

The banks’ concerns are valid, but a two-year suspension would do more harm than good. While a six-month suspension is understandable, given the exceptional circumstances, a two-year delay would do little more than collapse a system that is still being built up with considerable care and difficulty. The government must, therefore, resist the demands of the banks. There are other ways to protect them — ending the IBC mechanism, which is structured to ensure the flexibility of capital, is not one of them. The IBC in the end benefits banks, even if it means that they have to respond to market conditions in a pandemic. Almost 2,000 cases are still going through the IBC process, many of them having long passed the deadlines that the code had set for resolution. There are other mechanisms that could be considered to ensure that some of the companies that are being taken to the IBC or could be once the moratorium ends are preserved as going concerns, to the benefit of the banks. For example, a consent-based moratorium on debt enforcement is one possibility. It has worked elsewhere in the world as a counter-cyclical measure. Of course, a shorter duration of suspension for the IBC is also a possibility — it lasts only as long as other Covid-19 measures such as successive lockdowns. 

The IBC cannot be suspended for an extended period just because market conditions have become adverse. That is precisely when such a mechanism is needed to ensure that capital is not locked up but instead circulates and stays productive. There will be many such demands that turn up on the government’s desks in the coming weeks — demands from interests that would like to ensure that anti-recession and counter-pandemic measures bail them out of all their past mistakes. The government must do only as much as is required to prevent the pandemic from shutting down the economy, and resist attempts to do any further— such as have come in from the banks.