The need to restructure the old regime of insolvency law that causes creditors low recovery

Five years ago, India devised a legislative solution to its recurrent economic issue of rescuing money trapped in zombie businesses. India's poor use of its scarce domestic capital has resulted in a persistent failure to employ its growing ranks of youngsters. After more than a decade of deliberation, New Delhi came up with contemporary bankruptcy legislation as a remedy. The data has been a mixed bag. According to REDD Intelligence, 48 per cent of the 4,300-plus stressed debtors that went through the 2016 corporate insolvency law were liquidated, with half of them being liquidated in less than 314 days. Half of the 13 per cent that was sold to bids emerged from bankruptcy in fewer than 425 days. As the REDD researchers point out, these aren't bad results considering prior wait periods of five years or more. However, if the insolvency legislation resulted in prompt extraction of substantial quantities, credit should be redeployed in new initiatives. On this front, the evidence is scant. Loan growth is sluggish at 6%. Companies are unwilling to borrow even at negative real interest rates; according to the Boston Consulting Group, corporate leverage is at an all-time low of 0.46 times equity.

Incomplete bankruptcy reform isn't the main reason Indian banks aren't lending more to new businesses, preferring to fund unsecured personal loans, which doesn't create much new employment. It might be viewed as a confidence issue over the last year. As the threat of a catastrophic second pandemic recedes, businesses will require confidence that the economy will not be rocked by lockdowns again. That would necessitate a much higher proportion of the population is completely vaccinated than the current figure of less than 5%. However, the bankruptcy legislation does not deserve to be given the benefit of the doubt. Its most serious flaw is institutional infirmity.

Aside from a few high-profile transactions, primarily of steelmakers like Essar Steel India Ltd., the recovery rate for creditors has been as low as 24 per cent, according to Macquarie. While India may be able to extract cash more quickly than in the past, it is still unable to get much from defunct businesses. The poor recovery rate isn't helping India's state-run banks, which hold the majority of the defaulted loans. Several of them will now have a share in Jet Airways India Ltd., which hasn't flown in over two years. The airline's airport landing slots have been allocated to other airlines, and the epidemic has devastated aviation economics.

All of this drama to reclaim 5% of debts when creditors just needed to dismiss Naresh Goyal, the founder of what was once India's biggest airline, in due course. They didn't do it. Even now, Vodafone Group Plc's India joint venture is fighting to remain viable due to extractive government demands, but lenders aren't doing anything to hedge their bets on the debt-laden telecom provider. The employment-to-population ratio in India has dropped from 55 per cent in 2005 to 43 per cent now. Bangladesh and Vietnam did better. Not all of the blame for job insecurity can be pinned on a faulty bankruptcy system. India has scored its own goal by neglecting low-skill textile and shoe manufacturing and promoting high-skill software. Nonetheless, large-scale insolvency resolution gaming has cost India. Even before the epidemic, the financial system was creaking; now, it's just being held in place. Banks may rely on government guarantees on loans to pandemic-affected small companies. In the face of consistently low-interest rates, the central bank artificially lowers the interest rate they must pay savers. Even yet, the central bank has warned that 9.8 per cent of its loan book might go bad by March 2022. The aim is now to transfer at least $11 billion in problematic business loans from commercial lenders to a newly formed bad bank. A junkyard for companies with very little recoverable capital isn't going to do anything for fresh investors. Rehabilitating assets that still have some worth will necessitate an immediate change in the legislation. A bankruptcy salon that offers 90% haircuts is a terrible joke on India's taxpayers, savers, and employees.