Bankers Going Bald?: India’s Insolvency Law Facing Fresh Challenges
India’s Insolvency Law: A Headache for Bankers
India’s lenders are facing a growing headache thanks to the nation’s insolvency law. It’s not just about the delays and poor recoveries that have plagued the system since its inception nine years ago. Now, a recent court order has added a new layer of complexity, raising the possibility of banks having to return money they received from selling off bankrupt assets.
A System in Trouble
The Insolvency and Bankruptcy Code, introduced in 2016 to tackle India’s massive pile of bad debt, has struggled to deliver on its promises. A third of bankruptcies have ended in liquidation, and three-quarters of ongoing cases have exceeded the 270-day resolution deadline. Creditors have recovered a paltry 31% of the $133 billion in bad debt they’ve pursued under the law. Often, banks end up with a fraction of their original claim even after selling off troubled assets.
A Court Uproar
The recent court order involving JSW Steel’s acquisition of Bhushan Power & Steel has thrown a wrench into the system. The Supreme Court ruled that the acquisition didn’t comply with bankruptcy law and ordered Bhushan’s liquidation, four years after JSW took over. This decision could force JSW to lose 13% of its revenue, and it’s planning to appeal. Government-owned lenders, including State Bank of India and Punjab National Bank, are also expected to challenge the ruling.
Political and Economic Implications
The case is being closely watched by Prime Minister Narendra Modi’s government, as the Insolvency and Bankruptcy Code is one of its signature reforms. The code, even with its shortcomings, attempted to curb bad behavior by forcing family-owned businesses to face consequences for mismanagement. But if asset forfeitures or sales can be reversed years later, it could damage investor confidence and weaken lenders’ bargaining power. The decision could also further complicate India’s already challenging business environment.
This situation highlights a deeper issue: the power dynamics within India’s corporate landscape. Unlike the US, where corporations are often led by executives, control in India often rests with business families, sometimes referred to as “promoters.” These families wield considerable influence, and genuine reform will require tackling this entrenched power structure.
A Need for Change
The Indian government needs to re-evaluate its insolvency law and provide more certainty to outcomes. However, any changes must consider the unique challenges of India’s business environment, where political and economic interests often intertwine.
