The government has initiated the process of preparing individual insolvency norms that will provide for loan waiver up to Rs 35,000 for the poorest of the poor through “out-of-court settlements” under the Insolvency and Bankruptcy Code (IBC), seeking to extend a breather to those in the vulnerable sections struggling in the clutch of a debt trap.
This will require an amendment to the IBC that typically involves resolution under the overall scrutiny of an adjudicating authority (NCLT, in the case of corporate insolvency). In fact, the government’s earlier plan was to facilitate individual insolvency resolution for all categories of debtors through the debt recovery tribunal (DRT). The Insolvency Law Committee under corporate affairs secretary Injeti Srinivas may soon submit a report on individual insolvency, suggesting this change.
Once the regulations are in place, under a so-called “fresh start” process, the poor who don’t own houses, earn up to Rs 60,000 a year and have assets up to `20,000 are likely to be eligible to apply for such a relief. The committee’s recommendations will have to be ratified by the Cabinet before the government moves to the next stage of seeking Parliamanetary clearance for a bill to amend the IBC to implement this idea.
“The idea of an out-of-court settlement process was mooted, as it would otherwise be very hard for the poor to spend money on litigations, especially when the default involves a small amount. A framework will be developed under the IBC to facilitate this,” a senior government official told FE.
The government also looks to address concerns of micro-finance institutions that fear loss of revenues if they have to forgo money lent to customers, the official said. However, analysts have pointed out that the MFIs, in any case, hardly lend without collateral to the poorest of the poor who would qualify for such a waiver.
As FE had reported earlier, a section of the government still believes it will be more effective than populist moves like farm loan waivers that involve relief from just bank debt and is mostly exploited by rich farmers. It will also deal a deadly blow to money lenders who charge exorbitantly high interest rates (30-40% a year in many cases) from the poor by taking advantage of their vulnerability and often force them into a debt trap (many farmers have committed suicides due to this).
Also, at a time when a very large number of promoters of big corporate houses have each defaulted on loans of Rs 30,000-40,000 crore or more, a haircut of Rs 20,000 crore for lenders on ten million underprivileged debtors — assuming an average loan size of Rs 20,000 — appears insignificant. As for informal sector lenders, the government won’t compensate them for potential losses due to write-offs. While hailing the new regulations, some analysts, however, fear the move, unless implemented properly, could distort credit behaviour of these individuals and may choke credit flow to them in future.
However, since any such relief will be part of their credit history, potentially discouraging lenders to lend them again, these small debtors could also have the flexibility to opt out of the insolvency process and settle with lenders on their own.
