Fixing the Bankruptcy Code

Two years ago, the landmark Insolvency and Bankruptcy Code (IBC) appeared to have handed a silver bullet to bankers for a quick resolution of the vexed problem of stressed loans. The Act did manage to create a sense of fear among corporate defaulters, but failed to maximise the value of assets for creditors and achieve a time bound resolution. While it is too short a period to jump to any conclusions, the government changed track a few days ago by giving the green signal to a new five pronged approach under "Project Sashakt" (or Empowerment). Under this, the government wants to set up one Asset Management Company (AMC) a Bad Bank in common parlance, which would take over the stressed assets first, and try and nurse them to health. (Later there could be more AMCs) In one stroke, the government seems to have relegated the IBC, making it a resolution tool of last resort.

The new five tier resolution structure lists the IBC at fourth place. The first three approaches are outside the IBC and essentially entail dividing the Rs 8 lakh crore plus stressed loans into three different buckets