Pre-Packaged Insolvency: A Key to Resolving Stress Assets

In a bid to expedite the resolution of stressed assets, Reserve Bank of India (RBI) Governor Shaktikanta Das has urged creditors and debtors to consider adopting the pre-packaged insolvency resolution process (PPIRP). Speaking at a conference on the Insolvency and Bankruptcy Code (IBC) organized by the Centre for Advanced Financial Research and Learning (CAFRAL), Das highlighted the potential benefits of PPIRP and called for its wider adoption.

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Addressing Delays in the Resolution Process

Das cited data from the Insolvency and Bankruptcy Board of India (IBBI) and pointed out the long delays associated with the insolvency resolution process. He emphasized the need for course correction and suggested adopting PPIRP and addressing group insolvencies as effective measures to streamline the process.

Overcoming Hesitancy in Adopting PPIRP

The governor acknowledged the muted response to PPIRP and attributed it to the hesitancy of financial creditors in approving proposals under this mechanism. He clarified that the haircut involved in PPIRP is not voluntary but rather a result of prudential considerations and realistic cost-benefit evaluations. Das emphasized that PPIRP incentivizes promoters to engage constructively with creditors, leading to swifter and smoother resolutions.

Benefits of PPIRP for Creditors and Debtors

Das highlighted the potential win-win situation for both creditors and debtors when PPIRP is adopted. He noted that once the perception of PPIRP as a voluntary haircut is dispelled, there could be greater acceptance of this mechanism, especially for larger corporate debtors. Creditors and debtors are encouraged to consider PPIRP in applicable scenarios based on realistic cost-benefit evaluations, as it has the potential to transform the resolution of stress assets.

Challenges in Implementing PPIRP

Despite the rollout of PPIRP for micro, small, and medium enterprises (MSMEs), its adoption has been limited. Das identified several factors contributing to delays in the insolvency resolution process, including evolving IBC jurisprudence, litigatory tactics by debtors, lack of coordination among creditors, and inadequate judicial infrastructure.

Need for a Clear Framework for Group Insolvency

The governor also emphasized the absence of a clear framework for group insolvency as a significant impediment to successful resolution. He noted that the group insolvency mechanism has been evolving under the guidance of courts in the absence of a specified framework. Das called for appropriate legal changes to move forward and address this issue effectively.

Importance of a Vibrant Secondary Market for Stressed Assets

Das highlighted the lack of a vibrant secondary market for stressed assets in India as a major hurdle in implementing successful resolutions. He explained that the absence of a secondary market limits the pool of prospective resolution applicants for stressed assets under the IBC. A robust secondary market for loans, according to the governor, can serve as a crucial mechanism for managing credit exposures by lending institutions.

By promoting the adoption of the pre-packaged insolvency resolution process (PPIRP), addressing delays in the resolution process, and establishing a clear framework for group insolvency, India can enhance the effectiveness of its insolvency and bankruptcy regime. Additionally, developing a vibrant secondary market for stressed assets will further support the successful resolution of stressed assets and contribute to a healthier financial system.