RBI Governor advocates financial creditor-led amendments to bankruptcy law

Bankruptcy law amendments: Reserve Bank of India (RBI) Governor Shaktikanta Das stressed the need for amendments to India's bankruptcy law, focusing on a financial creditor-led framework for resolving stressed assets. Speaking at an event in Mumbai, Das highlighted the importance of recognising the higher risk undertaken by financial creditors, such as banks and financial institutions, and ensuring they are appropriately compensated with priority.

Das stated, "Any amendments to the (Insolvency and Bankruptcy) Code and its evolution thereof may continue to emphasise a financial creditor-led resolution framework, in an overarching manner."

Addressing certain shortcomings related to the committee of creditors, Das noted a recent trend toward balancing the rights of operational creditors and financial creditors under the insolvency code. Financial creditors, having a financial contract with the debtor, bear a higher degree of risk, as opposed to operational creditors who are owed money for goods or services availed.

The Governor highlighted the necessity of distinguishing among creditors based on the level of risk absorbed by them from the outset. He called for a differentiated weightage for various categories of creditors.

India's Insolvency and Bankruptcy Code, introduced in May 2016 and subsequently amended, has played a significant role in aiding lenders in recovering outstanding loans. Das reported that since its inception, 7,058 corporate debtors have been admitted to the insolvency process, achieving a recovery rate of 32 per cent as of September, as per data from the Insolvency and Bankruptcy Board of India.

Highlighting a "visible impediment" in India's insolvency process, Das called for the establishment of an explicit framework for group insolvency through legislative changes. Additionally, he suggested that a robust secondary market for loans could enhance lenders' ability to manage credit exposures effectively.

The Governor's remarks underscore the ongoing efforts to refine and enhance the effectiveness of India's bankruptcy laws in addressing the complexities of corporate insolvency and debt resolution.

(With Reuters inputs.)