Banks and creditors would need to take a "haircut" on their bad loans, even as defaulting promoters could make their businesses operational again by paying the outstanding interest on the loan, Finance Minister Arun Jaitley said on Friday.
He was replying to the debate in the Lok Sabha on Friday after it passed the amendments to the Insolvency and Bankruptcy Code (IBC) which seek to plug potential loopholes in the Code and prohibit "certain persons", such as wilful defaulters, from submitting resolution plans to let them take charge of the company.
"Workmen, creditors, banks, unsecured creditors..all need to take a haircut so there is an equitable distribution of the resolution process," Jaitley said, noting that the government featured later in the "waterfall list" of creditors involved in the resolution of the non-performing assets (NPA), or bad loans, in the Indian banking system that have crossed the staggering level of Rs 8.5 lakh crore.
A haircut signifies accepting a lower than market value for the asset for a resolution of the NPA.
"However, you cannot have a situation where the promoters responsible for the NPAs in the first place come in through the back door to take over the company again...so it was necessary to have an ineligibility criteria," he said.
Jaitley, who also holds the corporate affairs portfolio, further clarified that management is not barred from making a unit operational if it pays the outstanding interest on the stressed loan.
"No one is being debarred for life and neither are we asking that you pay the whole amount. Just pay the interest and make the account operational," he said.
The Insolvency and Bankruptcy Code (Amendment) Bill, 2017 will replace an ordinance promulgated earlier. The IBC, being implemented by the Corporate Affairs Ministry, became operational in December 2016 and provides for a time-bound insolvency resolution process.
The changes proposed are expected to help streamline the process of selecting buyers for stressed assets.
For instance, currently the Code does not specify the type of buyers who can bid for stressed assets of companies that are undergoing bankruptcy proceedings.
Certain people prohibited from submitting the resolution plan include wilful defaulters, disqualified directors, promoters or management of the defaulting company or any person who has indulged in these activities abroad.
According to the American rating agency S&P-owned Crisil, Indian banks will need to take a "haircut" of up to 60 per cent on their bad loans to resolve the issue of NPAS, which is holding up higher economic growth.
The government has embarked on a two-pronged strategy in this regard.
On the one hand, it has brought in the Insolvency and Bankruptcy Code which provides for a time-bound insolvency resolution process. On the other hand, it has approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks.