IBC and credit culture in India

• The introduction of the Insolvency and Bankruptcy Code marked a fundamental change in the relationship between borrowers and lenders.

What changes?

• With a creditor-in-control framework, the move to a time-bound resolution process shifted the balance of power away from the corporate borrower.
• The code was meant to discipline errant borrowers - who till then had been able to game the system-with the threat of losing control.
• However, delays in the resolution process beyond the timelines prescribed in the code, the large haircuts that creditors have taken, and the disproportionate share of cases that have ended in liquidation, have cast a shadow over the functioning of the code.
• A recent court judgement is only likely to further complicate matters.

Issues Likely to rise

• Till now, in order to initiate proceedings under the IBC, financial creditors had to provide proof of the corporate debtor's default.
• Once the adjudicating authority, the National Company Law Tribunal, was convinced of the default, the application was admitted.
• This allowed for quick admission of cases.

Way forward

• In large measure the success of the IBC was in its attempt to transform the credit culture in the country.
• The threat of losing control over the firms was meant to ensure the borrowers honour their obligations.