Insolvency and Bankruptcy Code

Tackling the problem of bad loans


From UPSC perspective, the following things are important :

Prelims level: NARCL

Mains level: Paper 3- NARCL-challenges and opportunities


The newly-created National Asset Reconstruction Company (NARCL) in the public sector offers hopes for the faster clean up of lenders’ balance sheets.

Features of National Asset Reconstruction Company (NARCL)

  • The newly-minted ARC, NARCL is not a bank, but a specialised financial institution to help resolve the distressed assets of banks.
  • Faster aggregation: Its greatest virtue lies in the faster aggregation of distressed assets that lie scattered across several lenders.
  •  Soverign assurance: Its securitised receipts (SRs) carry sovereign assurance.
  • This is of particular comfort to PSU banks as price discovery would not be subject to later investigations.
  • Focus on large accounts: It would initially focus on large accounts with debts over Rs 500 crore.
  • IDRCL: All eyes will be focused on IDRCL (Indian Debt Resolution Company), the operating arm, which would be in the private sector.

Past policy measures to resolve the bad debts

  • Institutional measures include BIFR (Board for Industrial and Financial Reconstruction, 1987), Lokadalat, DRT (Debt Recovery Tribunal, 1993), CDR (Corporate Debt Restructure, 2001), SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement, 2002), ARC (Asset Recovery Company, 2002).
  • The RBI has also launched a slew of measures during 2013-14 to resolve, reconstruct and restructure stressed assets.

Why the measures to resolve the bad debt failed?

  • Of the 28 ARCs (private sector) in operation, many are bit players.
  • Dominance of few ARC: The top five ARCs account for over 70 per cent of the asset under management (AUM) and nearly 65 per cent of the capital.
  • Restructuring as an exception: Financial and business restructuring appears to be more an exception than the norm.
  • Nearly one-third of debts are rescheduled.
  • This is not much value addition to what lenders would have otherwise done at no additional cost.
  • Success and shortcomings of IBC: The IBC, introduced in 2016, was landmark legislation and marked a welcome departure from the earlier measures, with a legally time-bound resolution.
  • The focus is on resolution rather than recovery.
  •  It nearly put an end to evergreening.
  • Even though there are delays under this newfound promise, they are counted in terms of days and not years and decades.
  • The NCLT (National Company Law Tribunal)  is the backbone of the IBC, but lamentably is starved of infrastructure and over 50 per cent (34 out of 63) of NCLT benches were bereft of regular judges.
  •  Even the parliamentary committee has expressed indignation on a large number of positions left vacant.
  • This lack of adequate infrastructure, coupled with the poor quality of its decisions, has proved to be the IBC’s Achilles’ heel.
  • We need judicial reforms for early and final resolutions.
  • Issue of delayed recognition and resolution: Forty-seven per cent of the cases referred to the IBC, representing over 1,349 cases, have been ordered for liquidation.
  • Against the aggregate claims of the creditors of about Rs 6.9 lakh crore, the liquidation value was estimated at a paltry Rs 0.49 lakh crore.

Suggestions to make IBC more effective

  • Delayed recognition and resolution: Lenders and regulators need to address the issue of delayed recognition and resolution.
  • Business stress and/or financial stress needs to be recognised even prior to regulatory norms on NPA classification.
  • Dealing with anchoring bias: The tendency to make decisions on the basis of first available information is called “anchoring bias”.
  •  The first available information in bidding for distressed assets is the cost of acquisition to ARCs.
  • Potential bidders would quote prices nearer to this anchor.
  • Nobel Laureate Daniel Kahneman has suggests a three-step process to mitigate anchor bias: One, acknowledge the bias; two, seek more and new sources of information, and three, drop your anchor on the basis of new information.

Way forward for NARC

  • Forbid wilful defaulters from taking back distressed asset: The IBC has made considerable progress in bringing about behavioural change in errant and wilful defaulters by forbidding them to take back distressed assets.
  • Otherwise, the credit culture suffers.
  • The NARC should uphold this principle, not dilute it
  • Introduce Sunset clause: It should have a sunset clause of three to five years.
  • This will avoid the perpetuation of moral hazard and also encourage expeditious resolution.
  • Deal with anchor bias: Anchor bias needs to be mitigated by better extrinsic value discovery.
  • Avoid selling to other ARCs: It should avoid selling to other ARCs.


The RBI has recently released (November 2) a report on the working of ARCs and makes 42 recommendations to improve the performance of ARCs. This article incidentally makes an effort to identify some constraints and offer solutions to improve the performance of ARCs.

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2 years ago

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Last edited 2 years ago by Jennifer Dehner


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