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Saturday, December 09, 2017

What is the right role for promoters in the bankruptcy process?

by Ajay Shah.

Promoters and bankruptcy in a good world

We should not see default in a moralistic way. People enter into debt/equity relationships, and sometimes equity is not able to pay, in which case equityholders are pushed out of the way, and debt takes over the company. After that, the Committee of Creditors looks for the person who offers the best price to buy the company. This can be the erstwhile shareholder.

Hence, we should be fine with promoters tossing in a bid into the insolvency resolution process. They may have good knowledge of precisely what went wrong, they help increase competition in the IRP, and may often be the highest bidder. By this logic, having the promoter in the IRP helps increase recovery rates. The recent Ordinance, which amended the IBC to block all defaulters from all IBC activities, has been widely criticised for being out of touch with commercial sense. Two recent articles by Fiebelman & Sane and Sengupta & Sharma explore these issues and the recent Ordinance.

We are furious about theft by promoters of assets from within the company. This does not justify debarring promoters from the bankruptcy process: it justifies S.69 of the IBC, 2016, which initiates a process of identifying and punishing such theft. Debarring promoters from the bankruptcy process would actually increase their incentive to steal in this fashion.

Improvised Explosive Devices (IEDs) tucked away inside many Indian firms

There are some unique features of most firms in India which alter this thinking. Most firms in India do not have a clean structure of legal contracts. There are a large number of unwritten arrangements which keep the firm aloft. Examples of these include:

  • Oral contracts.
  • Legal contracts which are incomplete contracts, where the counterparty is friends/family to the promoter.
  • Ongoing litigation.
  • Loopholes in land title.
  • Elements of tax evasion or violation of law, and the repeated game with politicians/officials that sustain them.
  • Arrangements with labour unions which keep the peace.
  • The elements of the business where cashflow is stolen by the controlling team.

Each of these hampers the extent to which the business can be taken over by a new person without the cooperation of the promoter. For the new person, things won't work like they used to when the promoter was around, unless the promoter has done a lot by way of handing over.

The phrase `poison pills' is used to describe these booby traps hidden in most firms, but as Harsh Vardhan correctly emphasises, poison pills are formal legal structures that can be uncovered in the due diligence. These are more like IEDs that won't be detected in the diligence.

How will this influence bidding in the Insolvency Resolution Process?

The Akerlof `lemons model' teaches us that when faced with this kind of asymmetric information, bidders will shade their bids down. On paper, you think the firm is worth 30 paisa to the rupee; you suspect there are IEDs embedded within; to be safe you bid 15 paisa to the rupee.

The promoter has better information and hence bids 30 paisa to the rupee. He wins.

Imagine that this process gets repeated many times. The professional buyers, that we so badly require to make the Indian bankruptcy process work, will lose heart. What we need most, for the maturation of the Indian bankruptcy process, is for them to develop organisational and financial capital. Instead, after they lose a few bids, they will exit the business. This will harm competitive conditions in the IRP. When competition is weakened, recovery rates will be harmed.

We will get trapped in the wrong equilibrium, where in most cases, promoters bid and win at particularly low recovery rates.

In the limit, if promoters know that if arms length investors bid low prices, then there can be moral hazard as follows. A promoter can initiate default, knowing that in the IRP he will be able to buy 100% of the equity of the firm at (say) 70% of the value of the debt.

At this stage, of course, this is deductive reasoning, as the database of experience under IBC has not yet built up. We should be suitably cautious in our thinking, knowing that we do not know.

What is the way out?

We should not be moralistic about firm failure. But we should recognise that the equilibrium outcome described above is a bad one. We should cautiously consider using the coercive power of the State to exclude promoters from the IRP (in a narrow way: for the company that has defaulted only).

If the promoter is comprehensively excluded from any connection to the IRP, bidders will shade their bids down as they do not know where the IEDs are buried. The solution lies in encouraging side contracts where bidders pay promoters for information about IEDs.

Promoters would then negotiate with various bidders and agree to a side transaction, where they are paid cash in return for full information about the IEDs. Apart from that, they would not be bidders.

This can be achieved by a narrow IBC amendment that requires that the post-IRP equity structure for a company cannot contain shareholding by the erstwhile promoters of that company.

IEDs, resolvability, credit risk assessment

A firm that borrows Rs.100 is expected to repay $100(1+r)^T$, but with probability $p$, it goes into default that yields the recovery rate $R$.

Estimating $R$ is about grappling with resolvability. A clean, transparent, simple business can easily be put through the IRP and yield a good $R$. A messy business is one with numerous IEDs. In a messy business, the IRP will involve complex negotiations for bidders with the promoter and there will be greater fear, thus yielding a lower $R$.

Most credit risk analysis in India today focuses on estimating $p$. We should think about $R$ also. Modelling resolvability and recovery rates is as important as modelling the probability of failure. When the credit market works in an intelligent way on these questions, transferable businesses will get debt at a lower cost. Clean firms will obtain a lower cost of capital and gain market share.

Complex firms and a supportive institutional environment

It should be noted that the market for control transactions also desires a clean, transparent, simple business where control can be transferred. If you were going to put in a bid for a company in a hostile takeover, you will pay more for a transparent firm. If you were building a firm with the aim of selling it in a control transaction at a future date, you would increase transparency. If you plan to borrow, then greater simplicity will yield better pricing from a rational credit market.

However, complexity is important to many large firms. At the level of the economy, high productivity firms are large complex firms. Economies of scope and economies of scale inevitably lead to business complexity. Firm internationalisation is correlated with firm productivity, and internationalised firms must engage in the complexities of multinational corporate finance which requires much complexity of contracts, holding company structures, tax havens, etc. Recovery rates are lower for complex multinational firms.

As a thumb rule in India, I think that if the managers desire it, it is possible to build a Rs.10 billion company in many industries that is easily transferable. But by the time you get to a Rs.100 billion company, considerable complexity is likely. This harms the cost of debt capital and deters certain control transactions. This induces diseconomies of scope and scale.

To say this differently, when the governance environment cleans up, complex companies will become more viable, and this will permit the economy to better nurture the largest firms which are able to harness economies of scope and scale in order to achieve the highest productivity.


  1. Credit default is not sin. We should not be moralistic in policy thinking. In a limited liability corporation, the liability of shareholders should be limited to losing the equity capital that they put in. We should not create a new notion of harm to a promoter when his company defaults, well beyond his loss of equity capital.
  2. Most Indian firms are peppered with IEDs. The promoter has a unique informational advantage as she knows where the IEDs are buried.
  3. Arms length buyers will shade their bids down, reflecting fears of the IEDs. They will not be able to compete with the promoter. This will shrivel the buy side of the bankruptcy process. Barring promoters from the IRP is a way to restore competitive conditions in the IRP and enhance recovery rates.
  4. But the promoters know something unique which can improve recovery rates. We should not waste this knowledge. The best arrangement is one where the promoters sell this information to bidders.
  5. The recent ordinance debars such side transactions, which is inefficient.
  6. Estimating the loss given default is one important element of estimating the fair price of corporate credit. Lenders need to think about resolvability. A clean business, with a structure of complete legal contracts and no IEDs, will be the easiest to carry through the IRP and will get the highest recovery rates. These firms will get the cheapest debt from a rational debt market.
  7. The most productive firms are the largest and internationalised firms, which have harnessed economies of scope and scale. But these firms are inevitably complicated, with layered holding structures, multinational corporate finance, use of tax havens, and so on. Under present Indian governance arrangements, these largest firms will tend to have low transferability. This hampers their cost of capital. This is a channel for diseconomies of scale, scope and internationalisation. Improvements in the governance environment are required to remove this handcap in going from a firm size of Rs.$10^{10}$ to Rs.$10^{11}$.

I thank Harsh Vardhan, Bhargavi Zaveri, Josh Felman, Anjali Sharma, Adam Fiebelman, M. S. Sahoo, Susan Thomas, Renuka Sane, and Rajeswari Sengupta for useful discussions on these questions.

Friday, December 08, 2017

Digitising land record management in Maharashtra

by Sudha Narayanan, Gausia Shaikh, Diya Uday and Bhargavi Zaveri.

The 2006 Hindi film Khosla ka Ghosla narrates the story of one K.K.Khosla, who buys land on the outskirts of a city to only later find it squandered to squatters. Anecdotally, the story of K.K.Khosla represents the story of many plot buyers in India, for whom the idiom "possession is ninth-tenths of the law", is a harsh reality. Many of the problems associated with this idiom are a direct outcome of incomplete and inaccurate land title records.

Clear and accurate land title records underpin the protection of property rights in any state. Despite the state having conventionally monopolised the function of maintaining and updating land records, until the late 1990s, land titling systems was not the world's "sexiest" topic and got sparse attention from policymakers (Zasloff 2011). As one of the participants at an IGIDR roundtable on Land And Access to Finance described it, a posting in the land revenue administration is commonly regarded as punishment posting for government officials. However, since the 1990s, the connection between clean title records and access to finance and overall economic development, has gained traction.

A new study on digitising land record management in Maharashtra

In India, the central and state governments have been making concerted efforts at improving the land record management systems and the delivery of clean title records to citizens. Many of these initiatives have largely focused on the digitisation of land records and have been launched under the auspices of the Digital India Land Record Modernisation Programme (DILRMP), formerly known as the National Land Records Modernisation Program.

In a report released in the public domain on 13th November, we record our findings of a field study in Maharashtra, which was aimed at understanding (a) the extent to which land record administration had been digitised; and (b) the efficiency of service delivery of accurate land title records to citizens. We designed this study in collaboration with two other institutions, which conducted similar studies in Himachal Pradesh and Rajasthan respectively. For the purpose of our study, we studied digitisation' of the following aspects:

  1. existing land records;
  2. the process for recording or effecting a change of interests in land;
  3. the process for retrieval of copies of land records; and
  4. the inter-connectivity between the different offices of the state administration that maintain land records.

Absence of a centralised repository of title records

We find that in India, the land records administration systems pre-date independence, and have been largely driven by considerations involving the collection of land revenue, as opposed to the delivery of clean and accurate title records to the public. Although there are State-wise variations, land records in every State are generally spread across three offices of the State administration:

  1. Deeds (contracts) registering the transfer of land (and built-up area) are maintained by the offices of sub-registrars (SROs) under the
    Registration Act, 1908.
  2. Revenue records showing ownership and other interests in individual land parcels are maintained by the revenue records offices under the revenue codes enacted by States. Revenue records are commonly referred to Record of Rights (RoRs) for rural land and Property Register Cards (PR cards) for urban land in Maharashtra.
  3. Cadastral maps of villages and land parcels are maintained by the survey offices, which are responsible for conducting State-wise land surveys and parcel-wise boundary demarcation. Cadastral maps are generally made for each village.

Currently, these offices are only partially interconnected, and the level of interconnectedness also varies from to state to state. The absence of a comprehensive repository of information pertaining to the characteristics (such as permitted usage and current built-up status), ownership and all other interests created in respect of a land parcel, leads to incomplete or inconsistent land records. Further, it reduces the efficiency of service delivery of land records to the end-consumer. Consequently, buying and selling land and built-up area is more time consuming and expensive relative to other assets such as securities.

State, Tehsils and parcels

Our study investigated the abovementioned components of digitisation at three levels:

  1. State level: At the state level, we studied the extent to which the land record management system has been digitised in the state. For this, we largely relied on state-reported data. We conducted in-person interviews with officials of the revenue ministry of Maharashtra. We also relied on the data reported by the Maharashtra Government in a Management Information System maintained by the Central Government to track the State-level progress of the Digital India Land Record Modernisation Program (DI-LRMP).
  2. Tehsil level study: For the purpose of land revenue
    administration, Maharashtra is divided into six revenue divisions comprising of 36 districts, 181 sub-divisions, 358 Tehsils (referred to as Talukas in Maharashtra) and 44,855 villages. After conducting a state-level study in the first leg of the study, we narrowed down two sample Tehsils, Mulshi and Palghar located in Maharashtra. This exercise focused at understanding the extent of digitisation at the level of the sample Tehsils.
  3. Parcel level study:We further narrowed our focus to individual land parcels in the sample Tehsils, and studied 100 land parcels spread across 10 villages in each of the two Tehsils. This leg of the study aimed at comparing the land records of the sample parcels with the ground reality. The 100 sample parcels were selected through a stratified random sampling methodology. We inspected each land parcel in the sample and interviewed the owners and persons in possession of the land parcels. We asked questions such as whether a person claiming to be the owner on the ground was reflected as the owner in the records, whether the land was being utilised as per its classification in the land record. We also measured each parcel in the sample to ascertain the discrepancies between the area of the parcel as reflected in the land records and the area on physical measurement of the parcel.

This article gives an overview of our findings on the status of digitisation of land records in Maharashtra at the state level and the service delivery by the land record administration at the level of the Tehsils.

Digitisation of existing records:

Revenue records

We find that currently, throughout Maharashtra, RoRs are prepared digitally, that is, there are no hand written RoRs in Maharashtra, except for one Tehsil. Tables 1 and 2 show that Maharashtra has made significant progress on the digitisation of RoR, with the RoRs of three hundred fifty-seven out of three hundred fifty-eight Tehsils having been digitised and stored on state level servers. This has, however, not been accomplished for eighty-three villages of Jivati Tehsil in the Chandrapur District.

Table 1: Digitisation of RoRs in Maharashtra
Total Number of Tehsils 358
of Tehsils in which the RoRs have been digitised
Number of Tehsils for which the RoRs are
stored digitally

Table 2: Digitisation of RoRs in Mulshi and Palghar
Digitised (as a % of the total RoRs in the
Mulshi 100
Palghar 92

It is important to distinguish digitisation from scanning processes. In Tables 1 and 2, digitisation refers to the creation and storage of the RoR in a text-searchable digital format.

Cadastral maps

The digitisation of CMs may or may not be preceded by a survey or re-survey of the land. A survey of agricultural land, using traditional survey techniques such as plane table, in Maharashtra, was conducted before independence. The Maharashtra Government has not conducted a state-wide re-survey of agricultural land since independence. Non-agricultural land located in a village, town or city with a population exceeding 2000 persons, is commonly referred to as "Gaothan land" (abadi areas). A state-wide survey of gaothan areas has never been conducted. Table 3, which summarises our findings on the status of digitisation of cadastral maps, shows that very little progress has been made on this front.

Table 3: Digitisation of cadastral maps
(as a % of total CMs)
Maharashtra 3.79
Mulshi 7.59
Palghar 1.44

Here too, while 100% of the maps held by the state government have been scanned, Table 3 denotes the maps which are 'digitised' after vectorisation.

A pilot re-survey with modern survey techniques

Recently, the State Government initiated a pilot re-survey of agricultural land in twelve villages, using modern survey techniques and equipment such as such as High Resolution Satellite Imagery (HRSI), Electronic Total Station (ETS) and Differential Global Positioning System (DGPS), in the Mulshi. We have been informed that the pilot has been completed and the State Government has proceeded to digitise maps of these re-surveyed villages. The RoRs of these re-surveyed villages are also in the process of being revamped to integrate the geo-co-ordinates and aerial images, of the individual land parcels. Figures 1 and 2 contain images of a hand-written RoR and a revamped digitised RoR with geo-co-ordinates and an aerial image of the land parcel integrated in it.

Fig 1: Hand-written RoR

Fig 2: Sample RoR generated from the pilot
re-survey in Mulshi

The sample RoR in Fig.2 is a remarkable development in land record administration, as it integrates textual and spatial information pertaining to a specific land parcel in a single document maintained by the state.

Digitisation of the process of recording a change of interest in land

There are two processes involved in recording a change of interest in land. First, registration of the deed (contract) under which the change of interest is recorded. The Registration Act, 1908 mandates the registration of certain land transactions such as sales and mortgages, and requires the physical appearance of the parties to a contract before the SRO for the registration process. In 2013, Maharashtra made certain amendments to the Registration Act to allow registration through electronic means and issued rules to allow the e-registration of certain documents such as leave and license agreements.

While the State Government has undertaken three initiatives for digitising different stages of the registration process, the process can only be completed by physically attending the SROs, except for leave and license agreements in respect of built-up property. Table 4 summarises the status of digitalisation of each process involved in a land transaction, and gives a comparative overview of Mulshi and Palghar Tehsils.

Table 4: Status of digitisation of the registration process
Stage Mulshi Palghar
Title search Not digitised Not digitised
Determination of stamp duty Digitised Digitised
Payment of stamp duty and registration fees Digitised Digitised
Preparation of the transfer document Digital facility available only for leave and license agreements in one SRO Digital facility available only for leave and license agreements
Application for registration Digitised in one SRO Digitised
Verification of identity and documents Digital verification of identity done for leave and
license agreements in one SRO
Digital verification available only for leave and license agreements
Getting photographed Digital facility available
only for leave and license agreements in one SRO

Digital facility available only for leave and license

The second process involves the updation of the RoR. In most
states, the RoR is prima facie evidence of interests created in respect of land. We find that while the data-entry processes at the revenue offices have been digitised entirely, the process of applying for updation of RoRs continues to remain paper-based. Table 5 gives an overview of the status of digitisation of each phase of updation of RoR. While Table 5 gives a comparative overview of our findings in Mulshi and Palghar Tehsils, it represents the status of digitisation of the process for updating the RoR across Maharashtra:

Table 5: Digitisation of the process for updating RoRs
Task Mulshi Palghar
Application for updating the RoR Not digitised Not digitised
Data entry for updating the RoR Digitised Digitised
Generation of a notice inviting objections Digitised Digitised
Certification by the circle officer Not
Not digitised

Digitisation of the process for retrieval of copies of land records

Easy access to title records is one of the fundamental tenets of a good land records administration system. We find that while copies of RoRs are easily retrievable from the web by keying in basic details of the land parcel such as the cadastral number, such copies are not certified or digitally signed, which creates challenges for their usage as evidence before courts and other authorities. However, we understand that digitally signed copies of RoRs for a few Tehsils in Maharashtra are available for web retrieval, although we have not been able to retrieve any. The state officials informed us that copies of registered deeds can be retrieved from the web by keying in basic details about the land parcel or the registered deed. However, we have not been able to retrieve any. Cadastral maps are not available for retrieval online. In a nutshell, the process of applying for certified copies of title records continues to be largely physical.

As part of the study, we conducted test checks for retrieving a copy of a document known as Index II (which is a record issued by the SRO containing an extract of the transaction in a registered deed) and RORs. Table 6 contains the results of our test checks for retrieval of land records in Maharashtra.

Table 6: Digitisation of the process for retrieval of land title records
Online Kiosk Office retrieval
Index II Facility available but we could not retrieve copies No Yes
RoR Yes Yes Yes
Cadastral Maps No No Yes

Time for service delivery

We also studied the time taken for delivery of certain services to the citizens, namely: the time taken for registration, updation of land records and retrieval of certified copies of land records. For this purpose, we conducted test checks on randomly picked applications made in the last three years from each of the offices. Tables 7 and 8 contain our findings of such test checks conducted in Mulshi and Palghar Tehsil level offices.

Table 7: Time taken to obtain certified copy of RoRs and CMs
Minimum (in days) Maximum (in days) Average (in days)
Mulshi (when original not digitised) 10 68 29.4
Mulshi (when original digitised) 2 2 2.5
Palghar Same day Same day NA
Cadastral Maps
Mulshi Same day Same day Same day
Palghar Same day Same day NA
Table 8: Time taken for registration and updation of land records
Minimum (in days) Maximum (in days) Average (in days)
Registration of land transfers
Mulshi Same day Same day NA
Palghar Same day Same day NA
Updation of RoR
Mulshi (sale) 48 170 85.2
Mulshi (succession) 37 287 110.4
Palghar (sale) 38 111 52.6
Palghar (succession) 26 67 47.8
Correction of entries in the RoR
Mulshi 33 311 137.25
Palghar 109 535 269.6

Digitisation of the inter-connectivity between the various offices

As mentioned above, land records are currently maintained across three different departments of the Revenue Ministry. Clean title records require constant co-ordination between these departments. We find that the SROs (where land transaction deeds are registered) and the Talathis (who maintain RoRs at the village-level) are digitally interconnected, so that details of land transactions are regularly intimated to the Talathi, who then initiates the process for updating the RoRs. However, the co-ordination is often affected by breakdowns and power shortages. On the other hand, the connection between the survey department (which is in charge of preparing CMs) and the other two departments is weak. Also, we find that courts, which often pass orders affecting interests in land, are not connected to land records offices.

Way forward

  1. Absence of a comprehensive land records repository:
    Title records to a land parcel comprise of the RoR, CMs and registered deeds. All of these are currently maintained by different offices. This inherently creates inefficiencies in the internal management as well as access to title records for the public. Moreover, since these offices are not connected to other forums which are empowered to pass orders affecting rights in relation to land (such as courts, and tribunals), a comprehensive repository reflecting all the interests subsisting in respect of a land parcel, is missing. While digitisation, as is being currently implemented, can increase the efficiency of these silos, the creation of a single repository reflecting all interests in land, will be game-changer.
  2. Varying levels of progress in digitisation: We find that while some components of the system are in reasonably advanced stages of digitisation, others are not. For instance, the digitisation of CMs has not seen much progress in the state. Greater progress can be achieved on this front by either dispensing with land surveys for digitisation of CMs, or pursuing alternative survey techniques and easing government contracting processes for conducting surveys. Similarly, the processes of applying for registration, updating mutation entries and boundary demarcation, have not been digitised.
  3. Optimising interface platforms for service delivery:
    There is scope for bringing in efficiencies in the interface between the public and the land records administration by implementing some reasonably easy processes, such as allowing them to remotely track the status of their applications for land-related services.
    Even the platforms currently available do not allow land-holders to access copies of title records that will be accepted before judicial forums. For instance, copies of land records, such as the RoR that can be accessed from the web, are neither digitally signed nor certified. While we understand the process of facilitating such access is underway, until such access is fully operationalised, the absence of certified copies would imply that there is no legal sanctity to land title records retrieved from the web.
  4. Infrastructure issues: Throughout the duration of our study, we noticed infrastructure issues such as server breakdowns, slow connectivity, power shortages and shortage of survey equipment, which are major contributors to delays in the service delivery. We noticed the absence of good physical office infrastructure in several offices responsible for maintaining land records. For instance, we found that many of these offices lacked basic facilities such as restrooms and other resources necessary for any record-keeping unit such as photocopiers and printers.


The average Indian household holds 77% of its total assets in real estate. Anecdotally, land and fixed assets constitute a significant proportion of secured lending in India. The World Bank's Ease of Doing Business Ranking 2018 ranks India in the bottom quartile for property registration. In short, as per these rankings, critical infrastructure for a land market in India, is at best, poor and at worst, non-existent. The recent focus in India on digitisation of land records administration is admirable and is a step in the right direction towards increasing the overall efficiency of land record administration in India.

Even as we seek to improve land records administration through a single-minded focus on digitisation, the next step in this field is to re-think the institution design for the maintenance land records by the state, and re-focus it on service-delivery, as opposed to the collection of land revenue.


Jonathan Zasloff, India's Land Title Crisis: The Unanswered Questions, Jindal Global Law Review, Vol. 3, 2011.


Sudha Narayanan is faculty at IGIDR. Gausia Shaikh, Diya Uday and Bhargavi Zaveri are researchers at IGIDR.

Thursday, December 07, 2017

Understanding the recent IBC (Amendment) Ordinance, 2017

by Rajeswari Sengupta and Anjali Sharma.

The Insolvency and Bankruptcy Code, 2016 (IBC) is a landmark reform for India. At its core are three principles. First, businesses can and will fail, and all failure is not fraud. The IBC provides a forum for the creditors to collectively resolve such failures. Second, insolvency resolution is a commercial decision best left to the creditors' collective wisdom. Creditors are better placed than the state or the judiciary to decide whether to resolve or liquidate a firm in distress. Finally, predictability in the resolution process and the resolution outcomes improves the overall credit ecosystem. The report of the Bankruptcy Law Reforms Committee (BLRC) which proposed the IBC clearly explains that such a principles-based approach would yield positive outcomes for the overall credit environment of the country.

One year after the notification of the law, an Ordinance to amend IBC has been promulgated. This Ordinance bars several categories of persons and entities from participating in the IBC processes. In our assessment, by doing so, it goes against each of the three core principles of the IBC. In this article we analyse the Ordinance from three perspectives:

  1. Who does the Ordinance disqualify and from which IBC processes? Does the disbarment extend beyond the promoters of the firms in IBC?

  2. What is the likely impact of the Ordinance on the IBC?

  3. What is the likely impact of the Ordinance on the incentives of the various concerned parties?

Q1. Who does the Ordinance disqualify? From which IBC processes?

The Ordinance introduces a new section 29A in the IBC. This section identifies eight categories of participants and bars them from participating in three IBC processes. It bars them from being a resolution applicant and submitting resolution bids for firms that are in IBC. Second, it bars them from making any bids in the IBC liquidation process. Finally, it bars them from being associated with the debtor firm while an IBC resolution plan is being implemented.

A critical feature of the disbarment is the extent of its coverage. Not only does the Ordinance bar the eight categories of participants, it also bars all persons connected with them (section 29(i)). The definition of connected person is fairly wide. As per the Ordinance, it includes promoters, holding and subsidiary companies, associate companies, persons in management, persons in control as well as related parties. It is unclear which definition of related parties will be applicable to assess this disbarment. The term related party is defined in three separate laws, each with varying degrees of coverage:

  1. Under section 188 of the Companies Act, 2013.
  2. Under the Clause 49 of the Listing Agreement laid down by SEBI.
  3. Under section 2(24) of the IBC itself where related parties in relation to the corporate debtor are laid down.

The IBC definition of related party is the widest. It includes directors, partners, key management personnel, entities with common directors, advisors, entities associated with policy making, subsidiaries, holding companies, associate companies, shareholders with 20% or more voting rights, and entities that provide or receive managerial or technical assistance.

The eight categories of persons being disbarred are themselves extensive in coverage. These categories are sourced from several laws ranging from the Banking Regulation Act, the SEBI Act, the Indian Penal Code (IPC), and the IBC itself. Laws from foreign jurisdictions also form the basis of one such category. We take a closer look at these categories of disbarment, their possible coverage, and the requirements which form the basis of these disqualifications.

  1. Undischarged insolvent (section 29A(a)): Given that the IBC is the insolvency law in force, this category finds its basis in the IBC itself. It effectively excludes all entities that are in the IBC process, and their related parties such as promoters, managers and associate companies, from making resolution bids or participating in liquidation. With this clause in place, only third parties not connected to the firm in IBC can participate in the IBC resolution process. However, the other clauses of the Ordinance include even the third parties in the list of exclusions.

  2. Persons convicted for any offence punishable with imprisonment for two or more years (section 29A(d)): This category finds its basis in the Criminal Procedure Code (CrPC) as well as other laws which have penal provisions for imprisonment of two years or more. For instance the Income Tax Act, the Negotiable Instruments Act, and the Prevention of Money Laundering Act all have such provisions for a range of offences. The manner in which this clause has been drafted does not require the person to be awarded an imprisonment of two years or more. It requires only that the offence they have been convicted of have this penalty available as an option. Often the imprisonment penalty in these laws ranges from three months to two or three years. The intent of this clause may have been to disbar persons who have been convicted of serious offences from IBC proceedings, but its drafting overreaches and disbars a far larger group of participants.

    This clause creates uncertainty about any IBC bids from persons who may be under investigation for such offences. The Committee of Creditors (CoC) may be biased against such bids due to the risk of future convictions. This clause also has the potential of being abused by vested interests who may use it to create negative biases against competitors' bids.

  3. Wilful defaulters (section 29A(b)): This category finds its basis in the wilful defaulter guidelines of the Reserve Bank of India (RBI). There are inherent problems in the process using which some defaulters are classified as 'wilful'. The process is conducted entirely by committees of banks' senior management, who in this case are nemo iudex in causa sua or judges of their own cause. Even though the consequences of being classified a wilful defaulter are steep, there is no appeal mechanism available in the RBI norms. In some cases, the classification as wilful defaulter has been successfully challenged in High Courts.

    The RBI norms bar wilful defaulters from accessing bank credit. SEBI has barred them from a wide range of activities in the capital markets- from raising capital, to holding Board positions, to setting up capital market intermediaries such as mutual funds or brokerages. Reports suggest that as of March 2017, banks had classified 8,915 accounts amounting to Rs. 0.92 trillion of loans as wilful defaults.

    Since a wilful defaulter is shut out from formal financial institutions and markets, market dynamics would naturally prevent them from submitting any credible bids in the IBC resolution process. Even if a wilful defaulter is able to submit a bid, the CoC in IBC has the power the reject such a bid. Given that commercial incentives were already stacked against any bids made by wilful defaulters, it is unclear why the need was felt to amend the law to exclude these entities explicitly.

  4. Any person with a loan that has been NPA for one year or more (section 29A(c)): This category finds its basis in the micro-prudential regulations that RBI imposes on banks under the Banking Regulation Act, 1949. When loan accounts become overdue for more than 90 days, banks are required to classify them as non-performing assets (NPAs). A borrower whose loan remains an NPA for 12 months or more, is barred by this Ordinance from submitting IBC resolution bids. A person may have one or more loans from banks and if even one of them fulfills this condition, then she is barred from bidding in IBC.

    This criterion creates uncertainty for participants in the stressed asset market who may have invested in a defaulting firm or wish to buy NPAs from banks. Unless they get clarity that these actions will not disbar them from the IBC process, they will be disincentivised from making such investments.

    A recently released Credit Suisse report points to the likely extent of exclusion that may occur on account of this category of disbarment. It finds that more than 50% of the stressed debt in the corporate sector (Rs 7.3 trillion) is with firms whose interest coverage ratio (ICR) has been less than one for two years. An ICR of less than one over such a long period suggests that many of these firms did not have the wherewithal to pay the interest on their borrowings and are likely to be NPA for more than 12 months in the banks' books.

    The Indian corporate sector has been in distress from 2010 onwards. For a large part of this period, banks under the umbrella of various restructuring schemes initiated by the RBI allowed corporate distress to remain hidden and unresolved. In the last two years, as part of RBI's Asset Quality Review (AQR) process many of these corporate loan accounts got classified as NPAs. Barring them from the IBC process puts the blame for unresolved distress squarely on these companies and their promoters, and lets the banks and the RBI off the hook despite their role in encouraging the 'extend and pretend' course of action and delaying resolution of corporate distress.

  5. Persons disqualified as directors (section 29A(e)):
    This category finds its basis in section 164 of the Companies Act, 2013 (CA2013) which lays down the criteria for director disqualification. In October 2017, in a crackdown on shell companies, the Ministry of Corporate Affairs disqualified around three lakh persons from acting as directors. This action was taken under section 164(h)(a) of CA2013, which disqualifies a director of a company that has not filed financial statements or annual returns for three years in a row. There is no appeal mechanism available in CA2013 for a person disqualified as a director.

  6. Persons barred by SEBI from the securities markets (section 29A(f)): This category finds its basis in the penal provisions of the SEBI Act, 1956. This disqualification criterion lacks clarity. The SEBI Act empowers SEBI to issues two types of orders through which participants are barred from accessing the securities markets: interim orders and final orders. Interim orders are ex-parte orders that are issued when investigation against the concerned entities is still ongoing. In these cases the concerned parties do not have the remedy of appeals to the Securities Appellate Tribunal (SAT) available to them. In its current form, the Ordinance bars both types of participants from the IBC process: those against whom an investigation is ongoing, and those against whom a final order has been made by SEBI.

  7. Persons who have given a guarantee to a creditor in respect to a corporate debtor in IBC (section 29A(h)): This clause does not have any legal basis. Its simply bars any person who has extended an enforeceable guarantee to a creditor in respect of a company in IBC from submitting bids under IBC. Effectively, it makes the act of giving a guarantee an offence which is penalised under IBC.

    For a long time, banks in India have followed the practice of taking guarantees from promoters, major shareholders and associate companies for giving loans to companies. If such a company became distressed and ended up in IBC, it is unclear why these parties should be excluded from the resolution process. If these guarantors fail to fulfill their guarantee, IBC can be triggered against them. Similar concerns also arise for parties that have provided credit enhancement facilities, which are nothing more than guarantees.

  8. Persons from foreign jurisdictions (section 29A(j)):
    This category offers the least clarity, in terms of coverage and intent. It bars from the IBC bidding process any person who falls in categories 1 to 7 as per the laws of foreign jurisdictions.

    The drafting of this clause suggests a wide disqualification, even for foreign participants. For instance, it suggests that a person or a company in India who may have an NPA account of more than one year in a bank in the UK is barred from submitting IBC resolution bids for any company in India. Likewise, a person or a company in the UK, who has given a guarantee for a UK company which goes into insolvency as per UK laws, cannot submit a resolution bid for a company under IBC in India.

To sum up: if a person satisfies any of the above criteria or if a person is connected to an entity who satisfies any of the above criteria, then she cannot make a resolution bid or participate in liquidation proceedings in IBC.

The initial discussion around this Ordinance focused on the disbarment of promoters of firms that are undergoing IBC proceedings from the resolution process of their own firms. However, in its current form the Ordinance bars them from any IBC resolution or liquidation, not just of their own firm. It also bars from the IBC bidding process, promoters of firms that are not in IBC, but who fall in any one of the eight categories.

Q2. What is the likely economic impact of this Ordinance on IBC?

In our view, this Ordinance will impact the IBC in four ways:

  1. Procedural impact: The Ordinance introduces substantial procedural uncertainty in the resolution process and opens it up to disputes and litigation. For instance, it is unclear if this Ordinance will apply prospectively or retrospectively. Will it apply to the cases that are already in IBC? Similarly, will it apply to borrowers whose loans were NPA greater than 12 months as at the date of the Ordinance, or after?

    It complicates the role of the Resolution Professional (RP) or the Liquidator. These insolvency professionals now have the task of determining the eligibility of applicants as per this Ordinance.

    The Ordinance also puts a strain on the 180 (or 270) day timeline of the IBC. In case potential resolution applicants dispute their disbarment, the entire IBC process has to be put on hold till such dispute is adjudicated upon. If this Ordinance is applied to the current IBC cases many of which are already well underway, then the IPs may have to seek bids from new applicants eligible under the Ordinance and discard existing offers that may have been made by persons falling in any of the eight disbarment categories. The timeline of 180 (or 270) days may not be sufficient for the IPs to go through the bid-seeking process all over again.

  2. Economic impact on resolution: The Ordinance effectively disqualifies vast sections of the corporate world,
    both in India and abroad, from participating in the IBC bidding process. In doing so, it significantly reduces the number of likely resolution plans that maybe submitted in any IBC case in an already gloomy landscape. The lack of competition among the narrow pool of eligible bidders will depress the financial value of any resolution plan that is eventually submitted to the CoC. The smaller the value of the eligible resolution plans, the greater will be the haircuts that the financial creditors, including banks, will be forced to accept. If the Ordinance is retrospectively applied, it will affect the current crop of 402 cases in IBC, including the 12 big cases that the RBI had identified earlier this year. These 12 cases are in the distressed sectors of steel, power, infrastructure, engineering-procurement-construction etc. for which recovery rates are expected to be low. With this Ordinance, the recovery rates in these cases will be even lower than initially expected. It is likely that many of these will end up in liquidation due to lack of sufficient bids.

  3. Economic impact on liquidation: In the worst case scenario of no viable resolution bid submitted during the 180 (or 270) days of IBC, the firm in question will go into liquidation. Liquidation recovery rates are in any case lower but the Ordinance further aggravates it by signficantly reducing the pool of prospective buyers in liquidation as well.

    Presumably the driving force behind the Ordinance is to keep the promoters of the IBC firm at bay in order to prevent them from buying back the firm at a lower price. In India, third parties may find it difficult to acquire and manage promoter-controlled businesses without the cooperation of promoters. This is because such businesses may be operating on the basis of a large number of unwritten, informal contracts between the promoters and other parties. These maybe difficult for the RP to formalise within the 180 (or 270) day period of the IBC resolution process.

    Even if an eligible, external bidder makes a bid for acquiring a firm in IBC, it will apply discounts to the risks it faces on account of these informal contracts. In many cases these risks may be large enough to deter any third party bids. The exclusion of the promoters by the Ordinance may in fact negatively impact the outcome. In such circumstances, liquidation of the firm becomes highly likely.

    Large scale liquidations destroy organisation capital of firms. They are bound to have a detrimental effect on jobs, corporate sentiments and the overall economic growth of the country. In other words, the repercussions of the Ordinance may extend far beyond mere promoter exclusion.

  4. Impact on IBC principles: By substantially shrinking the universe of eligible resolution applicants as well as potential buyers in liquidation, the Ordinance violates the core principles of the IBC.

    The IBC is based on the premise that all business failure is not fraud. The Ordinance by its very design goes against this principle. By disqualifying from the IBC bidding process any defaulter who has had an NPA account for one year or more, or who has given a guarantee, it views business failure and fraud with the same lens. A person may have faced adverse economic shocks such as a business cycle downturn or a commodity price shock as a result of which the firm owned or managed by her may have been unable to repay a loan for more than a year. This is different from a fraudulent or an unscrupulous promoter who may have been siphoning off assets from her own firm and hence has rendered it insolvent by her own actions. The Ordinance treats both these categories on par. In doing so and by disqualifying genuine bidders, it runs the risk of committing what is called a Type I error in statistical analysis.

    Another core principle of the IBC is that the resolution outcome is best left to the creditors' collective wisdom. Accepting or rejecting a resolution plan is a commercial decision and the creditors are best-placed to evaluate such a plan. The IBC gives the CoC complete discretion to reject any resolution plan that they may consider unviable or unsuitable. The creditors should have the right to choose a plan based on how much value they will recover in the process. By interfering with this process and by deciding who all are now eligible to submit their bids, the Ordinance risks jeopardising the very outcomes intended by IBC.

    An ultimate test of the success of IBC is the recovery rate. As the preamble to IBC clearly states, the primary objective of the law is maximisation of value of assets of the debtor firm undergoing the insolvency and bankruptcy proceedings. Fulfilling this objective requires a competitive bidding process such that there is a fair price discovery mechanism. The Ordinance thwarts this process by removing a large number of potential bidders from the applicant pool. By doing so, the Ordinance may end up lowering the recovery rate in the IBC resolution process. This creates uncertainty in the credit environment of the country. Creditors are encouraged to offer better terms and conditions when they are assured of a certain outcome upon the default of a firm. In an environment of persistently low recovery rates, IBC may not result in the desired outcome of an improved credit culture.

Q3. What is the likely impact of the Ordinance on the incentives of concerned parties?

The Ordinance, by its sweeping nature, is likely to affect the incentives of several stakeholders, both within and outside of IBC proceedings. Here we conjecture about the change in incentives of three main parties:

Promoters and borrowers

The Ordinance shuts out a large fraction of the promoters from the IBC bidding process, not just the wilful defaulters. Once disqualified from submitting bids for their own firms, the promoters have little incentive to co-operate with the RPs and share relevant information using which the RPs can seek potential bids.

In fact, as a firm becomes stressed, the Ordinance creates incentives for its promoters to indulge in high risk behaviour or asset stripping, even is it means running their firms to the ground. This is because the promoters know that with the amended IBC in place, they have no chance to buy back their firm once it enters into IBC.

The Ordinance disqualifies defaulters with an NPA account of one year or longer. This clause creates disincentives for firms that have inherently risky business models to seek bank financing. Since banks are the largest source of finance in India, this may create barriers to firm growth.

In the long run the Ordinance may affect the spirit of entrpreneurship in the country. The essence of IBC is to facilitate quick exits of failed firms and to accept failure as a natural outcome of entrepreneurship. With the Ordinance in place, the amended IBC will lead to promoters losing their firms even if the firms were in genuine distress.


The Ordinance gives incentives to the banks to delay NPA recognition for as long as possible.

By disqualifying a large number of persons, the Ordinance will lower the amount that the banks as the main financial creditors in most of the IBC cases expect to recover. This may result in the banks not recognising accounts as NPA so that the promoters can submit their bids in the IBC resolution process. The more the number of resolution plans submitted to the CoC, the higher will be the recovery rate in the competitive bidding process. It is possible that banks may also pressurise the promoters to pay up their dues but there is also a cost of provision that comes with early classification. If, as a result of the Ordinance, banks can benefit from higher recovery rate and also avoid provisions, they may have a greater incentive to delay NPA recognition.

Further, given that the Ordinance may adversely affect the recovery rate in the IBC process, banks may no longer have the incentive to trigger IBC to begin with. This Ordinance puts at risk even the out-of-court settlements with the eight categories of disbarred participants. For instance, if a plan that involves one of the eight categories of participants is negotiated out-of-court, and IBC subsequently gets triggered by a third party, the negotiated plan cannot be implemented and the RP has to seek fresh resolution bids.


Most of the banks in the CoC are public sector banks, especially in the big cases undergoing IBC proceedings. By affecting the recovery rate that these banks may expect to achieve, the Ordinance may also affect the incentives of the government as the majority shareholder in these banks. The government maybe incentivised to encourage public sector firms (PSUs) to bid in the IBC resolution process so that the deals go through at relatively higher prices and the PSU banks do not face large haircuts. This may create an illusion of success in the IBC process but it will result in increased government ownership in the stressed industries which is not an efficient outcome.

If the inevitable outcome of the Ordinance is an increase in the number of liquidation cases, then also the government maybe incentivised to step in and instruct the PSU firms to bid in order to prevent large scale liquidations and resultant job losses.


Given its wide coverage, it is not clear whose interest the Ordinance is trying to protect or who the Ordinance is trying to punish. It is difficult to ignore the role of the promoter in any Indian business. If the promoter is allowed to bid for her firm as part of the IBC resolution process, there may not be any other bidder because there is a big asymmetry of information that favours the promoter. If, on the other hand, the promoter is completely shunned, then there may not be sufficient number of bids and the firm may go into liquidation.

One way to resolve this conundrum maybe to bar promoters from participating in the IBC bidding process in their full capacity while permitting them to make deals with third parties such as private equity funds, who would be the primary bidders. The share of the promoters maybe capped at a certain threshold in the resolution plan submitted to the CoC by the fund. This could be a reasonable compromise wherein the promoters get some value out of the auction process. They are not able to fully buy back their firms at a discounted price neither are they completely pushed aside. This may also ensure that the firm does not get liquidated and organisational capital is not lost.

Once such a condition is put in place in the amended IBC, there is no rationale for barring all the other categories of persons in the sweeping manner as done by the Ordinance. The IBC process in essence is a commercial one and the Ordinance to amend the IBC should not be driven by moral considerations.


Rajeswari Sengupta and Anjali Sharma are researchers at Indira Gandhi Institute of Development Research, Mumbai. The authors would like to thank Ajay Shah and Josh Felman for useful discussions


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Friday, December 01, 2017

Estimating the potential number of personal insolvency cases at the DRT

by Renuka Sane.

The Insolvency and Bankruptcy Board of India (IBBI) has recently proposed regulations that would bring into effect the personal insolvency sections in the Insolvency and Bankruptcy Code (IBC). These are to be initially applicable for guarantors and small businesses, and over the next few years, be applicable to all individuals. Under the IBC, Debt Recovery Tribunals (DRTs), that were established for adjudication and recovery of debts due to banks and financial institutions, are designated to be the adjudicating authority for personal insolvency.

This article examines the likely load on DRTs due to the notification of personal insolvency sections of the IBC by asking
three questions with respect to personal loans from the banking channel in India:

  • What is the spread of personal loans across districts in India?
  • How many cases are likely to emerge on account of defaults?
  • How well prepared are the DRTs to handle these cases?

The article focuses only on personal loans for two reasons. First, data on bank loans is one of the only reliable sources of public data on individual borrowing. Data on borrowing from other sources is not easily available. Second, there is no ambiguity about personal loans being taken by individuals. Other categories of loans (such as retailers, industry, transport operators etc) may or may not be individuals. The estimates, therefore, are conservative. They exclude loans given by banks to individuals which are not classified as personal loans. They also exclude other formal and informal loans that individuals may have taken from sources such as NBFCs, micro-finance and others.

The question on DRT preparedness also narrowly focuses on the presence of the DRT in a particular district, and the expected case-load where DRTs are present. Questions on procedural efficiency at DRTs, as well as optimal judge strength will also be important, as will be the interaction between the resolution professionals and the DRTs.


Data on credit outstanding is sourced from Table 5.9, Basic Statistical Returns of Scheduled Commercial Banks in India - Volume 45, March 2016, Reserve Bank of India. Personal loans are divided into three categories - loans used for housing, loans used for the purchase of consumer durables and loans for other reasons. Among these, it is likely that loans for housing and consumer durables are secured loans. Table 1 shows the summary statistics for the district-wise spread of outstanding personal loans and the number of accounts as of March, 2016.

Table 1: District wise outstanding accounts for personal loans (RBI, 2016)
Min Median Mean Max
Outstanding personal loans (in Rs. billions) 0.062 5.2 21.2 953.8
Outstanding personal loans accounts (in 000) 0.27 23.9 85.7 3949.6

The maximum credit outstanding in a district was INR 954 billion in 3.9 million accounts. The data also suggests that the spread of loans is not normally distributed, that is, there exist a few districts with very high outstanding personal loans (in terms of both, value and number of accounts).

Personal loans across India

An understanding of total credit outstanding in each district would be extremely important from the point of view of the impact of personal loans (and defaults on these loans) on the banking system. However, the question of interest is the number of potential insolvencies from the point of view of the DRTs. It is, therefore, more important to focus on the number of loan accounts, than the value of credit outstanding.

For example, if we have two districts with the same value of credit outstanding, but one district has twice as many loan accounts as the other district, the number of default cases are likely to be higher in the first district if one assumes similar rates of default. While it is true that if one DRT sees fewer cases of higher value, while the other sees larger number of cases of lower value, then the staffing, technology and expertise required in the two DRTs is likely to be different. However, from a pure case-load point of view, the number of potential defaults is the statistic of first-order importance.

Figure 1 shows the total number of personal loans outstanding by districts. The darker shaded districts have higher number of personal loan accounts. The yellow dots represent DRT locations.

Figure 1: Number of accounts - outstanding personal loans

There is wide variation in the distribution of number of accounts across India. Though the map for credit outstanding is not presented, the variation is similar to that of number of accounts. The DRTs are located in regions with high number of personal loans. However, there are several districts in South and East India that have a large number of loan accounts, but do not have a DRT in their district. Similarly districts in Kutch, Rajasthan, Punjab also do not have a DRT.

If we focus only on the top 10% of districts by total number of personal loans, we end up with 63 districts. The median number of loan accounts in these 63 districts is 233,807 while the average number of accounts is 561,436. Of the 63 districts, almost 70% districts do not have a DRT. However, the top 10 districts in these 63 account for 62% of the total number of accounts, while the top 20 account for 74% of the total accounts. Of the top 10, two districts do not have a DRT. Of the top 20, seven do not have a DRT. From the narrow point of view of presence of DRTs, the situation is perhaps not that bad, as districts with a high concentration of loan accounts (barring the seven in the top 20) do have a DRT.

The absence of DRTs becomes prominent as we move to districts in the lower deciles. Even though the number of loan accounts in these districts may be low, borrowers will need some mechanism to be able to access the DRTs if they are to avail the provisions of the IBC.

Expected case load

Total number of accounts give us a stock of debt at a particular point in time. Not all loans will undergo default, and not all loans that undergo default will come to the IBC to get resolved. To arrive at a number of potential cases, we have to make assumptions about number of defaults, and the number of cases that may come through the IBC route.

Information on defaults on personal loans is sparse. Delinquency on education and housing loans is estimated to be around 8-9%, and 1% respectively. We, therefore, calculate the likely number of accounts that will default in each district, under assumptions of a default rate of 1%, 5%, and 10%. This analysis assumes that the default rate is uniform across the country, though in reality, this will differ by district. The analysis further assumes that 10% of the cases that default will come to the IBC. This is a purely arbitrary number. Ex-ante we do not know how many cases will come to the IBC, and in fact, the efficiency of the IBC will drive this number over time.

Table 2 provides the potential number of accounts (in '000) that will default if the default rate were 1%, 5% and 10%.

Table 2: Number of potential defaults (in 000) in top 20 districts
State District 1% of accounts 5% of accounts 10% of accounts DRT present
NCT of Delhi Delhi 39.50 197.48 394.97 Yes
Karnataka Bangalore urban 34.13 170.63 341.27 Yes
Maharashtra Mumbai Suburban 31.80 159.02 318.04 Yes
Maharashtra Mumbai 27.47 137.33 274.66 Yes
Tamil Nadu Chennai 24.78 123.88 247.76 Yes
Telangana Hyderabad 17.37 86.85 173.71 Yes
Maharashtra Pune 16.77 83.83 167.66 Yes
West Bengal Kolkata 10.69 53.47 106.93 Yes
Maharashtra Thane 8.14 40.71 81.41 No
Telangana Rangareddy 7.84 39.19 78.37 No
Gujarat Ahmedabad 7.25 36.23 72.47 Yes
Haryana Gurgaon 5.06 25.28 50.57 No
Tamil Nadu Coimbatore 4.77 23.86 47.73 Yes
Kerala Ernakulam 4.63 23.13 46.25 Yes
Uttar Pradesh Gautam Buddha Nagar 4.25 21.24 42.49 No
Gujarat Vadodara 3.97 19.84 39.68 No
Rajasthan Jaipur 3.87 19.36 38.71 Yes
Kerala Thiruvananthapuram 3.87 19.35 38.70 No
Andhra Pradesh Vishakhapatnam 3.51 17.56 35.13 Yes
Gujarat Surat 3.39 16.95 33.91 No

As discussed earlier, several of the districts even in the top 20 districts by number of loan accounts, do not have a DRT presence. With a 1% default rate, and 10% of default cases going to the IBC, the following number of cases will not have an obvious choice of DRT in the district.

Table 3: Number of potential default cases in districts without a DRT
District 1% accounts 10% defaults
without DRT default go through IBC
Thane 8140 814
Rangareddy 7840 784
Gurgaon 5060 506
Gautam Buddha Nagar 4250 425
Vadodara 3970 397
Thiruvananthapuram 3870 387
Surat 3390 339

In the districts, where there is a DRT presence, the case-load may become too large. For example, if we assume a default rate of 1%, then Delhi should see 39,000 defaults. If the default rate is assumed to be 10%, then Delhi should see almost four lakh defaults. One could argue that several of these cases are housing or consumer loan cases which may not come to the IBC. While this is true, the number of loan accounts on housing and consumer durables are much smaller - for example after removing these two loans, Delhi would still see 37,000 defaults if 1% of accounts were to undergo default. Even if only 10% of these, i.e. 3,700 cases, were to make it to the IBC, it still adds up to a sizable number of cases.


Currently, the DRTs deal with bank loans above INR 10 lakh. However, there are only 65 lakh loan accounts in this size threshold in the entire banking system. In contrast, there are 14 crore household loan accounts, and their average size is INR 2.3 lakhs. The logistics, procedures and skills required to deal with cases stemming from defaults on small personal loans will be very different from what the DRTs are typically used to dealing with. The analysis suggests two challenges for the DRTs in dealing with personal insolvency:

  1. There are at least seven districts where the number of loan accounts is high, but there is no DRT presence. As one moves to districts with fewer loan accounts, the DRT presence becomes
    negligible. While it is true that defaults in these districts will not be as high as in the districts with a larger number of loan accounts, a mechanism for these borrowers to reach out to the DRTs needs to be designed and implemented.

  2. The case load on existing DRTs will rise significantly even if 1% of personal loan accounts in a district were to default, and just under 10% of these were to be brought under the IBC. This is a concern as there were already a 109,518 cases pending at the DRTs as of 30 June 2017. One way to deal with this issue is to have a larger role for the resolution professional combined with simplified forms and procedures to reduce the flow of cases to the DRTs.

Even conservative estimates of defaults only on personal loans from the banking channel, suggest that the DRTs have to increase their preparedness before they handle personal insolvency cases. The current functioning of the DRTs leave a lot to be desired. One issue that has been raised is that of low productivity of judges at the DRTs, where productivity is measured as the low disposal rate per judge. Low disposals also result in delays in cases. However, the delays are often a result of trial failures, on account of incompetence by the concerned parties to the case.

If these issues are not resolved, then the the DRTs will get overwhelmed with cases from individual insolvency. To effectively deal with resolution of such loans, there will need to be an increase in the presence of DRTs across India. The DRT rules of procedure, reach, infrastructure, as well as their use of technology for case management, will require a comprehensive re-think.


Renuka Sane is a researcher at the National Institute of Public Finance and Policy. I thank Mayank Mahawar for research assistance.