The effective functioning of the corporate insolvency resolution process and liquidation process needs an efficient and sound information infrastructure
All stakeholders in the insolvency or bankruptcy process of a debtor should have access to reliable financial information about the debtor, which is also called credit information. The Bankruptcy legislative Reforms Committee (BlRC) recognises that asymmetry of information is a critical barrier to fair negotiations, or ensuring swiftness of the process. The committee recommended the creation of a regulated information utility that will make available all relevant information to all stakeholders in resolving insolvency and bankruptcy. The panel introduced a novel concept of information infrastructure that governs information submission, access and retrieval during insolvency. The BlRC envisaged that over time, information utilities would collectively capture a comprehensive picture of the financial liabilities of all entities. This information would be revealed in order to facilitate the resolution of insolvency or bankruptcy.
A report of a Reserve Bank of India (RBI) panel on furnishing credit information also indicates that adequate amount of quality information on counter-parties is a critical component of financial infrastructure. Reducing the information asymmetry between lenders and borrowers will provide a fillip to growth of credit especially among disadvantaged sections of society and foster financial inclusion and inclusive growth. An efficient system of credit information sharing reduces cost of intermediation. It allows banks to effectively price, target and monitor loans and thereby enhances competition in the credit market. It also reduces credit defaults benefitting consumers with reduction in average interest rates.
India stands 44th in the World Bank’s report of 2017, as against the 36th rank it had in 2015. The reported stressed assets in the Indian banking system amounts to Rs10 lakh crore. As per a study on ‘Insolvency and Bankruptcy Code 2016: A game changer’, effective implementation of the Insolvency and Bankruptcy Code, 2016, can potentially release about Rs25,000 crore capital currently locked up in non-performing assets (NPAs) over next four to five years. The amount of top 20 non-performing Assets (NPAs) accounts of public sector banks stands at Rs1.54 lakh crore. As per a research, different countries in the world like Japan, Singapore, Hong Kong, the US, Malaysia, Germany, Korea, China, Indonesia generally take upto 1.5 years to resolve an insolvency case with an average recovery rate of 85 per cent. In India, the time period taken is 4.3 years, with an average recovery rate of 25 per cent.
The Credit Information Bureau (India) ltd (CIBIl) was incorporated in 2000 and it launched its operations in April 2004. It collects and maintains records of an individual's payments pertaining to loans and credit cards on the basis of the periodic submission of information by banks and credit institutions..
Credit Information Companies (Regulation) Act (CICRA) was enacted in 2005, and a few Credit Information Companies (CICs) were also set up. Further, the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) maintains a structure for the purpose of registration of transactions of securitisation, asset reconstruction of financial assets and creation of security interest. However, many issues relating to credit information are still to be addressed, such as standardisation of information, authentication of information, expansion of information base etc.
The effective functioning of the corporate insolvency resolution process and the liquidation process requires an efficient and sound information infrastructure to be in place. Credit information is the base for Insolvency Resolution Process. It is identified by the Bankruptcy law Reform Committee Report that considerable amount of time is lost in obtaining credit.
The concept of development of the information utilities has been introduced for the first time in India under the Insolvency and Bankruptcy Code 2016. The provisions of the Code relating to the information utilities have been notified by the Insolvency and Bankruptcy Board of India and became effective on April 1, 2017. The information utilities facilitates credit information by getting the information authenticated by the parties, and stores the financial information. Once information utilities process becomes operational, it will not only improve India's ranking with respect to credit information, but also would facilitate efficient insolvency regime by speeding up the insolvency process.
(The writer is president of Institute of Company Secretaries of India)