Individual insolvency: debt settlement of the poor on the anvil

The government is also seeking to address the concerns of microfinance institutions that fear loss of income if they have to forgo money loaned to clients, the official said.

The government has launched the process of preparing individual insolvency standards which will provide loan exemption up to Rs 35,000 for the poorest of the poor through “out-of-court settlements” under the Code. Bankruptcy and Insolvency (IBC), seeking to extend a respite to those vulnerable sections struggling in the grip of a debt trap.

This will require an amendment to the IBC which usually involves a resolution under the overall control of a decision-making authority (NCLT, in the case of corporate insolvency). In fact, the government’s previous plan was to facilitate individual insolvency resolution for all categories of debtors through the Debt Collection Tribunal (DRT). The Insolvency Law Committee under the leadership of Corporate Affairs Secretary Injeti Srinivas may soon submit a report on individual insolvency, suggesting this change.

Once the regulations are in place, in a so-called ‘fresh start’ process, the poor who do not own a home earn up to Rs 60,000 per year and have assets of up to € 20,000. are likely to be eligible for such a request. a relief. The committee’s recommendations will need to be ratified by Cabinet before the government takes the next step of seeking parliamentary approval for a bill amending the IBC to implement this idea.
“The idea of ​​an out-of-court settlement process was brought up, as it would otherwise be very difficult for the poor to spend money on litigation, especially when the default is for a small amount. A framework will be developed under the IBC to facilitate this, ”a senior government official told FE.

The government is also seeking to address the concerns of microfinance institutions that fear loss of income if they have to forgo money loaned to clients, the official said. However, analysts have pointed out that MFIs, in any case, hardly lend without collateral to the poorest of the poor who could benefit from such a waiver.

As FE reported earlier, part of the government still believes it will be more effective than populist measures like farm loan waivers that involve bank debt relief and are mostly exploited by wealthy farmers. It will also deal a fatal blow to money lenders who charge exorbitant interest rates (30-40% per annum in many cases) to the poor by taking advantage of their vulnerability and often forcing them into debt (many farmers committed suicide because of this).

In addition, at a time when a huge number of promoters of large corporations have each defaulted on loans of Rs 30,000-40,000 crore or more, a haircut of Rs 20,000 crore for lenders on ten million. disadvantaged debtors – assuming an average loan amount of Rs 20,000 – seems insignificant. As for informal sector lenders, the government will not compensate them for potential losses due to write-offs. While welcoming the new regulations, however, some analysts fear that this move, if not implemented properly, could distort the credit behavior of these people and could stifle credit flows in the future.

However, since such relief will be part of their credit history, potentially discouraging lenders from re-lending to them, these small debtors might also have the option to opt out of the insolvency process and settle on their own with it. lenders.

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