The Insolvency and Bankruptcy Code (IBC) has provisions for individuals as well, but they are yet to be notified. In a move that is being seen as a precursor to notifying bankruptcy rules for individuals, the government is reportedly considering moving ahead with Fresh Start, a part of IBC that applies to low-income individuals who have small debts. Fresh Start envisages a simplified and fast-track procedure which provides relief from debts that are below a certain threshold. Neil Borate asks experts if the thresholds for Fresh Start are set too low, and whether or not the procedure will help small borrowers.
Aishwarya Satija, Research fellow at Vidhi Centre for Legal Policy
Fresh Start can be effective in getting people out of debt trap
The objective of the Fresh Start process is to enable debtors who fall below certain asset- and income-based thresholds to get their debts waived through a streamlined and time-bound adjudication process.
The process has the potential to be extremely effective in waiving debts of people trapped in a debt cycle. However, this completely hinges on its implementation.
Given the pending caseload and limited presence of debt recovery tribunals, the government may consider setting up special benches or vesting jurisdiction with another judicial body. The judges and resolution professionals appointed in these cases may also need special training to be able to balance the interests of stakeholders and understand the effect of waivers on the cost of credit. Also, the asset and income thresholds given in IBC for eligibility should be reconsidered to ensure appropriate coverage.
Harshala Chandorkar, Chief operating officer, TransUnion CIBIL
Such waivers may affect credit score, access to loans
As per Credit Information Companies (Regulation) Act, 2005, the payment history on loans taken by individuals and corporates is reported to credit information companies and reflects in the borrower’s credit report. When the loan is settled or written-off by a lender, it will show as such on the credit report and impact access to credit in the future.
While providing this relief, borrowers must be made aware that this waiver may impact their credit report and score which, in turn, affects their access to credit in future. They must also be counselled about how they can rebuild their company’s credit report by being regular in repaying credit availed in the future.
Consumer awareness on credit reports and score and how to improve access to credit will go a long way in further improving the ease of doing business in India, which is steadily improving, as is the country’s global rank in terms of credit availability.
Prakash Praharaj, Founder, Max Secure Financial Planners
The proposed limits are too low and will exclude many
The IBC for corporates came into force in 2016. For individuals, IBC was supposed to be notified as a replacement for the Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920. Both laws still prevail and suffer from several issues, including a lengthy and costly recovery process. Also, it becomes difficult to avail fresh loans after being declared a defaulter.
The provisions of Fresh Start can improve on these areas for proprietors, partners and guarantors for corporates. The resolution process can be simpler, faster and less costly. But the proposed limits of ₹60,000 for income, ₹20,000 for assets and ₹35,000 for debt are too low and will exclude a large segment of micro, small and medium enterprises. This is minuscule compared to the exemption limits for income tax and reservation for weaker section. A mechanism similar to the US bankruptcy code could be the way forward.
L. Viswanathan, Partner, Cyril Amarchand Mangaldas
Low threshold to ensure credit discipline is maintained
Such schemes offer relief to small borrowers and eliminate the burden of litigation cost and time for both the borrowers and lenders. A process-oriented, formalised framework under the Code may not be sufficient to handle the large volume of such borrowers in the credit market. A personal insolvency cell within the Insolvency and Bankruptcy Board of India, as currently proposed for handling such cases, will definitely be more amenable for such situations.
The eligibility thresholds are targeted at the section of the society that requires relief, and should not benefit others. Hence, the lower the threshold, the better it is, as this should not affect credit discipline.
The individual insolvency provisions under IBC need to be notified. Fresh Start measures are a precursor for such eventuality so that cases up to a threshold can be resolved without going through the framework of the Code.