Major change in Insolvency and Bankruptcy Code to benefit poor defaulters

Learn more about the waiver scheme designed to benefit millions of poor and low-income loan defaulters with a key insertion in the Insolvency and Bankruptcy Code.

Major change in Insolvency and Bankruptcy Code to benefit poor defaulters

The Ministry of Corporate Affairs is working on a universal loan waiver scheme that is intended to benefit the small borrowers of the country. It is one of the major changes planned to be inserted in the Insolvency and Bankruptcy Code (IBC) and is designed to shape up as a well-structured loan waiver scheme which will benefit small farmers, artisans and micro enterprises. The initiative is expected to be ready by the time the next government is sworn in. The benefits of the scheme will be available on the basis of income. Accordingly, only people or entities with an annual income of less than Rs. 60,000; or outstanding loan of less than Rs. 35,000; or assets under Rs. 20,000 would be eligible for the waiver available under the scheme.

Related: A new way to clean up the default loan mess

As the slabs suggest, the scheme will benefit the borrowers who are genuinely poor and at the moment are subject to the same loan default and recovery procedures and treatment as the rich corporates, sometimes even worse. The cost of the entire waiver is expected to stay within Rs 20,000 crore, but is poised to benefit millions of small borrowers. However, the scheme will remain voluntary. Notably, there is a stigma attached with such benefits and the creditworthiness of the person is also likely to be affected due to the waiver.

The waiver will be made available through an online system to be incorporated within the Insolvency and Bankruptcy Board of India and a dedicated team will monitor the eligibility and disbursal of the waiver.

Related: How does your employer profile decide your loan eligibility?

Why including the scheme in the Insolvency and Bankruptcy Code is significant?

IBC is the Act that seeks to consolidate and amend all laws and regulations related to reorganisation and insolvency of individuals and entities. By inserting the scheme in the IBC, the waiver scheme gets a statutory status. The implementation of the scheme can be expected to be much simpler due to this insertion.

What is the Insolvency and Bankruptcy Board of India?

IBBI is the regulator in India to oversee insolvency proceedings. It is also the supervisor of insolvency-related entities like insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU). The IBBI also aims to speed up the process of resolution of stressed assets of the nation and will be the special team working on the Universal Debt Relief Scheme that will operate under it.

Related: A step-by-step guide to building a strong credit score 

Why a special treatment of small borrower is required?

At present, there is little differentiation in the loan default and recovery mechanism between the rich and the poor. In some cases, the government goes for expensive “haircuts” (loan waivers) for massive corporate loan defaults. Such steps are taken to avoid panic in the market and also rescue corporate assets for the greater interest of the industry and the economy. On the other hand, take the example of the legal notices sent to over 12,000 farmers in Punjab for not being able to repay loans worth Rs. 229 crore, peanuts compared to the 92% loan waiver given to Adhunik Metaliks or the Rs. 34,000 haircut incurred for the Bhushan Steel default. This scheme will only bring the much-needed loan waiver to people who need it most. Read this piece to know how you can be on the right side of debt. 

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