International Monetary Fund (IMF) has advised Indian Government to initiate insolvency reforms including enactment of a new law.

In its latest financial system-focused country report on India, IMF says: “ Despite numerous recent legislative changes, significant weaknesses in the insolvency framework remain.”

The report titled ‘ India: Financial System Stability Assessment Update' notes that Insolvency is governed by a multiplicity of laws in India

and the process of registering security interests remains difficult. For creditors seeking to recover debts from borrowers, the primary tools are the Debt Recovery Tribunals (DRTs) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI), both of which present significant limitations.

Says the report, “Both tools result in relatively low returns for creditors and

long time periods needed for liquidation. Delay in the recovery proceedings result in a slowdown of credit growth and the drying up of funding for creditworthy borrowers, which prevents its proper utilization and recycling.”

The general insolvency framework affords inadequate protection to creditors, and does not offer a viable rehabilitation regime for distressed companies. General corporate insolvency is administered by the courts, and the proceedings are plagued with procedural delays, which erode the value of the company, it adds.

The report has pointed out that the laws governing insolvency for corporate, nonregistered businesses, fail to allow sole proprietors to make a proposal to creditors, and are punitive rather than rehabilitative. A unified insolvency law that addressed unincorporated businesses would be the best solution, but barring that possibility a more comprehensive “personal” insolvency law should be enacted to respond to the needs of small businesses.

As put by the report, “market participants commented that the insolvency regime requires a major overhaul since protracted insolvency proceedings are mentioned as a key weakness of the system.”