In News: The series of regulatory forbearance steps taken by authorities to help them tide over this unprecedented crisis, In Current scenario that crisis COVID-19 Pandemic.
What is regulatory forbearance ?
- Forbearance, a term which means restraint and tolerance.
- Financially speaking, forbearance means the provisional moratorium over loan repayments between the lender and the borrower, caused by a demonstrated economic hassle on the latter’s side.
- A regulatory policy (i.e., a policy implemented by central banks and other regulatory authorities) that permits banks and financial institutions to continue operating even when their capital is fully depleted.
- Regulators give banks extended periods of time during which they have to comply with regulatory requirements (by securing new capital funds).
- This inaction reflects the unwillingness of regulators to take disciplinary action against problem banks for some period of time.
- Regulatory forbearance is also known as capital forbearance.
- The regulatory forbearance has been cited by several economists as the reason why bad loans and insolvency proceedings have not surged yet.
Measures Taken Government Under regulatory forbearance like
- Interest rates were cut after the onset of the pandemic,
- A moratorium was offered on loan instalments due from borrowers, and
- Liquidity infusion into the system has provided a temporary respite.
- The Insolvency and Bankruptcy Code 2016 is currently suspended
- Sections 7, 9 and 10 of IBC enable financial creditors to initiate insolvency proceedings against a corporate debtor.
- Whereas Section 9 grants these powers to operations creditors, Section 10 allows corporate debtors to initiate insolvency proceeding
- Sections 7, 9 and 10 of the bankruptcy law were suspended for six months from March 25 by way of an ordinance in June.
- The Government has extended the suspension on the Insolvency and Bankruptcy Code (IBC)till the end of the present financial year (March 31 2021).
- The aftermath of the above-mentioned measures, the credit disbursal to key sectors of the economy has been insufficient.
About the IBC:
- The IBC was enacted in 2016, replacing a host of laws, with the aim to streamline and speed up the resolution process of failed businesses.
- The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.
- The code stipulates that the resolution process of a stressed company will have to be completed in a maximum of 270 days.
When does the Insolvency and Bankruptcy Code (IBC) apply?
- In March this year, the government raised the threshold for invoking insolvency under the IBC to Rs 1 crore from Rs 1 lakh with a view to prevent triggering of such proceedings against small and medium enterprises that are facing the heat of the coronavirus pandemic.
The Code creates various institutions to facilitate resolution of insolvency. These are as follows:
- Insolvency Professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
- Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
- Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
- Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code. The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law