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The Way Forward for Personal Insolvency

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Part of the India Studies in Business and Economics book series (ISBE)


In 2016, the Indian Parliament passed the Insolvency and Bankruptcy Code (IBC). The Government has chosen to notify only the part on corporate insolvency. It is expected that the part on personal insolvency will be notified for individuals with business debt and personal guarantors. In this context, this chapter describes the Indian credit market and presents an argument for the need for personal insolvency law. It provides a brief overview of the provisions on personal insolvency in the IBC. It makes suggestions on questions of policy that need to be addressed before the law can be meaningfully implemented as the success of the IBC depends on the design of the subordinate legislation as well as the evolution of the institutional infrastructure.

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  1. 1.

    This may, however, change with the recent Supreme Court judgment that has held the use of Aadhaar based authentication by the private sector to be unconstitutional.

  2. 2.

    As described by Banerjee and Duflo (2014), the lack of availability of adequate and timely credit is one of the biggest problems affecting the growth of the small-scale enterprises in India.

  3. 3.

    See Sane (2015).

  4. 4.

    See Iyer (2018).

  5. 5.

    See Khosla (2018).

  6. 6.

    The genesis of PSL was a study group in 1969 that observed that while agriculture contributed 50% to the national output, it received only a third of institutional credit. This led to setting of group-wise quantity targets for disbursal of credit. Over time other groups such as village and cottage industries, weaker sections, micro-finance were added to the definition of groups eligible for priority sector lending. The drive for continuing with the quantity targets comes from the need to somehow restrict the reach of informal lenders (such as moneylenders) who are seen as exploitative.

  7. 7.

    See RBI (2018).

  8. 8.

    See TechSci Research (2018).

  9. 9.

    See Kohli (2016) and TOI (2018).

  10. 10.

    Gross Non-Performing Assets (NPAs) and Gross Advances by Priority and Non-priority Sectors: Domestic Scheduled Commercial Banks (excluding Foreign Banks), CMIE Economic Outlook.

  11. 11.

    KCC scheme that was put in place in 1998, which provided farmers with easy credit without any collateral. The holder of the KCC could withdraw money up to Rs.50,000, from a bank and use it for any purpose. This also ruled out the possibility of banks monitoring the usage of the loans.

  12. 12.

    Mudra loans which are given under the Pradhan Mantri Mudra Yojana is a Government of India initiative to provide credit support to small business.

  13. 13.

    See Kapoor and Yadav (2018).

  14. 14.

    Tiwary (2017) reports that between 2015 and 2016, farmers suicides spiked by 41% and 80% of the suicides were because of bankruptcy or debts owed to banks and micro-finance institutions.

  15. 15.

    See IE (2018).

  16. 16.

    See Prathap and Khaitan (2016).

  17. 17.

    See Bhageria (2017).

  18. 18.

    See Sane and Sapre (2017).

  19. 19.

    See Kanz (2016).

  20. 20.

    See The New Indian Express (2018).

  21. 21.

    See Sane (2018).

  22. 22.

    While the Debt Recovery Tribunals are another mechanism, they apply only to loans worth Rs.10 lakh and more, and hence are largely used for corporate insolvency.

  23. 23.

    See Malhotra (2009).

  24. 24.

    RBI Report on Trends and Progress in Banking in India, 2008–2013.

  25. 25.

    Khanna (2017) mentions the discussions on this issue in several Law Commission of India reports (No. 14, 79, 124, 230 and 245).

  26. 26.

    See RBI (2003).

  27. 27.

    See RBI (2012).

  28. 28.

    Sane and Thomas (2013) provide a brief overview of the micro-finance crisis and argue the need for better consumer protection frameworks in the collection of debts.

  29. 29.

    World Bank (2017) presents a case on the importance of personal insolvency for the MSME sector.

  30. 30.

    For example, in 2010 the Andhra Pradesh government brought an ordinance effectively banning micro-finance in the state in response to alleged suicides caused because of coercive collection by micro-finance. See Sane and Thomas (2016) for the impact of this Ordinance on consumers.

  31. 31.

    An example of this is described by Ameerudheen (2018) on recovery proceedings under the SARFAESI Act, 2002 in the past two years against cashew farmers in Kerala.

  32. 32.

    Feibelman (2005) presents a discussion on the insurance function of bankruptcy.

  33. 33.

    See Bankruptcy Law Reforms Committee (2015).

  34. 34.

    See Feibelman (2005) and Feibelman (2018).

  35. 35.

    Feibelman (2018) provides an excellent summary of the provisions of the Code.

  36. 36.

    Section 78, IBC.

  37. 37.

    Section 3(10), IBC.

  38. 38.

    Section 79(15), IBC.

  39. 39.

    Chapter III, Part III, IBC.

  40. 40.

    Section 99, IBC.

  41. 41.

    Section 101, IBC.

  42. 42.

    Sections 102, 103 and 104, IBC.

  43. 43.

    Section 111, IBC.

  44. 44.

    Section 108(3), IBC.

  45. 45.

    Section 114, IBC.

  46. 46.

    Section 116, IBC.

  47. 47.

    Section 121, IBC.

  48. 48.

    Section 125, IBC.

  49. 49.

    Section 126, IBC.

  50. 50.

    Section 128, IBC, Sect. 154, IBC.

  51. 51.

    Section 155, IBC.

  52. 52.

    Sections 129–137, IBC; Sect. 178, IBC.

  53. 53.

    Section 94(6), IBC.

  54. 54.

    Section 105(2)(b), and Sect. 178, IBC.

  55. 55.

    Qualifying debt includes debt that is due for repayment provided it is not part of the excluded debt category, is not secured, and has been incurred three months before the fresh start application. See Sect. 79(19) of the IBC.

  56. 56.

    These thresholds have been designed using the SECC, 2011, Deprivation Index as well as the Key Indicators of Debt and Investment in India for 2013 and will need to get revised over time.

  57. 57.

    Section 80, IBC.

  58. 58.

    Section 82, IBC.

  59. 59.

    Section 81(4).

  60. 60.

    Section 83, IBC.

  61. 61.

    Section 84, IBC.

  62. 62.

    Section 84, IBC.

  63. 63.

    Section 92, IBC.

  64. 64.

    Section 92(5).

  65. 65.

    See Feibelman (2005).

  66. 66.

    Section 110, IBC.

  67. 67.

    Section 172, IBC.

  68. 68.

    Section 178, IBC.

  69. 69.

    Section 100(1), IBC.

  70. 70.

    Section 100(2), IBC.

  71. 71.

    Section 114, IBC.

  72. 72.

    Section 178(3), IBC.

  73. 73.

    The IBBI published draft regulations on personal insolvency in December 2017. While these regulations provided the details for a broad process to be followed, they were not accompanied by a broad objective and goals that the regulations wished to achieve.

  74. 74.

    World Bank (2014) provides a comprehensive analysis of the various choices regarding a personal insolvency regime.

  75. 75.

    Sane (2018) for a description of how loan waivers can be carried out through the fresh start process in the IBC.

  76. 76.

    The Supreme Court, in L. Chandra Kumar vs. Union of India, 1997 lamented that Indian tribunals function inefficiently since there is no authority in charge of supervising and fulfilling their administrative requirements.

  77. 77.

    Damle and Regy (2017) show the shortfall in the number of judges in the NCLT in the context of the increasing case load from the IBC. Datta and Shah (2015) point out the mistakes made in India on court modernisation.

  78. 78.

    A similar suggestion was made by the FSAT Task Force led by Justice N. K. Sodhi, in 2015, to provide administrative services to tribunals in financial sector.

  79. 79.

    Prashant (2017) presents a critique of the IU regulations.

  80. 80.

    Anagol and Kim (2012), Halan et al. (2014), Sane and Halan (2017), Anagol et al. (2017) are examples of consumer protection problems in the insurance and mutual fund industries in India.

  81. 81.

    Existing professional organisations such as the Institute of Chartered Accounts of India (ICAI), Institute of Company Secretaries of India (ICSI) and Institute of Cost Accountants of India (ICWAI) have been given the license to perform as IPAs.

  82. 82.

    See Vats (2018), Gopakumar and Upadhyay (2017) for more details.

  83. 83.

    These are not-for-profit agencies set up to advise and educate consumers on financial portfolio management.

  84. 84.

    See Shah (2017).

  85. 85.

    Rai (2018) makes this argument in the context of the design of a privacy law.


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I thank Adam Feibelman, Josh Felman, Ajay Shah and Anjali Sharma, and participants of the round-table on personal insolvency at the National Institute of Public Finance and Policy for useful comments. This chapter draws heavily from the author’s working paper—Sane (2019), The way forward for personal insolvency in the Indian Insolvency and Bankruptcy Code. Working paper No. 251, NIPFP Working paper series. National Institute of Public Finance and Policy, New Delhi.—and content has been re-used with permission The opinions expressed in this chapter and all errors are the author’s own.

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Sane, R. (2022). The Way Forward for Personal Insolvency. In: Thomas, S. (eds) Insolvency and Bankruptcy Reforms in India. India Studies in Business and Economics. Springer, Singapore.

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