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Assessing the Borrower-Level Impact of the Insolvency and Bankruptcy Code: A Study of the Fresh Start Process

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The 2016 Insolvency and Bankruptcy Code (IBC) is a landmark legislation with the potential to impact every borrower. This paper focuses on Part III of the IBC, which deals with natural persons, proprietorships, and personal guarantors for corporate debt. Through the paper, we attempt to estimate the potential consequences of the Fresh Start Process (FSP) defined under this Part. The IBC lays out economic criteria that can qualify (or disqualify) an applicant for FSP. Under FSP, a borrower must be asset-lite, have a low income, and hold minimal outstanding debt to qualify. These thresholds determine the applicability of the process once the IBC is fully notified. Thus, empirical estimates regarding the effects of the provisions on the Indian credit market are crucial to deciphering the impact of the IBC, more specifically, the FSP.

We start by comparing the contemplated processes and outcomes of IBC with other similar legislations, like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002), Provincial Insolvency Act (1920), and Presidency Town’s Insolvency Acts (1909). We then proceed to estimate how many borrowers are likely to qualify under the FSP. We use the Centre for Monitoring Indian Economy’s (CMIE) Consumer Pyramids Household Survey (CPHS) conjoined (using a nearest neighbour model and the Hungarian Algorithm) with the All-India Debts and Investments Survey (AIDIS) for 2019 to estimate how many households qualify under the FSP.

The full paper is accessible here.

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