Independent Research and Policy Advocacy

Estimating Eligibility for the Fresh Start Mechanism under IBC, 2016

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The provisions for insolvency, bankruptcy and fresh start for natural persons as contained in the Insolvency and Bankruptcy Code (IBC) 2016 are expected to shift the paradigm of the Indian consumer credit market. This paper attempts to capture the impact of one such remedy, the Fresh Start Process by estimating the number of eligible consumers and the debt they hold. Empirically, it was observed that there has been a shift in the distribution of number of credit accounts with outstanding less than INR 35,000 (the debt ceiling for fresh start) in the last five years, especially for SCBs, and presently only 2.21 million credit accounts of Schedule Commercial Banks (SCBs) and 0.79 million clients of Microfinance Institutions (MFIs) would qualify under the Fresh Start eligibility criteria based on income and debt profile. The analysis further shows the debt-at-risk (combined exposure of the financial sector that may have to be written off) amounts to INR 59.24 billion. Though these numbers seem significant, reading them in context of the overall exposure of the banking system and the micro-finance sector reveals that when the provisions of Fresh Start are notified the credit sector is very likely to withstand its impact. The paper also situates the empirical observations amidst a discussion of the extant statutory provisions and expected hurdles in the implementation of the remedy.

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