The Insolvency and Bankruptcy Board of India (IBBI) has recently proposed regulations that would bring into effect the personal insolvency sections in the Insolvency and Bankruptcy Code (IBC). These are to be initially applicable for guarantors and small businesses, and over the next few years, be applicable to all individuals. Under the IBC, Debt Recovery Tribunals (DRTs), that were established for adjudication and recovery of debts due to banks and financial institutions, are designated to be the adjudicating authority for personal insolvency.
This article examines the likely load on DRTs due to the notification of personal insolvency sections of the IBC by asking three questions with respect to personal loans from the banking channel in India:
- What is the spread of personal loans across districts in India?
- How many cases are likely to emerge on account of defaults?
- How well prepared are the DRTs to handle these cases?
The article focuses only on personal loans for two reasons. First, data on bank loans is one of the only reliable sources of public data on individual borrowing. Data on borrowing from other sources is not easily available. Second, there is no ambiguity about personal loans being taken by individuals. Other categories of loans (such as retailers, industry, transport operators etc) may or may not be individuals. The estimates, therefore, are conservative. They exclude loans given by banks to individuals which are not classified as personal loans. They also exclude other formal and informal loans that individuals may have taken from sources such as NBFCs, micro-finance and others.
The question on DRT preparedness also narrowly focuses on the presence of the DRT in a particular district, and the expected case-load where DRTs are present. Questions on procedural efficiency at DRTs, as well as optimal judge strength will also be important, as will be the interaction between the resolution professionals and the DRTs.
Data on credit outstanding is sourced from Table 5.9, Basic Statistical Returns of Scheduled Commercial Banks in India - Volume 45, March 2016, Reserve Bank of India. Personal loans are divided into three categories - loans used for housing, loans used for the purchase of consumer durables and loans for other reasons. Among these, it is likely that loans for housing and consumer durables are secured loans. Table 1 shows the summary statistics for the district-wise spread of outstanding personal loans and the number of accounts as of March, 2016.
|Outstanding personal loans (in Rs. billions)||0.062||5.2||21.2||953.8|
|Outstanding personal loans accounts (in 000)||0.27||23.9||85.7||3949.6|
The maximum credit outstanding in a district was INR 954 billion in 3.9 million accounts. The data also suggests that the spread of loans is not normally distributed, that is, there exist a few districts with very high outstanding personal loans (in terms of both, value and number of accounts).
Personal loans across India
An understanding of total credit outstanding in each district would be extremely important from the point of view of the impact of personal loans (and defaults on these loans) on the banking system. However, the question of interest is the number of potential insolvencies from the point of view of the DRTs. It is, therefore, more important to focus on the number of loan accounts, than the value of credit outstanding.
For example, if we have two districts with the same value of credit outstanding, but one district has twice as many loan accounts as the other district, the number of default cases are likely to be higher in the first district if one assumes similar rates of default. While it is true that if one DRT sees fewer cases of higher value, while the other sees larger number of cases of lower value, then the staffing, technology and expertise required in the two DRTs is likely to be different. However, from a pure case-load point of view, the number of potential defaults is the statistic of first-order importance.
Figure 1 shows the total number of personal loans outstanding by districts. The darker shaded districts have higher number of personal loan accounts. The yellow dots represent DRT locations.
|Figure 1: Number of accounts - outstanding personal loans|
There is wide variation in the distribution of number of accounts across India. Though the map for credit outstanding is not presented, the variation is similar to that of number of accounts. The DRTs are located in regions with high number of personal loans. However, there are several districts in South and East India that have a large number of loan accounts, but do not have a DRT in their district. Similarly districts in Kutch, Rajasthan, Punjab also do not have a DRT.
If we focus only on the top 10% of districts by total number of personal loans, we end up with 63 districts. The median number of loan accounts in these 63 districts is 233,807 while the average number of accounts is 561,436. Of the 63 districts, almost 70% districts do not have a DRT. However, the top 10 districts in these 63 account for 62% of the total number of accounts, while the top 20 account for 74% of the total accounts. Of the top 10, two districts do not have a DRT. Of the top 20, seven do not have a DRT. From the narrow point of view of presence of DRTs, the situation is perhaps not that bad, as districts with a high concentration of loan accounts (barring the seven in the top 20) do have a DRT.
The absence of DRTs becomes prominent as we move to districts in the lower deciles. Even though the number of loan accounts in these districts may be low, borrowers will need some mechanism to be able to access the DRTs if they are to avail the provisions of the IBC.
Expected case load
Total number of accounts give us a stock of debt at a particular point in time. Not all loans will undergo default, and not all loans that undergo default will come to the IBC to get resolved. To arrive at a number of potential cases, we have to make assumptions about number of defaults, and the number of cases that may come through the IBC route.
Information on defaults on personal loans is sparse. Delinquency on education and housing loans is estimated to be around 8-9%, and 1% respectively. We, therefore, calculate the likely number of accounts that will default in each district, under assumptions of a default rate of 1%, 5%, and 10%. This analysis assumes that the default rate is uniform across the country, though in reality, this will differ by district. The analysis further assumes that 10% of the cases that default will come to the IBC. This is a purely arbitrary number. Ex-ante we do not know how many cases will come to the IBC, and in fact, the efficiency of the IBC will drive this number over time.
Table 2 provides the potential number of accounts (in '000) that will default if the default rate were 1%, 5% and 10%.
|State||District||1% of accounts||5% of accounts||10% of accounts||DRT present|
|NCT of Delhi||Delhi||39.50||197.48||394.97||Yes|
|Uttar Pradesh||Gautam Buddha Nagar||4.25||21.24||42.49||No|
As discussed earlier, several of the districts even in the top 20 districts by number of loan accounts, do not have a DRT presence. With a 1% default rate, and 10% of default cases going to the IBC, the following number of cases will not have an obvious choice of DRT in the district.
|District||1% accounts||10% defaults|
|without DRT||default||go through IBC|
|Gautam Buddha Nagar||4250||425|
In the districts, where there is a DRT presence, the case-load may become too large. For example, if we assume a default rate of 1%, then Delhi should see 39,000 defaults. If the default rate is assumed to be 10%, then Delhi should see almost four lakh defaults. One could argue that several of these cases are housing or consumer loan cases which may not come to the IBC. While this is true, the number of loan accounts on housing and consumer durables are much smaller - for example after removing these two loans, Delhi would still see 37,000 defaults if 1% of accounts were to undergo default. Even if only 10% of these, i.e. 3,700 cases, were to make it to the IBC, it still adds up to a sizable number of cases.
Currently, the DRTs deal with bank loans above INR 10 lakh. However, there are only 65 lakh loan accounts in this size threshold in the entire banking system. In contrast, there are 14 crore household loan accounts, and their average size is INR 2.3 lakhs. The logistics, procedures and skills required to deal with cases stemming from defaults on small personal loans will be very different from what the DRTs are typically used to dealing with. The analysis suggests two challenges for the DRTs in dealing with personal insolvency:
There are at least seven districts where the number of loan accounts is high, but there is no DRT presence. As one moves to districts with fewer loan accounts, the DRT presence becomes negligible. While it is true that defaults in these districts will not be as high as in the districts with a larger number of loan accounts, a mechanism for these borrowers to reach out to the DRTs needs to be designed and implemented.
The case load on existing DRTs will rise significantly even if 1% of personal loan accounts in a district were to default, and just under 10% of these were to be brought under the IBC. This is a concern as there were already a 109,518 cases pending at the DRTs as of 30 June 2017. One way to deal with this issue is to have a larger role for the resolution professional combined with simplified forms and procedures to reduce the flow of cases to the DRTs.
Even conservative estimates of defaults only on personal loans from the banking channel, suggest that the DRTs have to increase their preparedness before they handle personal insolvency cases. The current functioning of the DRTs leave a lot to be desired. One issue that has been raised is that of low productivity of judges at the DRTs, where productivity is measured as the low disposal rate per judge. Low disposals also result in delays in cases. However, the delays are often a result of trial failures, on account of incompetence by the concerned parties to the case.
If these issues are not resolved, then the the DRTs will get overwhelmed with cases from individual insolvency. To effectively deal with resolution of such loans, there will need to be an increase in the presence of DRTs across India. The DRT rules of procedure, reach, infrastructure, as well as their use of technology for case management, will require a comprehensive re-think.
The article first appeared on Ajay Shah's blog, 1 December 2017. I thank Mayank Mahawar for research assistance.