What’s common for Micheal Jackson, Mike Tyson, Donald Trump, Nicolas Cage and Willie Nelson? Apart from being hugely successful, all have filed for bankruptcy either in personal or business capacity at least once in their lifetime.
Unlike in India, bankruptcy and insolvency law has been around in the US for last 200 years or so. In India, it was only last year that the government formulated The Insolvency and Bankruptcy Code and set up an Insolvency and Bankruptcy Board of India (IBBI). This only deals with insolvency and bankruptcy for companies and partnership firms.
However, a report in The Times of India on Monday citing sources says that the government is now laying down a process for a similar code for individuals. According to the report, it is aimed at helping common people, such as farmers, kirana shop owners or even a salaried middle class person, better deal with a financial crisis arising from the loss of business or job.
It is high time that such a step is taken as the current laws, which provide for individual declaration of bankruptcy, are pretty useless, as they are not only state-specific but have been rarely used because of the cumbersome process associated with it.
If the development is true, it is indeed good news. For one, it will help demystify personal debt crises. In India, bankruptcy is considered as an indication of profligacy, overspending and over borrowing. Remember, it is only recently that Indians have become comfortable with personal debt. Given this, bankruptcy seems like death.
Nearly a decade ago, when I started off as a reporter at a personal finance magazine, I soon learned that “debt” is considered bad. Taking loans is bad, talking about it is even worse. So it is important that it had to be kept a secret. And God forbid, if you fail to repay, banks truly have an upper hand in recovery.
A case in point is the global financial crisis of 2008 and the resultant turmoil in personal lives of people in India. There were huge job losses across sectors after economy slowed down sharply. In a few cases of EMI defaults, banks resorted to intimidation for recovery. Taking loans and defaulting on them was such a shame that many preferred taking their own life, instead of taking a legal recourse.
In a case that shocked the nation, an ICICI Bank customer and Mumbai resident Prakash Sarvankar, 38, who had taken a Rs 50,000 personal loan, committed suicide, holding such recovery efforts responsible for his death. If Sarvankar had an option to file for bankruptcy without any social/ personal shame being associated with it, he probably could have started his life afresh instead of committing suicide.
The need for individual bankruptcy law is all the more urgent today. With the growth in income, individuals have become more confident about taking on debt. Availability of credit has also become easier with lenders looking to sell more such products. According to the RBI data, as of 28 April 2017 personal loans outstanding of Indian banks stand at Rs 16 lakh crore. This forms 23 percent of the total credit offtake.
Of this, credit card debt outstanding is Rs.54,100 crore, housing loans Rs 8.6 lakh crore and vehicle loans at Rs 1.73 lakh crore. In case of a default now, either the creditor incurs a loss or the customer suffers a disrepute when the bank uses coercive modes to recover. Though the apex bank and authorities have come up with recovery guidelines, a full-fledged reform is yet to take place on this front.
It is to be remembered that the growth that India is currently witnessing is not creating jobs. On the contrary, there are reports of job losses across sectors. According to media reports, an estimated 1.5 million lost their jobs in the first four months of 2017 alone. Another estimate says around 6 lakh IT jobs will be lost in next three years due to technological advances. As the urban middle class - with the home loan, car loan, personal loans and credit card debt - loses employment, there definitely is a real scare for the banking industry.
Already banks have seen the default rates in education loans going up. According to a report in The Indian Express, the defaults in this category have gone up by a whopping 142 percent.
Seen in this context, a formal and strong legal framework for personal insolvency and bankruptcy is an urgent need of the hour.
However, while devising such a law utmost care has to be taken that it is not misused by careless customers. At the time of lending, both creditor and borrower should discuss the terms for renegotiating the repayment options in case of financial crises. Moreover, bankruptcy should only be the last resort and not the first.
In the US there are there are two options - Chapter 13 and Chapter 7. Under Chapter 7, the debtor will likely have to return the house or car to the creditor or arrange to pay the whole value of loan taken. Under Chapter 13, he is allowed to keep the house or car if he stays current with a court ordered payment system. In short a fresh start to rebuild a financial life again. While devising the law here, the authorities should indeed give both the options. But it would be better to give more weight to the Chapter 13 model.
It is good that such a law has at least come in the news headlines in these times of extreme volatility. If it happens, it will definitely save many from falling into depression and eventual suicide.
Updated Date: Jul 26, 2017 13:27 PM