Vishleshan for Regulatory Exams, 14th August 2025: New IBC Rules & RBI’s Seven Sutras for AI Adoption

Want to get ready for the UPSC, RBI, SEBI, or NABARD exam? If yes, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss the New IBC rules to make insolvency faster and RBI’s Seven Sutras for AI Adoption. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.

Speeding Up Insolvency Resolution

Context: Proposed amendments to India’s Insolvency and Bankruptcy Code (IBC) that include a provision for out-of-court procedures could solve its problem of delays. Crucially, a new path could make space for talks reduce the role of resolution professionals.

Link to the Article: Mint

The government has introduced a bill to amend the Insolvency and Bankruptcy Code (IBC) of 2016, acknowledging the need to address its inefficiencies. The IBC, a landmark reform aimed at time-bound resolution of corporate insolvency, has been praised for its objectives but has faced practical challenges, including a high number of pending cases and resolution times far exceeding the stipulated deadlines. The proposed amendments seek to streamline the process, introduce out-of-court mechanisms, and strengthen the powers of the regulator, the Insolvency and Bankruptcy Board of India (IBBI).

Insolvency and Bankruptcy:

Insolvency: A state where an individual, firm, or company is unable to pay its debts as they fall due.

Bankruptcy: A legal declaration of insolvency by a court of competent jurisdiction. It is a legal status for a person or entity that is insolvent, and the court issues orders to resolve the insolvency and protect the rights of creditors. While insolvency is a financial state, bankruptcy is the legal process that follows.

• Need for IBC 2016:
  • The IBC was enacted to consolidate and amend all laws related to insolvency and bankruptcy resolution in India.
  • It was introduced to simplify and expedite the insolvency resolution process for companies, partnership firms, and individuals in a time-bound manner.
  • Its key objectives include maximizing the value of assets, promoting entrepreneurship, increasing the availability of credit, and balancing the interests of all stakeholders, including creditors and debtors.
• Regulation Framework:
  • Insolvency and Bankruptcy Board of India (IBBI): The IBBI is the regulatory body established under the IBC to oversee the insolvency proceedings and regulate the entities registered under it. It is one of the key pillars of the IBC ecosystem and has regulatory oversight over the service providers in the insolvency ecosystem.
  • Adjudicating Authority (AA): The National Company Law Tribunal (NCLT) is the adjudicating authority for corporate persons, while the Debt Recovery Tribunal (DRT) handles cases for individuals and partnership firms.
  • Insolvency Professionals (IPs): These are licensed professionals who manage the insolvency process, control the debtor’s assets, and provide information to creditors.
  • Committee of Creditors (CoC): This committee of lenders is formed to make decisions on the resolution process through voting. They can either decide on a resolution plan or liquidate the company’s assets.

The IBC Process:

The Corporate Insolvency Resolution Process (CIRP) under the IBC is a time-bound process for resolving the insolvency of a corporate debtor.

1. Initiation of CIRP: A CIRP can be initiated when a debtor defaults on a payment. An application is submitted to the NCLT by a financial creditor, an operational creditor, or the corporate debtor itself. The NCLT has a maximum of 14 days to admit or reject the application.
2. Moratorium: Once the application is admitted, the NCLT declares a moratorium, which bars the institution of new litigation against the corporate debtor and suspends the debtor’s ability to move, sell, or transfer any of its assets. The moratorium remains in force until the end of the CIRP.
3. Appointment of Resolution Professional (RP): An Interim Resolution Professional (IRP) is appointed to take charge of the company’s management, and later, a full-time RP may be appointed. The board of directors is suspended during this period.
4. Information and Resolution Plan: The IRP/RP calls for the submission of claims from creditors and a Committee of Creditors (CoC) is formed. The CoC then evaluates and approves a resolution plan, which may involve debt restructuring or other measures to revive the company.
5. Completion of CIRP: The IBC stipulates that the CIRP must be completed within 180 days, with a possible extension of 90 days if a majority of creditors agree. The entire process, including any extensions or legal proceedings, has a maximum time limit of 330 days. If a resolution plan is not approved, the company proceeds to liquidation.

Analysis of the Article and the Proposed Amendments

The article critiques the practical shortcomings of the IBC, highlighting the need for amendments to improve its efficiency, and details the key proposals in the new amendment bill.

• Inefficiencies of the Existing IBC:
  • High Pendency: Over 12,000 IBC cases were pending before the NCLT in 2024, indicating a significant backlog.
  • Low Recovery: The recovery of dues was only about a third of the claims made, which was largely due to a few big resolutions.
  • Excessive Delays: The average time taken for a case to be resolved “exceeded 600 days and 700 days respectively in 2022-23 and 2023-24,” which is far in excess of the stipulated 330-day limit.
  • Lack of Finality: NCLT approvals are often challenged at the appellate tribunal, and the Supreme Court has “undone some high-profile resolutions”.
  • Ineffective RPs: The role of Resolution Professionals (RPs) has “rarely met expectations,” and in many cases, they have “seemed to get in the way of resolution efficiency”.
• Key Reforms Proposed in the Amendment Bill:
  • “Creditor-initiated Insolvency Resolution”: A new provision that allows for out-of-court negotiations and actions, potentially giving the process more speed and flexibility.
  • Facilitating Complex Cases: The bill seeks to facilitate resolutions for cases involving business groups and overseas assets.
  • Exclusion of Leased Assets: It gives legal backing for the exclusion of leased assets, such as an airline’s aircraft, from the assets that are frozen in a bankruptcy, aligning India with a global treaty.
  • Streamlined Admission Process: The bill aims to end delays in resolution plea admission by making a credit default a sufficient ground for CIRP initiation.
  • Strengthening IBBI’s Powers: The bill also strengthens the regulatory powers of the Insolvency and Bankruptcy Board of India (IBBI), even if not to the full desirable extent.
  • Incumbent Management’s Role: For ‘creditor-initiated’ cases, the bill provides that a corporate debtor’s board of directors can stay in place and run the company, but under the guidance of a Resolution Professional. This is a departure from the current practice where RPs take full charge.
• Further Suggestions by the Author: The Parliamentary panel should consider concurrent CIRP monitoring by the IBBI and legal norms that forbid the Supreme Court from interfering with the process without sufficient evidence of a miscarriage of justice.

In conclusion, the proposed amendments to the IBC represent a much-needed step to address the code’s practical failings, particularly the long resolution times and low recovery rates. The bill’s focus on out-of-court negotiations, streamlining the admission process, and giving legal backing to international norms for leased assets are all welcome. However, the success of these reforms will depend on careful deliberation by the select committee, ensuring that the new provisions truly smoothen the resolution pathways and enhance the efficiency of the IBC.

RBI’s Seven Sutras for AI Adoption

Context: The FREE-AI committee was constituted by the RBI to encourage the responsible and ethical adoption of AI in the financial sector.

Link to the Article: Business Standard

The Reserve Bank of India (RBI) has released the report of its Committee on the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI), which proposes a strategic approach to AI adoption in the financial sector. The committee’s central recommendation is to treat innovation and risk mitigation as complementary objectives, guided by a set of seven core principles or “sutras.” This framework aims to harness the transformative potential of AI to address developmental challenges and foster financial inclusion while establishing strong guardrails to mitigate new and existing risks.

The Potential Impact of AI on Banking

AI is poised to revolutionize the banking and financial sector, offering both significant opportunities and new risks.

• Positive Impacts of AI on Banking:
  • Enhanced Customer Engagement: AI can unlock new forms of customer engagement, including providing personalized services at scale. AI-powered chatbots and virtual assistants can provide 24/7 customer support, handling routine inquiries and freeing up human staff for more complex tasks.
  • Improved Credit Assessment: AI models can enable alternative and more accurate approaches to credit assessment by leveraging vast amounts of non-traditional data (e.g., utility bill payments, mobile usage patterns, e-commerce transactions). This can help expand credit access to “thin-file” or “new-to-credit” customers, particularly in underserved populations.
  • Advanced Fraud Detection: AI algorithms can improve risk monitoring and fraud detection by analysing patterns and anomalies in real-time. This can help identify suspicious transactions and enhance cybersecurity.
  • Operational Efficiency: AI can automate tedious, repetitive tasks, reducing manual errors and improving productivity. This allows human resources to focus on more strategic activities.
• Negative Impacts of AI on Banking:
  • Bias and Lack of Explainability: AI adoption could lead to new risks such as bias and lack of explainability. If AI models are trained on biased data, they can perpetuate discrimination, particularly in areas like credit scoring.
  • Data Protection and Cybersecurity: Increased AI adoption amplifies existing challenges related to data protection and cybersecurity. AI models themselves can be valuable targets for malicious actors.
  • Ethical Concerns: The use of AI raises ethical considerations regarding fairness, transparency, accountability, and the potential for job displacement.
  • High Implementation Costs: Implementing AI systems can require a substantial initial investment in infrastructure, technology, and skilled personnel.

Contemporary Issues in Banking Services that AI Can Fix

AI presents a powerful solution to several long-standing issues in banking services:

• Fraud Detection and Anti-Money Laundering (AML): Traditional, static rules-based systems struggle to keep pace with sophisticated fraudsters. AI’s machine learning algorithms can analyse massive datasets in real-time to detect subtle patterns and anomalies indicative of fraud or money laundering, significantly improving a bank’s security posture.
• Customer Service and Personalisation: Manual processes and rigid systems often result in impersonal and inefficient customer service. AI-powered chatbots and virtual assistants can provide instant, 24/7 support for routine inquiries, while machine learning can provide personalized product recommendations based on customer behaviour.
• Credit Scoring and Risk Management: Traditional credit scoring models often rely on limited data, leading to suboptimal lending decisions and excluding “thin-file” customers. AI-enabled models can consider a greater variety of non-traditional data sources to improve risk assessment accuracy, thereby expanding financial inclusion.
• Operational Inefficiency: Manual processes are prone to errors and are time-consuming. AI-powered robotic process automation (RPA) can streamline repetitive tasks, freeing up human staff to focus on more complex, strategic work.

FREE-AI Committee and Other Initiatives

• Background of the FREE-AI Committee:
  • The FREE-AI committee was constituted by the RBI in December 2024 to encourage the responsible and ethical adoption of AI in the financial sector.
  • The eight-member expert committee was chaired by Professor Pushpak Bhattacharyya of IIT Bombay.
  • Its mandate included assessing global and domestic AI adoption, evaluating regulatory approaches, identifying risks, and recommending a governance framework.
• RBI’s and SEBI’s Other Initiatives to Adopt AI:
  • RBI’s initiatives: The RBI has been actively exploring AI’s potential. It has developed an AI model called Mulehunter.ai to tackle the issue of mule accounts used for illegal activities. A recent RBI report suggests that generative AI could improve Indian banking operations by up to 46%, helping to enhance customer experience, improve productivity, and reduce costs.
  • SEBI’s initiatives: The Securities and Exchange Board of India (SEBI) is also proactive in this space. It has announced the use of AI to process IPO (Initial Public Offering) documents. SEBI has also issued a consultation paper proposing a regulatory framework for the responsible usage of AI/ML tools in the securities markets, emphasizing principles like transparency and accountability. SEBI has also placed full responsibility on regulated entities for the AI tools they use, whether developed internally or procured from a third party.

Analysis of the Article: Decoding the FREE-AI Framework

The FREE-AI committee’s report provides a strategic and balanced roadmap for India’s financial sector to leverage AI’s benefits while systematically addressing its risks.

1. A Unified Vision and Guiding Principles:

• The committee’s approach is to pursue innovation and risk mitigation as complementary forces.
• This vision is operationalized through seven “sutras” or core principles: trust is the foundation, people first, innovation over restraint, fairness and equity, accountability, understandable by design, and safety, resilience, and sustainability.

• The framework is built on six strategic pillars: Infrastructure, Policy, Capacity, Governance, Protection, and Assurance, which address both innovation and risk.

2. Recommendations for Fostering Innovation:

• Shared Infrastructure: The committee recommends establishing a shared infrastructure to democratize access to data and computation. This can help build trustworthy AI models and reduce barriers for smaller players.
• AI Innovation Sandbox: Creating an AI innovation sandbox would provide a controlled space for experimenting with AI applications in finance.
• Indigenous AI Models: The report calls for developing indigenous, financial sector-specific AI models tailored for India’s needs.
• Policy and Capacity Building: The committee urged the formulation of a clear AI policy and institutional capacity building at all levels, including for boards and the workforce of regulated entities.

3. Recommendations for Mitigating Risks:

• Board-Approved AI Policy: Regulated entities are urged to formulate a board-approved AI policy that covers governance structure, accountability, risk appetite, and operational safeguards.
• Expanded Product Approval: Product approval processes should be expanded to include AI-specific risk assessments before launching new financial products.
• Enhanced Cybersecurity: The report recommends strengthening cybersecurity practices and incident reporting frameworks, and augmenting existing business continuity plans (BCPs) to include AI model-specific performance degradation.
• Consumer Protection: It is crucial to update consumer protection frameworks and audits to include AI-related aspects and ensure that consumers are informed when they are interacting with AI.

4. The Challenge of Striking a Balance:

• The challenge of regulating AI lies in “striking the right balance” between reaping its benefits and mitigating its risks. The report’s recommendations aim to achieve this balance, positioning India to be a leader in ethical AI governance in the financial sector.

In conclusion, the FREE-AI committee’s report is a comprehensive and forward-looking document that provides a much-needed framework for India to responsibly and ethically enable AI in its financial sector. By emphasizing a unified vision built on principles of trust, fairness, and accountability, and by proposing a robust set of recommendations to foster innovation while mitigating risks, the RBI is positioning India to harness AI’s transformative power to drive growth, equity, and trust in the nation’s financial system.

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