Consumer Finance and Insolvency Law in India: A Case Study

Abstract

This Article provides a case study of the regulation of consumer finance and the role of consumer bankruptcy or insolvency law in the context of an emerging economy. Like other emerging economies, India is currently attempting a daunting regulatory balancing act: to promote the continued deepening of consumer financial markets while limiting the various social and economic costs of increased consumer indebtedness. Unlike other major emerging economies India has had a formally comprehensive consumer insolvency regime in place throughout its independent legal existence. Despite many formal and practical limitations, it appears that some debtors and creditors in India do employ the country’s insolvency laws. This indicates that India’s consumer insolvency regime is, at least, a functioning part of that country’s legal system. Nonetheless, beyond a small number of reported court decisions, there is little available evidence that India’s consumer insolvency laws are currently an important legal institution in that society. Thus, assuming that consumer insolvency law can, in theory, promote the efficient deepening consumer financial markets, it seems doubtful that it currently plays this role in India. This Article argues, however, that even modest reforms to India’s insolvency laws could enhance their role in this regard, and it discusses some potential reforms by way of illustration. To be clear, this Article does not advocate any particular reforms, nor does it suggest that Indian policymakers simply transplant rules or doctrines from other jurisdictions. The fact that India already has a functioning, perhaps familiar, consumer insolvency system, provides some reason for optimism that policymakers could transform the existing system into one that contributes more to social welfare in that country.

Keywords: consumer bankruptcy, insolvency, India, finance, consumer

JEL Classification: D11, D18, K10, K40, N20, N25, O12, O16, P20, P34