Half of IBC cases end in liquidation
WORRYING TREND: Haircut rises to 60% of lenders' claims in FY21, from an average of 55% in the previous years
Almost half the cases closed by Indian lenders under the Insolvency and Bankruptcy Code (IBC) 2016 in financial year 2021 have ended in liquidation while only 13 per cent cases were resolved.
As of March this year, banks closed 2,653 cases after invoking bankruptcy proceedings against loan defaulters.
In 16 per cent of the cases, they handed over the companies back to the promoters after they cleared part of their dues under Section 12A of the Insolvency Act (see chart). Around 23 per cent of the closed cases are either under review or in the appeals.
Of the total 4,376 cases, 2,653 were closed while the rest are ongoing, statistics by IBBI shows.
In another worrying trend for the lenders, the haircut on resolved cases rose to 60 per cent of the admitted claims from an average of 55 per cent in the previous years.
In the March 2021 quarter alone, haircut rose to a whopping 74 per cent of the claims made by lenders against defaulters. The haircut is the amount banks forego to settle a nonperforming account. Lenders and corporate lawyers say as 79 per cent of the ongoing cases till March this year have already passed 270 days since admission, thus liquidation in these cases is likely to increase in the next few quarters.
Higher number of liquidations means banks will have to go home with miniscule recovery in their dues by selling plants, machinery and other assets of defaulting companies. Latest statistics shows that of the total 4,376 cases, which have been admitted under the insolvency process till March 2021, 499 new cases were admitted in the last financial year. This was due to a one-year suspension of the IBC process by the Centre owing to the Covid-19 pandemic.
The Centre had launched the IBC process to help banks recover their dues from chronic defaulters. While it helped companies with good financial track records like Tata Steel, JSW Steel and Ultratech to acquire their rivals, several promoters lost control over their companies.
Statistics for the financial year 2021 shows that 43 per cent of cases admitted so far are filed by the financial creditors. This is in spite of the introduction of a new circular by the Reserve Bank of India (RBI) in June 2019 that removed a clause, which made it mandatory for cases to be admitted to IBC. Around 51 per cent of the admitted cases were initiated by the operational creditors.
Lenders said they are expecting to see a sharp jump in the number of cases being admitted as IBC suspension has now been lifted.
But with falling recoveries for the banks, this tool has also lost its steam as compared to the previous years.
Lawyers said more promoters are now taking the one- time settlement route to settle their accounts. The extent of the haircut depends on how much cash is being offered upfront and the rate of interest being offered on the deferred payment and write off amount. “All this will determine how much haircut lenders take in an OTS (one-time settlement) proposal,” said Nirav Shah, partner, DSK Legal.
The lenders are also waiting for a long time to get back part of their dues as the average duration of debt resolution is now 406 days for all resolved cases till FY21. This is excluding the time taken during litigation. About 79 per cent of the ongoing cases have crossed 270 days. Of the total admitted cases till FY21, 41 per cent were from the manufacturing space and 30 per cent from real estate and construction.