It’s Time to Pay up

Even before the Nirav Modi scam broke, PSU banks were drowning in NPAs amounting to Rs 7.34 lakh crore. The new Insolvency and Bankruptcy Code sets in motion a clean-up exercise

For the first time, Indian companies are being forced to come clean on their finances and repay their debts. As the deadline nears for the 12 biggest defaulters, the Insolvency and Bankruptcy Code (IBC) is set to change the rules of the game.

The mounting Non-Performing Assets (NPAs) of public sector banks (PSBs) paint a grim picture of corporate India. Bad loans of these banks stood at Rs 7.34 lakh crore at the end of the second quarter of the current fiscal. A bulk of it came from corporate defaulters, according to Reserve Bank of India (RBI) data. The RBI released a list of first 12 defaulters with a 180-day deadline to come up with a resolution plan or face proceedings under IBC. The deadline for most of these companies is in April. After that, the creditors—in this case, banks—will appoint insolvency professionals, who will take over the management of these companies as also their assets.

The RBI had to put a lot of pressure on banks to declare their bad loans as NPAs. Banks would take refuge in debt-restructuring exercises to not declare bad loans and keep their balance sheets clean. In case of a default, companies would go in for corporate debt restructuring, which could go on for years.

In 1993, when the Debts Recovery Tribunals and Debts Recovery Appellate Tribunal were established for quick adjudication and recovery of debts, banks did begin to recover a lot of loans. But the system failed against large and powerful borrowers. Under IBC, as soon as insolvency proceedings begin, insolvency professionals will be appointed to take over the management. The timelines are strict.

But a corporate lawyer who has been working with insolvency clients finds the new code “very extreme”. “There could be companies with a genuine cash problem because their business went through a difficult phase,” she says. The RBI has put an end to several stressed asset schemes, such as Corporate Debt Restructuring, Strategic Debt Restructuring, to name a few. The Joint Lenders’ Forum, set up to coordinate resolution of large consortium loans, has also been disbanded. This may pile up cases at the National Company Law Tribunal.

While the IBC mandates a strict timeline for the resolution process, there is none for liquidation. Experts say insolvency professionals can keep looking for a good price to liquidate, and if that is delayed, the banks don’t get anything. While one cannot dispute the intent behind going after errant promoters, the success of the move will depend on execution. The test begins on April 13 as the 90-day extension for Monnet Ispat and Energy Ltd ends. In all, at stake is over Rs 3 lakh crore of taxpayers’ money the 12 biggest defaulters owe PSBs.