IBC’S HAIR RAISING CUTS
It has been just over three years since the Insolvency and Bankruptcy Code (IBC), 2016, came into effect. An attempt to clean up India’s credit culture and make habitual loan defaulters fall in line, the IBC’s short history has been a chequered one. According to the Reserve Bank of India’s (RBI’s) June 2019 Financial Stability Report (FSR), of the 1,858 corporate insolvencies processed under the IBC, 94 were ‘resolved’ and 378 firms liquidated.
By March 2019, debts amounting to Rs 1.73 lakh crore had been ‘resolved’, says the FSR, though banks actually recovered only about 43 per cent (Rs 74,500 crore) of what they were owed. Settling for a fraction of their dues (a.k.a. a ‘haircut’ in banking parlance)—a forced waiver of 57 per cent, in fact—does not sound like a happy outcome for banks.
Except their recovery numbers might have been lower still were it not for the RBI-mandated resolution of six large accounts (see table overleaf: IBC, a Work in Progress) accounting for Rs 1.67 lakh crore of debt. Of these, Essar Steel’s case is incomplete—the National Company Law Appellate Tribunal (NCLAT) has yet to decide how the recovered amount will be split among creditors, though the FSR lists the case as ‘resolved’.
Even so, industry experts are not displeased. “These recovery rates are satisfactory, considering that earlier the rate was in the region of 15-20 per cent,” says Madan Sabnavis, chief economist at Care Ratings. He also points out that this metric does not paint a complete picture, saying, “By the time these debts became non-performing assets (NPAs) and came up for resolution, there was a gap of seven to eight years.” Essentially, by the time resolution proceedings began, the indebted companies’ assets had already depreciated significantly, further limiting their ability to pay what they owed.
In that light, the recovery rates could even be considered ‘good’, especially in the steel industry. A report by Crisil, published in June this year, notes that NPAs in that industry both account for an outsize proportion of the debts resolved so far, and that recovery rates in this
sector are significantly higher than the average. Sixteen of the 94 resolved cases came from that industry, and at 53 per cent (Rs 47,700 crore of Rs 90,000 crore in NPAs), the recovery rate for banks was a good 10 percentage points higher than the average rate in all 94 ‘resolved’ cases. ‘This is largely to do with attractive demand-supply dynamics, and higher realisations in the flat steel space, which is the key segment of operation for large integrated steel players,’ notes the Crisil report. ‘The balance stressed debt, worth Rs 80,000 crore, involved 78 assets spanning textiles, construction and auto components, among others. The haircut [for these NPAs] was around 69 per cent.’
Haircuts of this magnitude have led some to question how successful the IBC actually is. And moving forward, the pace of resolution may even begin to falter.
On February 12 this year, the RBI ordered lenders to trigger resolution proceedings under the IBC for even a single day’s delay in repayment. This order was subsequently quashed by the Supreme Court. Fresh regulations were issued last month—now, lenders are to trigger resolution proceedings if a borrower is over 30 days late on payments. However, this has led to fears that banks will try to keep their NPAs alive. “Banks may try to resolve cases of default by restructuring their debt load and interest rates, or by giving longer timelines for repayment,” says Sabnavis. “The issue is that banks may not want to take cases quickly to the IBC because of the huge hair-cuts involved.”
However, experts still consider the IBC the best route for NPA recovery. “Under the IBC, [at the very least] we have managed to get to a place where these cases are being brought to insolvency court,” says Sabnavis. Therefore, despite all its shortcomings, the IBC continues to be a ray of hope for those dealing with corporate defaulters.