IBC’S HAIR RAIS­ING CUTS

India Today - - CONTENTS - Il­lus­tra­tion by SID­DHANT JUMDE By M.G. Arun

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.

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