Bankruptcy code: Baby-steps towards recovery of bad loans

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Challenges ahead: All eyes are on banks to see if they will take the plunge and accept the haircuts

Bargain-hunters on the prowl for big assets, but huge haircuts hang over banks

A lot of hope is pinned on the Insolvency and Bankruptcy Code (IBC) to provide the much-needed cure to all the ills in the banking system.

Year 2017 was eventful when it came to taking the initial steps in loan recovery. The Reserve Bank of India’s first list of 12 large defaulters — who in aggregate owed ₹2.6 lakh crore to the banking system — has been able to draw the attention of buyers, including global investment funds. These 12 accounts constituted 25 per cent of the gross non-performing assets (NPAs) in the banking system.

The reason for excitement among buyers for the assets referred to the National Company Law Tribunal (NCLT) is not far to see. They hope to bag great bargains, as India goes about setting its stressed assets house in order. The idea is to get hold of good assets at a fraction of the costs of building new ones. Aiding the buyers in this quest has been a controversial government decision to keep out existing promoters from bidding for the stressed assets. The silver lining is that the existing promoters could bid if they repay the dues to the banking system, which is a tough ask.

According to a recent Motilal Oswal Securities report, tightening the eligibility norms in bidding for stressed assets might lead to higher haircuts for banks in the short run. However, in the long run, it would prevent the re-entry of wilful defaulters in the system and promote transparency, it added.

Interested buyers

From London-based Arcelor Mittal, Korea’s POSCO, Blackstone, TPG Capital to domestic biggies like the Tata Group, Mumbai-based Shapoorji Pallonji Group, Ajay Piramal-controlled Piramal Enterprises and Sajjan Jindal’s JSW Steel, there is now a good line-up of interested buyers for the stressed assets/companies referred to the NCLT under the insolvency process.

In India, the total outstanding amount for top 50 stressed borrowers, funded by scheduled commercial banks, stood at ₹3,72,379 crore as on September 30, 2017, according to the RBI.

Banks’ haircuts

The main issue is how are banks going to play the insolvency game. Rather than holding on to stressed assets in their balance sheets, will they be ready to take big haircuts? The grapevine in the market is that many prospective buyers are looking for an average 50 per cent haircut in large cases. All eyes are on banks to see if they would take the plunge and accept the haircuts.

Of course, the buyers’ response has been good only for large corporates. There are few takers for small and medium companies.

Going by the recent case of resolution at Murli Industries, banks had to settle for as high as 75 per cent haircut, which is not a happy situation for the lenders.

However, Pawan Agrawal, Chief Analytical Officer, Crisil, felt that the quantum of haircuts were more a function of specific cases. High haircuts may be reflective of lower economic value and viability of the businesses being referred, rather than it being a reflection of the IBC process, Agrawal said. “In future, once the resolution process is initiated early, the haircuts are expected to be lower,” he said. Tarun Bhatia, Managing Director, Kroll, a global risk consulting firm, said that ultimately recovery for the banks will be market determined and “we anticipate meaningful write-offs”.

He said these are early days for the IBC and one needs to see how many accounts achieve meaningful resolution or successful liquidation.

Meanwhile, the Motilal report highlights that haircut at 70 per cent of net stressed loans can impact net worth of lenders by 37-100 per cent. Private banks are better placed than PSU banks in terms of capital availability to absorb such potential losses. However, the government’s recapitalisation plan will enable the PSU banks to make necessary provisions towards such assets, according to the report.

Some visibility

By April 2018, there should be some visibility on how the entire IBC process is moving, said an economy watcher. Metal (mainly steel) and power assets form bulk of the cases referred to the NCLT (45 per cent in the RBI’s two lists taken together). Healthy recovery in these sectors are critical to assess the success of the NCLT route.

One of the many challenges faced in resolution of accounts under IBC is the RBI’s norm of classifying interim debt as standard, which will encourage bankers to go for interim lending in case of operating companies witnessing cash crunch, and thus, help them make a turnaround. Crisil’s Agrawal said that 2018 will be a critical year where one would get to know the effectiveness of the IBC, especially about the key expectation of a time-bound resolution. In particular, progress in resolution of large NPAs referred by banks can materially change the asset quality picture of banking system, according to Agrawal.

“2017 can be considered as an initial phase of implementation of an effective IBC in India. Even as the rules, infrastructure, and skills of Insolvency Resolution Professionals are falling in place, the number of cases initiated under the code have gathered pace. Even in this initial phase, the IBC has restored the much-needed balance between lenders and borrowers,” Agrawal added.

Litmus tests

According to Kroll’s Bhatia, 2018 will be a critical year as IBC will be tested for: i) Can promoters really be kept out despite the recent ordinance disallowing them from participating? ii) Will IBC be as relevant for mid and small accounts? iii) Who will be held accountable for the write-offs. Will the borrower/defaulter be tried for fraud?

“With promoters being kept out, as of now we see only the top 25-50 accounts having meaningful outside interest,” Bhatia said. Pankaj Dutt, Managing Partner, Alexander Hughes, a global executive search firm, said the Indian banking system could have avoided the current NPA mess had public sector banks given enough attention to the ‘risk management’ function and focused on having a chief risk officer at a level next to the board.

Loknath Das

Loknath Das

I am a blogger with the main motive of writing articles at my choice of level. I do love to write articles and keep my website updated regularly , if you love my article then be sure to share with your friends as they would love to read my article...

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