Of the 81 default cases admitted by the National Company Law Tribunal (NCLT) up to May 18 for resolution under the Insolvency and Bankruptcy Code (IBC), as revealed by finance minister Arun Jaitley on Monday, financial creditors accounted for only 18. Of these, just seven were initiated by banks (see the chart). The defaults involved in these seven cases, together, stood at Rs 1,376.6 crore, when banks’ gross non-performing assets (NPAs), according to Capitaline, stood at Rs 7.11 lakh crore as of March-end. This means that while small creditors have tapped the insolvency law more vigorously, banks, despite being large financial entities, haven’t done so. This makes the government’s ordinance last month, authorising the RBI to direct banking companies to resolve specific cases of bad loans by initiating resolution process under IBC, where required, and the central bank’s move on Tuesday to recommend 12 accounts for expeditious resolution immensely important. These decisions, by the government and the RBI, also mark a distinct break from the way the toxic asset problem was addressed in the past by banks.
MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India, told FE: “Banks as creditors, in fact, have many options to recover loans. They evaluate suitability of various options in a particular case and choose the one that works the best for them.”
Sahoo added, “The IBC provides creditors an additional option to resolve insolvency, while they may resolve insolvency even outside it.” Also, banks are large entities with their unique decision-making processes, he said. However, irrespective of the person who initiates insolvency proceedings, financial creditors form the committee of creditors and approve the resolution plan, he added.
Sahoo, however, stressed that within the short span of the law coming into existence, it has made a solid impact. He added as many as 900 applications were made before the NCLT as of May 18 to initiate insolvency proceedings, of which 81 were admitted by the adjudicating authority. The number of people making applications before the NCLT is rising by the day.
The IBC provides for the turnaround of the assets or, in case of liquidation, their quick monetisation, with secured creditors like banks third in the preference order in case of any liquidation, after the cost of resolution and workers’ dues.
Analysts say various options, including S4A, available with banks to resolve NPAs; fears that bankers could be blamed later if resolution process falters; and the prospect of inadequate recovery of assets are among the reasons that discouraged banks from earlier tapping the insolvency law.
The 12 accounts referred to the NCLT by the RBI totalled 25% of NPAs.