India needs insolvency ordinance to deal with Rs 9.5 lakh crore bad loan monster

By: | Updated: November 27, 2017 1:23 PM

The IBC amendment to plug a loophole in the law that allowed promoters to re-purchase their stressed assets at a discounted price through an Ordinance is being hailed largely, but some are also calling it a messy fix.

bank, indian banks, NPAs, state banks, central bank, indian tax payer, GST, tax, demonetisation, economyWhile the move to plug the loophole in the Insolvency law there are some lenders who are not happy about it. (Image: Reuters)

The Insolvency and Bankruptcy Code (IBC) amendment to plug a loophole in the law that allowed promoters to re-purchase their stressed assets at a discounted price through an Ordinance is being hailed largely, but some are also calling it a messy fix. There are three concerns regarding the amendment:  If promoters are barred from bidding, the non-promoters will bid conservatively and pressure banks for more discounts; what about a chance to small companies or units to revive their business, and what about companies genuinely hit by global-turndown and demand deficit?

The ordinance to amend the IBC has got President’s nod last week. Wilful defaulters, people associated with non-performing assets, or those who are habitually non-compliant cannot bid for stressed assets. While the concerns over the genuine business loss and small companies needing a chance seem legitimate, and the government may incorporate a solution in the final act. However, the argument that banks may incur more losses if promoters are barred from bidding is a tad bit gloom-mongering.

Banks have been failing to do anything to cease bad loans from piling up; in fact their effort, for a long time, was to “keep loan-loss provisions low rather than to resolve stressed asset”. RBI’s Viral Acharya recently argued that before the IBC and in the absence of an effective, time-bound statutory resolution framework, various schemes were introduced by the Reserve Bank to facilitate viable resolution of stressed assets were cherry-picked by banks to keep loan-loss provisions low rather than to resolve stressed assets.

With lenders’ apprehension, the focus seems to be shifting to banks, instead, on the long-term motive of the Ordinance at ensuring that there are fewer bank defaults by barring loans cheats from getting a backdoor entry in the business.

India’s bad loans have soared to Rs 9.5 lakh crore and the pile-up happened because defaulters were not dealt strictly in the past. Read how promoters trying to capitalise on the IBC loophole led to the insolvency ordinance.

(Data: World Bank)

In fact, sometimes, bankers even resort to providing additional funding to defaulters to repay previous loans. Meera Sanyal, the former CEO & chairman of the Royal Bank of Scotland in India, at an event, said that the problem of bank default is serious and there were many non-recognised NPAs despite the official figure. There is enough evidence of banks reporting a divergence on bad loans — Axis Bank, HDFC Bank, Yes Bank et al.

Former RBI chairman Raghuram Rajan had pointed out that there are many sick industries but no corporate honcho is “sick” (sic). We perhaps have the biggest example: Vijay Mallya. Recently, Uday Kotak said what loan defaulters really needed was the fear of losing the company. “For the first time, founders fear losing control of the company if dues are not paid,” Uday Kotak said.

The sense among some Indian executives that they could walk away from their debts without facing consequences was a major factor limiting past efforts to bring delinquent loans in check. The Ordinance seems to reinstil the fear among loan cheats. “The need of the hour is to amend the law to ensure that only deserving candidates are allowed to bid for stressed assets under the Corporate Resolution Plan. Otherwise, it would be a setback to the credible IBC process if the existing promoter is allowed to re-acquire the asset with a haircut,” Nishit Dhruva, Managing Partner, MDP & Partners said.

“This would ensure that the company does not face the same fate it has suffered in the hands of the current management and would streamline the process for selection of buyers as resolution applicants for stressed assets,” he added. Shardul Shroff of Shardul Amarchand Mangaldas said: “These amendments will save the government blushes in a situation where promoters of existing corporate debtors seek massive haircuts in the guise of a resolution applicant in relation to a resolution plan.”

And in SBI Chief Rajnish Kumar’s words, it will not be a loss-making deal everytime if promoters are barred. “I will be happy when the resolution happens. I don’t mind some haircut but I don’t want to go bald. The changes in the law will not bring down the valuation of the assets under resolution because there is lot of interest in these assets. Valuation has nothing to do whether the existing promoters are allowed to bid or not. Assets will go only on the fair value of the enterprise,” he said.

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