Former telecom minister Kapil Sibal, better known for his ludicrous zero-loss defence of the Raja scam, has now trained his guns on the BJP’s Insolvency and Bankruptcy Code (IBC) and alleges that it is resulting in “the highest form of crony capitalism” since valuable assets are being sold at heavily discounted valuations (goo.gl/5UAfeA).
Sadly, many others, including in the country’s courts and within the government, are buying into the argument that some checks need to be introduced into IBC or perhaps RBI needs to relax its resolution timeframe; one view is that, since foreign funds have a lot of money, this will result in national assets going into foreign hands.
Apart from arguing that the IBC process wasn’t really working in terms of clearing of NPAs, Sibal says “the dark side of this” is that there are very few firms who have the funds to buy even the discounted assets. So, he alleges, this is creating monopolies; in the steel sector, he says, there are “only two big domestic players and key global players who are eying assets” and, in power, “there are two key players and with one suffering disqualification, the sole beneficiary will be a single large corporate entity”. He argues that the recovery rates will be just 35% in the case of steel and 15% for power.
The Standing Committee on Energy, quoted in Sibal’s article, also says RBI’s 180-day timeframe to resolve bad loans isn’t enough to find a solution. That is why the Allahabad High Court stayed the RBI circular on NPA-recognition, and the Supreme Court did the same. Others, such as IIM Bangalore’s former RBI chair professor, Charan Singh, have trashed then RBI Governor Raghuram Rajan who started the process of RBI forcing banks to recognise bad loans more aggressively by arguing that the “strains of rising NPAs should have been addressed on a case-by-case basis” (see article on Op-ed page today). NITI Aayog vice chairman Rajiv Kumar has also blamed Rajan’s NPA-recognition spree for causing India’s growth to slow—Kumar says this slowing down has been wrongly seen as being caused by prime minister Modi’s demonetisation drive.
What Sibal doesn’t recognise is that, since IBC has resulted in defaulters, like the Ruias of Essar Steel, losing control of their companies, it is clearly anti-crony. Indeed, since Sibal hasn’t been able to demonstrate that the bids are rigged to allow only particular bidders, his argument of favouring cronies was always a shallow one.
And despite the irritating slowing in recent months with so many bidders filing appeals before the courts including the Supreme Court, there can be little doubt IBC is the fastest and most efficient loan recovery process India has ever seen. In 32 cases resolved till a month ago, while creditors including banks had said they were owed Rs 89,402 crore, Rs 49,783 crore has been recovered through IBC—had this not happened, the firms would have been liquidated at Rs 20,969 crore. That’s a recovery rate of 56% which, by any yardstick, is quite healthy. And, in the case of Essar Steel which is in the Supreme Court over whether the bidders are eligible to bid, ArcelorMittal has just upped its bid to Rs 37,000 crore against a loan default of Rs 49,000 crore (that’s a recovery rate of 76%). Contrast this with that the fact that, till IBC began, just about 17-18% of loans were recovered using all existing schemes (see graphic).
While Sibal etc feel free to trash IBC/RBI and want to go back to the earlier period, they ignore the amazing cronyism of the past and how this crippled banks. Between FY07 and FY12, 10 industrial groups saw their bank borrowings rise five times, and their share of total loans from the banking system rose from 6% to 13%; by FY12, their loans accounted for 98% of the banking system’s net worth! Some, like Videocon Group, had an interest cover of, hold your breath, 0.3! If this isn’t cronyism, what is?
Indeed, as Credit Suisse’s latest Corporate Health Tracker points it, IBC has been the key driver of debt recoveries, and loan recoveries as a proportion of outstanding loans were at over 4% in the first quarter of this year, or more than double that in recent times (see graphic). Contrast this with the fact that, by FY18, almost 70% of loans restructured in the case-by-case-resolution days became NPAs.
Given the overwhelming evidence of IBC’s success, it is remarkable that Sibal etc should try and trash it as they are. Indeed, if people feel IBC is a way to sell assets cheaply to foreigners, why not get PSUs like NTPC to bid for these assets at IBC or to reach a settlement with banks before they reach IBC? And while the Supreme Court seems to feel these assets would fetch more if the government fixed their problems first—like lack of coal supplies or power-purchase agreements—surely this would have been done if the government was able to? At a time when gross NPAs are 11.5% of all loans, and impaired loans 14.2%, anything that prolongs NPA resolution is nothing short of criminal.