Bankruptcy is Bankrupt

The Economic Times     21st July 2021     Save    
QEP Pocket Notes

Context: The Insolvency and Bankruptcy Code (IBC) is broken. It must be fixed, both to increase recovery and to  redeploy the assets locked up in failed firms. 

Fundamental issues in the Indian credit regime 

  • Built-in bias in the system: In the absence of a market for corporate bonds, large projects in India are  funded by banks. This comes with issues such as 
    •  Politicisation in sanctioning of loans. 
    •  Sanctioning at inflated project costs, which makes it difficult for projectsto be competitive in terms  of pricing and calls for larger-than-warranted debt servicing. 
  • Low recovery: Till IBC was enacted, promoters continued to be in control of their bankrupt companies and restructuring of loans continued indefinitely. Even after the implementation of IBC, issues persisted.
    • While 4,540 insolvency cases have been admitted for Corporate Insolvency Resolution Process,  significant recovery has materialised only in a handful of cases, such as Essar Steel and Bhushan  Power and Steel. 
    •  Low average realisation: At 40% and that for the largest 100 cases, 36%. 
    •  Huge haircuts: The Videocon resolution, in which creditors accepted a 95% haircut, has evoked a  protest from the National Company Law Tribunal (NCLT). 
    •  Ultimate loss to common man: As recapitalisation of banks that follows when banks fail to recover  monies is done from public exchequer. 
  • Issues in public policy approach: Justifying large, periodic write-offs of loans to industrial groups as the  price to pay for having an industrial sector that produces what society requires, creates jobs and  generates taxes. 

Way forward 

  • Create a market for corporate bonds and a secondary market for bank loans: As once the scope to pad  project costs is curtailed, viability would improve, and fewer loans would turn non-performing.
  •  Revamp asset reconstruction companies (ARCs): ARCs should be removed from the ambit of the  Sarfaesi Act and simply be bodies corporate governed by the Companies Act. 
    •  They should be free to buy up bad loans and/or underlying assets of bad loans.  
    • Patient capital in ARCs should own NPAs, and resolve the underlying assets, whether as going  concerns or by selling them off piecemeal, to the buyer who values each piece the most. 
    • Increasing competition among ARCs should fetch banks a reasonable price. 
    • The proposed bad bank owned by banks should be a model ARC.
QEP Pocket Notes