Banks wont recover even half of the Rs 4,000,000,000,000 bad loans of 37 companies. By Ishan Bakshi & Nitin Sethi
The first of a two-part series explores how the proceedings under the IBC have
taken off and whether the code is helping banks recover their unpaid loans
Only 1.9 per cent of
the cases admitted under the Insolvency and Bankruptcy Code (IBC) were resolved
by the end of December 2017 — a year after the code was put in place. In another
5.6 per cent of the cases admitted, companies are undergoing liquidation. In
this set of resolved cases, banks and other financial creditors are expected to
recover Rs 18.55 billion against unpaid dues worth Rs 55.24 billion in the
coming years (a recovery rate of 33.6 per cent).
These resolved cases
do not include the 37 large debtors that the banks took through the insolvency
process upon instructions from the Reserve Bank of India (RBI). The 37 had defaulted on
loans of Rs 4 trillion. Based on analysts’ estimates, banks are likely to
recover only Rs 1.7 trillion or 43.1 per cent of the principal. However, the
actual recovery rates are likely to be lower because the principal does not
include interest, penal interest and other charges that banks have levied. It
also does not include claims made by operational creditors. Nor does it take
into consideration the fact that in some cases banks will recover this money
over several years.
Insolvents and the
applicants: Launched on December 1, 2016, the IBC was designed to assist creditors to recover their
dues in a timely and efficient manner. It was also meant to provide failing
companies a quick exit route. The data till the end
of December 2017 shows 4,738 applications were filed for resolution. But only
half of these were fresh cases. The rest were old cases that were under-going
bankruptcy proceedings under other insolvency regimes which have now been subsumed in
the IBC. Of these 4,738 cases,
2,750 cases were disposed of either because parties had settled their
differences outside the process or because the tribunals had not found sufficient
grounds to admit the petition. Of the remaining 1,988
cases, only 540 cases were admitted for resolution at the end of December 2017,
and the rest remained pending. Of the 540, roughly 7.5 per cent have been
either resolved or are undergoing liquidation. In 10 cases there were willing
buyers, while in another 30 cases the liquidation process was ordered. The complete data for
January to May 2018 is yet to be released by the IBC.But it is known that another 275 companies entered the
resolution process by May 2018, while another 75 companies are undergoing
liquidation.
Financial creditors
slow to move: The time-bound process
of the IBC, with an outer limit of 270 days to settle all cases, was meant to
be a threat that banks could deploy against debtors to collect their dues. However, the data
shows that of the 540 cases that were admitted for resolution by December 2017,
just above a third were filed by financial creditors (banks and other financing
institutions). The reluctance of
banks to push all their cases of bad debts through the IBC process for
resolution is also observed in trends across quarters and confirmed by
officials of the Insolvency and Bankruptcy Board of India (IBBI).
For instance, in the
first seven months since the code was put in place, only 41 cases of the 166
admitted for resolution (24.6 per cent) were initiated by banks and other
financial creditors. Realising that banks
were dragging their feet, in June 2017, the RBI directed banks to take 12 large corporate debtors
through the insolvency process. The RBI followed this up by another list of 28 debtors. A double-edged effect
of this directive is visible in the numbers. The number of cases
filed by financial creditors rose from 41 cases in the first seven months to 97
cases in the next three months. But experts contend
that this push, while leading to a quicker resolution of a few big cases
involving large sums, may have inadvertently clogged up the system for the
rest. A senior IBBI official confirmed that this was the case. “The
big cases are cornering a disproportionate amount of focus.”
Operational
creditors do well: Unexpectedly,
operational creditors seemed to have made more of the opportunity. Between
April and June 2017, 59 of the 128 cases that were admitted to National Company
Law Tribunals were filed by operational creditors — vendors, supplies,
employees and others. In the subsequent three months, operational creditors
maintained their momentum, filing 102 of the 234 cases admitted.
Experts Business
Standard spoke to suggest one reason why operational creditors have embraced
the IBC with greater enthusiasm: It has provided them a credible threat against
errant corporate debtors.
Many of these vendors,
experts say, are small or mid-sized suppliers of goods and services to bigger
enterprises, who operate on a credit cycle. Before the IBC they had limited
scope to recover dues from recalcitrant large customers. With the IBC in place
any creditor with dues of Rs 100,000 can trigger the insolvency process. Thus many relatively
large debtors are settling out of court with their smaller suppliers either
before they receive the first notice or before the application is accepted,
said IBBI officials. Data seem to
corroborate this. Around 30 per cent of applications before tribunals were
either settled or withdrawn, shows data collated by IGIDR.
Corporate debtors: Companies can
themselves trigger the insolvency process if they are unable to service their
loans. However, the IBBI data shows that fewer corporate debtors are
triggering the insolvency process. Three months from the
point the code was put in place, 58 per cent of the applications accepted for
resolution were from corporate debtors. But at the end of four quarters, in
December 2017, this figure stood at just 20 per cent. IBBI officials suggest
this is too early to assess how the insolvency code is working. But, this is a crucial
phase for the banking sector as well as the economy. The next part of this
series analyses how well the code is helping banks and others recover their
money. Next: Recovery of
bad debts by banks set to go down
