Learning from haircuts to refloat sinking companies
Bad loan recoveries continue to throw up surprising outcomes. If banks recovering about 80-90% of the outstanding dues is comforting—though such cases are few and far between—instances of lenders agreeing to take as much as 94-95% haircut in others is disappointing. In the former, chances are that companies’ assets cover for much of the defaulted amounts, but in the latter, banks are being forced to accept promoter-backed deals though the offers weren’t worth one red cent. Such decisions puzzle even the NCLT, which is forced to review the bids and strike off if necessary, even risking resolution delays. The starkness of the above two disparate happenings shows what price discovery and value erosion can do for our battered banks.
What’s also evident is that defaulting promoters suddenly find magic pennies to clear dues just when their grip on companies is about to slip. Several founders in the past offered upfront payments higher than the winning bids. But their hopes were all dashed with the Supreme Court denying defaulting promoters a backdoor entry. Section 29A of the Insolvency and Bankruptcy Code (IBC) too bars insolvent and wilful defaulters from bidding, yet they do not stop taking a shot at the resolution process in order to retain ownership. Do banks blink as there are no other bidders and perhaps liquidation destroys chances of whatever little they could recoup? Possible, but such decisions go against the very spirit of the resolution process.
Worryingly, as India’s insolvency law turns five, it’s marred by delays and low recoveries. Banks recovered only Rs 2 lakh crore of the outstanding Rs 5.16 lakh crore. Moreover, 60% of the total 4,376 firms (outstanding Rs 6.8 lakh crore) undergoing insolvency proceedings have been liquidated. But liquidation is the antithesis of resolution causing loss of credit, businesses and jobs. The onus rests solely with banks and when the next credit cycle takes off, they shouldn’t lose sight of inherent risks and intrinsic value, without which all attempts to salvage losses only end up exacerbating systemic trouble.