IBC – A Gateway to Loot Public Money?

Insolvency and Bankruptcy (IBC) Act has been plagued with controversies ranging from causing delays typical of Indian judicial system as well as becoming a gateway to loot the public sector banks with haircuts going as high as 90% plus in some cases. Noted financial journalists Debashish Basu and Sucheta Dalal famous for their expose of Harshad Mehta followed by colocation scam at NSE have been raising their concern through their blog Moneylife.

Basu and Dalal’s list of key concerns is as follows: -

(i) Low recoveries leading to high write offs / haircuts as high as 90%

(ii) Collusion or corruption amongst resolution professionals, banks and defaulting promoters

(iii) Arbitrary / contradictory orders from judiciary

(iv) Delays and red tapism

(v) IBC becoming a vehicle to legitimization of bad governance / loss to public money

Recently the FM also admitted before the Parliament that only 13% of loans under “technical write offs” have been recovered. Considering the magnitude of technical write off ranging above 10 lakh crores, the loss of public money through our banking system raises eyebrows for an institutional collapse.?

Juxtaposed to this IBBI and Insolvency Professional Agencies have been hosting seminars to convey the pathbreaking change introduced by IBC and how defaulters are coming forward to settle their dues merely by a notice of referring the case under IBC.? IIM-A published a study on impact of IBC and concluded that there has been a 76% jump in the turnover of companies post resolution under IBC, besides generating new employment as is evident by 50% hike in cost of employees.?

Historically, the resolution of sticky advances has been an unresolved puzzle with number of legislations proving ineffective in our judicial system and fate of IBC is similar despite very noble intentions behind the introduction of IBC. To be fair, IBC has ushered a new era of setting up an elaborate framework for distressed debt resolution and certainly put a break on promoters on being easy to repay debt obligations.? Secondly, IBC can never ever promise an assured recovery and if recoveries are abysmal, then one can only do a post mortem to analyze such a big decay in realizable value of assets capitalized in the books. This may lead to traces of probable signs of fraud or forgery committed on lender, but there is very little merit in calling names to resolution professionals or bankers.?

Ignoring and setting the rhetoric aside, we must not forget that dirty dishes have a tale to tell and IBC is the enactment to shine the dirty dishes. Therefore, now is the time to look at the tales it is telling for us to be wiser and initiate corrective action we do have a need to reflect, debate and ponder over the following: -

(i) Root cause analysis for low recoveries to systemic corrections needed in banking system with respect to sanctioning the loan, and vigilance needed to getting advance signals of potential default

(ii) Need for growing market for distressed assets

(iii) Reforming the judicial system of IBC to hold accountability for timely resolution

(iv) Eliminating judicial intervention in admission of IBC cases

Conceptual crafting of IBC can withstand any advanced standards of quality from international standpoint, however, what has bugged the efficacy of IBC is the approach of judiciary grossly ill equipped in competence as well as strength to deal with the crux of a specialized legislation.? Many contradictory judgements have happened entirely due to improper understanding of the IBC and its spirit. Similarly, resolution professionals have been accused of absence of integrity, managerial competence and overall wherewithal needed to handle the responsibilities assigned in IBC. On the contrary, the truth lies in many competent, experienced and deserving professionals striving to get consideration for appointment.? Insolvency Professional Agencies have been announcing executive education courses to cover up the void in leadership competence without ever taking note of availability of such competence in their own database.? Ironically, one is yet to see anyone becoming a swimmer by taking a classroom coaching. Managerial talent develops only by being in industry and facing the challenges of running the organization. There is an urgent and immediate need to allot work to all the eligible insolvency professionals and compile a list of meritorious resolution professionals. Similarly, there must be room for fair compensation than prevailing practice of taking quotations and indulging in negotiations to reducing professional compensation.?

Our banking system is long overdue for a massive overhaul with respect to systems, methods used for appraising and sanctioning loans. Low realizable value of assets clearly indicates some intrinsic shortcomings in appraising or evaluating the projects for loan sanctions.?? Similarly, inability of banks to foresee a potential loss to take advance remedial actions has been completely missing the debates and discussions. Even the real-life experience of functioning of committee of creditors has been a sore point with resolution professionals.? Public sector banks are victims of large hierarchies, mediocre talent and bureaucratic set up.? In recent times, there is a shift in pattern of enterprise by moving away from debt to private equity and generating wealth from valuations.? Technology, enterprise and intellectual capital would only see a surge in this growing trend of low investment in fixed assets and dependence on equity investors than raising debt from a public sector bank. This would only translate to futuristic business opportunities stressing the need to dole out advances to deploy the deposits in asset heavy projects on paper with debatable probabilities of achieving the forecast return.?

Therefore, revamping our banking system is a bigger need than to keep criticizing the IBC for opening a window of loot. Revamping the banking system would necessitate a?? transformational shift from asset-based lending to an investor- based lending.? The shift to an investor- based lending would become an integral part of the enterprise to which the money is lent than completing formalities without having quintessential attributes or competence of the entrepreneurial world. The decay of business is less an outcome of market forces than poor leadership, organizational design and absence of integrity.? Charlie Munger used to often say that there is no lousy business, but lousy managers making the business lousy.

Currently, with infusion of capital, merging and consolidating poor performing nationalized banks, the problem seems to be arrested temporarily. However, this is only an allopathic medicine curbing the symptoms than attacking the root cause causing the disease.? Neither the system nor the method of lending has undergone any change to conclude that future would be radically different from the past.

[link - https://www.lawstreetindia.com/experts/column?sid=781]