A year of IBC - speed and direction

Indian banking system is bleeding profusely saddled with the unprecedented non-performing assets and default of loans due to the flurry of corporate frauds and inability of the borrowers to repay the loan amounts.

Indian banks had identified 12 largest loan defaulting cases (called the dirty dozen) and brought these cases to the notice of the Reserve Bank of India (RBI).

The RBI mandated the banks to refer the cases to the National Company Law Tribunal (NCLT) for quick resolution of the cases under the much flaunted and publicized Insolvency and Bankruptcy Code (IBC) - the underlying intent was to salvage the Indian banking system from ongoing crisis of loan defaults and non-performing assets.

IBC was expected to be a much speedier way of resolution of such cases than the prevalent traditional methods.

However, to no one’s surprise, the NCLT has been able to resolve only two cases (Bhushan Steel [acquired by TATA steel for INR 35,200 crore] and Electrosteel [acquired by Vedanta for a sum of INR 5320crore] out of 12 largest loan defaulters’ cases within the period of last one year.

This goes against the initial estimate that the 12 largest loan default cases (NCLT list 1 - combined debt worth INR 2.4 lakh crore) could be resolved by mid of 2018 and another 28 cases (NCLT list 2 - combined debt worth INR 1.2 lakh crore) will be resolved by NCLT by the March, 2019.

The primary reason behind the delay is last minute litigation (sometimes being the time-tested dilatory tactic employed by the promoters or other quarters) on every issue, sometimes even on non-issues. As a result, the resolution in such cases could see the light following the settlement of these issues only.

The interesting factor is that the bankers still prefer the NCLT for the resolution of loan default cases rather than other mode of loan recovery despite the snail paced resolution of the cases by the NCLT.

It seems that the cases related to steel sector will be resolved quickly given the great amount of interest of the acquirers in this business line and interest in the acquisition of non-steel business will be relatively low and banks could be forced to take a major haircut.

The following are the interesting facts reflected in the CLSA report that was released in March, 2018:

·       Debt worth of bottom-up assessment of the top NCLT cases stands at INR 4 lakh crore and amounts to 5% of total loans and 45% of non-performing assets.

·       Such assessment indicates that the banks may have to take the haircut ranging from 20% to 90% from case to case - however, it is expected that the total haircut may be less than 60%.

·       Another prospect is that least haircuts will be witnessed in large steel projects and highest haircuts in EPC & power sectors.

·       The loan recovery rate will be higher in NCLT list 1 when relatively compared to NCLT list 2.

It is also expected that due to the RBI circular mandating banks to refer loan default cases worth INR 2000 crore and above to NCLT could witness admission of many new cases to the bankruptcy court if the banks fail to find a speedy resolution of loan default cases within 180 days of default.

It is high time for the NCLT and associated authorities to speed up their effort to resolve the NCLT list 1 and 2 cases to salvage the banking system from the ongoing crisis of loan defaults and non-performing assets. Else, the threat of things could get worse looms large!

Research and inputs by Paruchuri Bawanth Mohan