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Govt’s Insolvency Drill Falls Short as Only Five of Dirty Dozen Cases Resolved in 2 Years

Govt’s Insolvency Drill Falls Short as Only Five of Dirty Dozen Cases Resolved in 2 Years

The resolution of cases of the 12 biggest corporate borrowers - known as the dirty dozen - has been less than satisfactory as only five have seen any resolution at all and the amount recovered has been a fraction of the debt repayment they have defaulted on.

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Sindhu Bhattacharya

New Delhi: India's determined push to recover bad loans through a dedicated Insolvency & Bankruptcy (IBC) mechanism, put in place by the Narendra Modi government, has been hailed, and rightfully so, as a much-needed step to bring its banks out of the NPA morass. But two years down the line, this process appears to have had middling success.

For one, the resolution of cases of the 12 biggest corporate borrowers - known as the dirty dozen - has been less than satisfactory as only five have seen any resolution at all and the amount recovered has been a fraction of the debt repayment they have defaulted on.

Second, of the ongoing corporate insolvency resolution (1143) cases, the maximum number or 362 cases have been ongoing for more than 270 days or about nine months. This indicates pitfalls in the process, according to insolvency experts, since quicker resolution would likely generate better recovery for lenders.

Third, maximum number of insolvency cases – 359 – has been admitted in the January-March period of 2019 after a determined push by the government to reluctant authorities.

And fourth, almost every second insolvency case which was closed, ended in liquidation in these two years.

Let us first look at the case of the 12 high-profile corporate defaulters. In 2017, the Reserve Bank of India (RBI) had shortlisted 12 such large corporate accounts for immediate bankruptcy proceedings, since these corporate debtors together owed the banks a whopping Rs 3.45 lakh crore.

But two years later, only five these accounts have seen any resolution at all: Bhushan Steel, Alok Industries, Electrosteel Steel, Monnet Ispat & Energy and Jyoti Structures. These five together owed lenders Rs 1.17 lakh crore.

After resolution, just Rs 52,519 crore has been recovered. This is a fraction of the Rs 3.45 lakh crore that was stuck with these 12 corporate accounts. However, if one were to take the liquidation value of these 12 corporate defaulters, then almost three fourth of the amount has already been recovered.

Among these 12 biggest defaulters, the resolution of Bhushan Steel has yielded the highest realisation at 63.5% to its creditors. The biggest haircut has been taken by lenders to Alok Industries, since they could not recover even a fifth of their loans, getting only 17.11% of their dues. In the case of Monnet Ispat & Energy, only a fourth of the outstanding has been recovered and cases like Essar Steel and Amtek Auto are anyway still ongoing.

So lenders to Bhushan Steel had to take a haircut of about a third of their loans. Bhushan Steel owed a little over Rs 56,022 crore to its lenders, as per latest data released by the Insolvency and Bankruptcy Board of India (IBBI). In its latest newsletter, the IBBI has said that "Resolution of 12 large accounts was initiated by banks as directed by RBI. Together they had an outstanding claim of Rs.3.45 lakh crore as against liquidation value of Rs.73,220.23 crore. Of these, resolution plan in respect of six CDs have been approved. Due to failure of implementation of approved resolution plan in Amtek Auto Limited, the process has restarted. Other accounts are at different stages of the process."

Some other interesting factoids also emerge from the IBBI newsletter. In all, 1,858 cases have been admitted under the IBC till March this year. So in 24 months, 1,858 cases have been filed or an average of 77 cases a month. As many as 1,118 of these cases have been filed since April 2018 or in the last one year.

Of these, 152 have been closed, 91 cases have been withdrawn, 378 have ended in liquidation and 94 have ended in approval of resolution plans. The largest number of corporate insolvency resolution cases in any quarter since the IBC was initiated was filed in the March quarter of 2019 at 359 such cases.

The data also show that almost one in three corporate insolvency resolution cases remain ongoing at 1143.Of these, 362 have been ongoing for more than 270 days, which experts say is a cause for concern. And almost every second insolvency case or 52.87% which was closed ended in liquidation, as compared to 13.14% ending with a resolution plan. In the January-March quarter of 2019 alone, 73 cases ended in liquidation.

But the IBBI newsletter said that 75% of the CIRPs ending in liquidation (283 out of 378) were earlier with BIFR and/or defunct. "The economic value in most of these CDs had already eroded before they were admitted into CIRP ".

That Indian banks are struggling under bad loans is no secret. According to this reply in Lok Sabha, gross NPAs of India’s scheduled commercial banks rose from Rs 3.23 lakh crore in March 2015 (4.3 % of gross advances) to Rs 7.9 lakh crore by March 2017 (9.3 % of gross advances).

They further rose to Rs 8.5 lakh crore by September of the same year (9.8 % of gross advances) and then climbed to Rs. 10.4 lakh crore by March 2018 (11.2 % of gross advances). The NPAs have subsequently declined to Rs 10.1 lakh crore as on 31.12.2018 (10.3 % of gross advances, as per provisional data).

Meanwhile, in a note to clients, analysts at brokerage Antique have said “The RBI's list 1 and 2 of IBC exposure should help resolve 9-16% of NNPLs. With high coverage on these exposures, banks should benefit in 2019-20. State Bank of India again seems to be better positioned with estimated recovery rate of 39%. We note that, apart, from RBI directed cases, other cases which are referred to IBC form 5% to 23% of the NNPLs. To estimate recovery rate on these would be difficult, but, going by the resolutions so far we are building a likely recovery rate of 25-30%.”


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