NEW DELHI: Senior officials of the Reserve Bank of India have expressed serious apprehension over the way banks are taking huge haircuts while settling outstanding loans from corporate giants.
In most cases, the RBI has observed that the banks are taking almost 80%-90% haircuts. And this, claim senior officials of the bank, is becoming a matter of serious concern. At the heart of these, claim the officials, are the attempts of the banks and the companies to resolve the crisis under the Insolvency and Bankruptcy Code (IBC). “It is failing time and again, there is lack of interest from external bidders and the banks are unable to recover even 20% of the cash loaned,” a senior official told this reporter.
Ministry of Finance officials say the closure of cases through liquidation under IBC has seen a massive value erosion of companies. The policymakers are worried, ostensibly because a huge number of insolvency cases are closed through the liquidation process. “This is not a good sign, the IBC is not working. It was designed to save jobs and protect companies from dying in the case of financial difficulties. But now it’s perpetuating joblessness instead by encouraging promoter replacement (through NCLT) as a first step.”
Consider the case of Suzlon Energy Limited. It is now open news that the State Bank of India has agreed to a restructuring proposal, the decision taken by the bank’s board after a series of deliberations. Suzlon owes the banks Rs 11,300 crore and SBI has accepted a haircut of about 68% on the debt. This is very worrisome news even as Suzlon has claimed that it wants to convert Rs 7,700 crore in debt into convertible debentures (to be held in the investment books of the banks). It is nothing but one step forward and two step backward syndrome. For example, the banks may convert a small portion of the debt into equity, giving lenders minority shareholding in the company. In turn, this will allow lenders to benefit from the upside in the company’s stock price once operations stabilise. “But will the operations stabilise?” asked the official.
Said the official: “The most damaging aspect of the IBC is on the competency and integrity of the resolution professionals (or RPs) and the bankers. No wonder so many companies are on death row.”
The Suzlon case is a perfect example to understand what is going wrong with IBC. Lenders have been planning to revamp the wind energy company after it failed to attract investors. Suzlon talked with Brookfield Asset Management and Vestas Wind Systems, but both backed out in 2019. The options were limited for the lenders, who could either approve the restructuring plan or refer the company for insolvency proceedings. That was not good news, considering the low interest in assets related to the power sector. And even if lenders approve the restructuring plan, this would be the second time that Suzlon has restructured debt since 2013. Suzlon reported a net loss of Rs 705 crore in the October-December 2019 quarter, last year the loss was Rs 64 crore. Total income from operations dropped to Rs 673 crore in the third quarter, as compared with Rs 1,112 crore last year.
Experts in Delhi say the Suzlon saga relates to various schemes initiated during the previous UPA era when P. Chidambaram was the Finance Minister. Chidambaram worked on the lines of withdrawn schemes, which basically meant creating a framework for revitalising distressed assets, corporate debt restructuring (CDR), flexible structuring of long term project loans (also known as 5/25 scheme), strategic debt restructuring schemes (SDR), change in ownership outside SDR, and scheme for sustainable structuring. “Even though the schemes were intended for genuine stressed companies, many took shelter under these schemes and mis-utilised the loans. And now, these very loans have skyrocketed to undesirable levels. As a result, the banks have no options but to take a huge haircut,” said a senior Finance Ministry official.
So what exactly is the problem?
“India is passing through a strange phase. The real SMEs are struggling for credit, unicorns are getting huge valuation despite heavy losses, large NPAs are settled for pennies, eroding the capital of PSU banks. And innovators do not have space despite creating big brands with genuine, intrinsic values. In short, merit has no value. It is overridden by the malicious interest of a few minions in power. This is not a good sign for the Indian economy,” said the official.
Let’s check the data collated by the Insolvency and Bankruptcy Board of India (IBBI). Of the 51 liquidation cases in which final reports have been submitted till 31 December 2019, only Rs 96 crore were recovered against Rs 9,870 crore claims admitted. Of the realised amount, Rs 92 crore has been disbursed among the creditors. “Do you realise the difference between Rs 96 crore and Rs 9,870 crore?” asked the official.
This is not all. Out of the 551 ongoing liquidation cases, whose data is now with the IBBI, the total claim amount is Rs 4.47 lakh crore, while the liquidation value is just Rs 21,147 crore. This is a big, big crisis zone. Out of over 3,300 cases admitted under IBC till December 2019, 780 have gone into liquidation and only 190 cases have been resolved. Of the 780 cases in liquidation, only 51 have seen proper closure with proceeds from asset sales being disbursed to the creditors. Of the 51 closed cases, only one corporate debtor—Emmanuel Engineering Private Ltd—has been liquidated as going concern. Of the ongoing 725 cases, at least 22 cases have not been closed even after the earlier stipulated two-year time period. As many as 250 cases have been going on for over one year.
The rules of the IBC are clear. It says under the IBC, if a resolution plan is not approved by the committee of creditors within the stipulated 270 days, the National Company Law Tribunal (NCLT) can order liquidation of the defaulting company. The liquidation process had to be completed two years earlier, but now it’s one year. The regulations now allow a defaulting company to be liquidated as a going concern, but the mere order of liquidation can lead to serious erosion of value of the company. Due to paltry realisation under liquidation process, the cash gets over by the time cost of insolvency process, workers’ dues and financial creditors’ claims are met. Corporate creditors and those below in the waterfall model get nothing.
So where does it leave the Indian banking sector? It has been identified as the most exposed to deterioration in corporate debt repayment capacity. The Moody’s Investor Service said the following recently: “In the banking sector, deterioration in growth dynamics and macroeconomic conditions will inevitably weigh on banks’ asset quality through a combination of deteriorating debt repayment capabilities and rising default risks among weaker Asian companies. Our stress tests on corporate income shock impact show that India and Indonesia are the countries most exposed to deterioration in corporate debt repayment capacity, followed by Singapore, Malaysia and China.”
This is not good news for the RBI, and for the Indian banks.