The banking sector’s gross non performing assets (NPA) ratio is estimated to have declined to 10 per cent in end-March 2019 from 11.5 per cent the year before on the same date, as recoveries through the Insolvency and Bankruptcy Code (IBC) helped banks recovery bad loans, rating agency Crisil said in a report Tuesday.
Even as the average time taken for resolution under IBC is higher than what is set out in the law, the bankruptcy system is yielding better recoveries in lesser time when compared with earlier methods of recovery. “Recovery through the IBC was Rs 70,000 crore in fiscal 2019 – or twice the Rs 35,500 crore recovered through other resolution mechanisms such as the Debt Recovery Tribunal, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, and Lok Adalat – in fiscal 2018,” Crisil said in the report.
“The recovery rate for the 94 cases resolved through IBC by fiscal 2019 is 43 per cent, compared with 26.5 per cent through earlier mechanisms. What’s more, the recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process,” said Gurpreet Chhatwal, President, CRISIL Ratings.
While the recovery rate is higher in cases of successful resolution, the time taken has exceeded the legal provision. “As on March 31, 2019, there were 1,143 cases outstanding under the IBC of which resolution in 32% of the cases was pending for more than 270 days. Significant delays also trigger liquidation. Also, there are a few big-ticket accounts for which resolution has not been finalised for over 400 days,” it said.
The IBC requires a corporate insolvency resolution process (CIRP) to be completed in 180 days, which can be extended by another 90 days to a maximum of 270 days. These time limits were set in to ensure that recovery of non performing assets (NPAs) happen in a time-bound manner and banks are able to reduce the quantum of stressed assets of more than Rs 10 lakh crore.
According to data from the Insolvency and Bankruptcy Board of India, as on March 31, 2019, out of total 1143 that were undergoing resolution under the IBC, a total of 548 cases exceeded the 180-day deadline. This reflects that in nearly 48 per cent of the cases (or 548 CIRPs), resolution could not be achieved within 180 days. A total of 362 cases – or 31.67 per cent of the ongoing CIRPs – surpassed the outer limit of 270 days set out in the IBC.
Lack of appropriate bids to takeover companies, differences among the lenders, legal challenges posed by existing promoters and operational creditors are among the reasons resulting in delay. “Then there are other challenges such as burden on the National Company Law Tribunal to resolve a large number of cases, clarity on priority of claims, limited number of information utilities, and creation of a secondary asset market, which need to be addressed,” Crisil said.
Of the 12 large accounts that had combined outstanding claim of Rs 3.45 lakh crore, resolution plans were approved in six cases, including that of Essar Steel which is now facing fresh delays. The other cases are yet to successful resolution plans. In the case of Amtek Auto Ltd, for instance, the approved resolution could not be implemented and the process has now started again.
The rating agency said the law has improved credit discipline and brought in a sense of urgency and seriousness among defaulting borrowers because losing their asset is very much a possibility if the resolution process fails.