Recoveries of banks and financial institutions under the Insolvency and Bankruptcy Code (IBC) are expected to improve next year as large cases such as Essar Steel and Bhushan Power and Steel get resolved.
The IBC, under which cases started flowing in from January 2017, has been one of the biggest financial reforms in the current year to tackle non-performing assets (NPA) in the banking sector and is a precursor to banks restarting lending after getting back stuck capital.
According to data analysed by The Indian Express on cases that underwent successful resolution under the IBC, the financial creditors could recover a total of Rs 58,385.23 crore out of their total claims of Rs 1,26,303 crore. This is a recovery rate of 46.2 per cent for cases for which various benches of the National Company Law Tribunal (NCLT) passed resolution orders under the IBC till September-end.
The data has been taken from the Insolvency and Bankruptcy Board of India and it does not include those cases for which liquidation orders were passed, as it is difficult to assess actual recovery in these cases until completion of liquidation.
Since financial institutions are likely to recover much lesser amounts in case of liquidation than in cases where resolution could be implemented effectively, to that extent, the average recovery rate is expected to be lower than that presented by cases that underwent successful resolution, according to industry people involved in resolution of cases. At September-end, 212 cases were resolved through liquidation while in only 50 cases a resolution plan was approved.
Financial creditors and debtors can initiate Corporate Insolvency Resolution Process (CIRP) under the IBC. Among the biggest cases resolved under the IBC include Bhushan Steel, Electrosteel Steel, Amtek Auto, Monnet Ispat and Energy, accounting for nearly Rs 93,000 crore worth of total claims of financial creditors. Recovery in individual cases show wide variation.
Among the large cases involving financial creditor claims above Rs 5,000 crore, recovery rate varies from as low as 0.3 per cent in case of Zion Steel to as high as 63.5 per cent in case of Bhushan Steel.
In two cases involving outstanding claims of more than Rs 5,000 crore each — Orissa Manganese & Minerals Ltd and Adhunik Metaliks Ltd — the recovery rate has been less than 8 per cent. In a total of 10 cases involving loans of less than Rs 100 crore each, financial creditors were able to recover 100 per cent or more.
This analysis is based cases resolved till September-end but a number of other high-value cases such Essar Steel are nearing resolution but are stuck in legal deliberations.
While resolution data presents an optimistic picture with regard to recovery of stuck loans, two IBC process faces two key challenges: large number of cases being referred to NCLT benches, and breaching of the resolution time-limit in many cases.
A hallmark of the IBC law was that resolution should be done within 180 days and a maximum of 270 days. This was inserted to bring in urgency in the process of resolving Rs 11 lakh crore worth of stressed loans.
However, in many cases, even the 270-day outer limit has been exceeded as parties went into appellate tribunal and courts. Banks are estimated to have lost out on about Rs 4,000 crore in additional income for the initial 12 companies in the RBI’s list of June 2017 due to the delays in the resolution process, rating agency ICRA said in a report last month. Of the 12 large accounts, only four cases have been successfully resolved whereas the other cases still remain unresolved even after more than 450 days have surpassed since being admitted by the NCLT, it said in its November 13 report.
“The two major challenges facing the NCLT process are clogged pipelines and the unsuitability of the method for some classes of stressed assets, especially power and small and medium enterprises. At current clearance rates, resolving the whole NPA problem could take another six years or so,” Former Chief Economic Adviser Arvind Subramanian wrote in recent his book ‘Of Counsel: The Challenges of Modi-Jaitley Economy’.
For faster resolution, he suggested that stressed assets should be divided into three groups: assets that should go through the CIRP; large assets such as in the power sector that need an alternative resolution mechanism; smaller assets that could potentially clog the CIRP.