Banker’s Trust: Has crony capitalism hijacked bad loan resolution?

Source: Business Standard

Relevance: Insolvency resolution is one of the parameters of promoting ease of doing business in India.

Synopsis: Challenges associated with bad loan resolution in India.

Background

• Kingfisher owed around Rs 9,000 crore to the banking system.
• Recently, the State Bank of India-led consortium received Rs 5,824.5 crore by selling shares of a Kingfisher’s group, that were attached under the anti-money laundering law.
• With this, the banks have recovered at least 70 percent of their exposure to the airline.
• Apart from kingfisher, Videocon Industries Ltd and its group companies, Siva Industries and Holdings Ltd who have defaulted are also subjected to the same process.
• Lenders to Videocon Industries Ltd and its group companies will get just Rs 2,962.02 crore, out of their total claim of Rs 64,838.63 crore.
• Similarly, lenders have entertained a one-time settlement proposal of Siva Industries and Holdings Ltd for Rs 318 crore. A minuscule percentage of the company’s total dues of Rs 4,863 crore.

What are the challenges involved in the recovery of bad assets?

• One, it would be difficult for banks to seize and sell the assets of the group companies, in the absence of a personal guarantee. Also, the corporate guarantee from the promoter was missing, while seeking loans.
• Two, the quantum of recovery will always depend on the profile of the defaulting company and the nature of its business. For instance, there will be aggressive bidding and high recovery for companies that have value but not for all.
  • In a recent case of Essar Steel Ltd, the lenders got back 82.91 percent (Rs 41,018 crore) of their Rs 49,473 crore claims.
  • Whereas in the case of Synergies Dooray Automotive Ltd, the creditors got back just 6 percent (Rs 54 crore) of the total debt of (Rs 972 crore).
  • Further, going by the data of the Insolvency and Bankruptcy Board of India, 2,653 cases have been closed. Only 348 cases of the closed cases have been resolved. The average realization by the lenders was 45.96 percent of their claims until March 2020.
• Three, insolvency is a time taking process in India, and the recovery rate is very poor compared to other countries.
  • A World Bank estimate says that in India, it used to take an average of 4.3 years to resolve insolvency and recovery was 25.7 cents for every dollar.
  • Whereas in Japan, it takes six months to settle a case and the recovery rate is close to 93 percent.
• Four, apart from logistical issues that delay the process, banks often give too long a rope to defaulters and this leads to the erosion in the enterprise value of the company.
• Five, the Indian insolvency law lacks the scope for the preservation of assets. In the absence of this, the value of incomplete projects gets eroded fast.
  • Ideally, lenders should invest and complete the project to extract maximum value from the bidders.
  • But the fear of investigating agencies stops them from lending fresh to such companies.
  • As a result of this, often a defaulting company loses the tag as a going concern and is sold at its scrap value.

If bankers move fast, try to preserve the enterprise value of the defaulting companies, and the promoters accept business failures as a reality, the recovery rate will improve.