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The Reserve Bank of India’s (RBI’s) new framework for stressed loans that would classify any default in one lender bank as a default in all other lenders’ accounts has been labelled by the government as a way to speed up the bad loan resolution process. While this may help in cleaning up the books of many banks that have borne the brunt of loan defaulters, the amount of money recovered by banks to date through insolvency proceedings seems to indicate that banks might have to write off billions of dollars’ worth of loans in the times to come. Since the Indian Insolvency and Bankruptcy Code (IIBC) was introduced in 2016, some 540 corporate entities have been admitted for resolution. According to information with the Insolvency & Bankruptcy Board of India (IBBI), 10 cases had been resolved as of December 2017. If the recovery amounts from these corporates are anything to go by, the road ahead for banks in recovering depositors’ money from corporate defaulters might not be easy. Banks, while trying to recover loans from these 10 corporate entities, have had to forgo more than Rs 37 billion. These 10 lenders collectively owed banks Rs 55 billion, but banks have been able to recover just about Rs 18 billion by selling off their assets and other securities that were pledged by companies while taking these loans. That means that banks on an average have been able to recover just 32 per cent of the money under the Corporate Insolvency Resolution Process (CIRP). Information available with Business Standard Research Bureau states that the amount owed by corporate defaulters (or net non-performing assets) to Indian banks was Rs 4.44 trillion. If all of these were to be brought for resolution, given the recovery record of banks under the new insolvency code, banks could end up failing to recover more than Rs 3 trillion. What makes it even trickier is that banks usually find it tough to ensure fast-track recovery of money from big corporate houses rather than smaller ones. The IBBI stated in February: “Small corporates generally have simple operating models and clear capital structures. Insolvency of such forms can be addressed more expeditiously compared to a normal period of 180 days.” And the biggest threat to banks may well be coming from large corporate defaulters. The Reserve Bank of India (RBI), in its latest Financial Stability Report, stated: “The total stressed advances of large borrowers increased by 2.4 per cent between March and September 2017.
Advances to large borrowers classified as special mention accounts-2 (SMA-2) also increased sharply by 56.5 per cent during the same period.” SMA-2 accounts are the worst performing loan accounts where the borrower has defaulted on his loans for more than 60 days. The RBI pegged loans in this category at Rs 2.8 trillion in its report.Another trend visible in cases that have been resolved under the Corporate Insolvency Resolution Process is that banks are able to recover less money from companies that owe them more. For instance, banks were able to recover just 40 per cent of its Rs 15 billion loans from Kamineni Steel & Power India, a Telagana-based corporate defaulter. The resolution process of Kamineni Steel & Power India was finished on November 27, 2017, and the company was the largest defaulter among all the 10 insolvency cases that have been resolved so far. The case of Sree Metalik, the second-highest defaulter in the resolved list is even more discouraging. Sree Meetalik owed banks almost Rs 13 billion, of which just 7 per cent was recovered under the insolvency resolution process. Synergies Dooray Automotive, which was the first case resolved under the new code, saw banks managing to recover just about 6 per cent of their loans. The amount of money recovered by banks under liquidation falls further and is generally lower than the amount recovered under the insolvency process. In all the resolved cases, the liquidation value was less than half the amount of money actually recovered by banks from selling off the pledged assets of these defaulters. The IBBI has acknowledged that the path to resolution of banks’ bad loans would be tricky. In its latest newsletter, IBBI states: “A relatively large number of corporate undergoing… Corporate Insolvency Resolution Process (CIRP) ending up in liquidation is on expected lines, as many of them have long-pending defaults and are left with little organisational value. Wherever resolution happens, the realisation for creditors as a percentage of their outstanding claims might not be very promising for the same reason.” The Narendra Modi government at the Centre last month decided to use Rs 8 billion worth of taxpayer’s money to bail out these banks during the present financial year. In addition, some of the badly hit public banks would be injected with Rs 80 billion worth of recapitalisation bonds. With Rs 3 trillion worth of depositors’ money that could potentially never be recovered from defaulting corporates, the government might have to do a bigger rescue act in the future than it has envisaged for the moment.