Half the cases closed under IBC end in liquidation, only 13% resolved

Haircut rises to 60% of lenders' claims in FY21

Almost half the cases closed by Indians lenders under the Insolvency and Bankruptcy Code 2016 in fiscal 2021 have ended in liquidation while only 13 per cent were resolved.

As of March this year, banks closed 2,653 cases after invoking the bankruptcy proceedings against loan defaulters and in 16 per cent cases, handed over the companies back to the promoters after they cleared part of their dues under Section 12A of the insolvency act (see chart). Twenty-three per cent of the closed cases are either under review or under appeal. Of the total 4,376 cases, 2,653 were closed while the rest are ongoing, statistics by IBBI shows.

In another worrying trend for the lenders, the haircut on resolved cases rose to 60 per cent of the admitted claims from an average of 55 per cent in the previous years. In the March 2021 quarter alone, haircut rose to a whopping 74 per cent of the claims made by the lenders against the defaulters. The haircut is the amount banks forego to settle a non performing account.

Lenders and corporate lawyers say as 79 per cent of ongoing cases till March this year have already passed 270 days since admission thus liquidation in these cases is likely to increase in the next few quarters. Higher number of liquidations means banks will have to go home with miniscule recovery in their dues by selling plants, machinery and other assets of the defaulting companies.

Latest statistics shows that of the total 4,376  cases which have been admitted under the insolvency process so far till March 2021, 499 new cases were admitted in the last financial year due to one year suspension of the IBC process by the Indian government due to Covid-19 pandemic.

The Indian government had launched IBC 2016 to help banks recover their dues from chronic defaulters. While it helped the Indian companies, with good financial track record like Tata Steel, JSW Steel and Ultratech, to acquire their rivals, several promoters lost control over their companies.

Statistics for the fiscal 2021 shows that 43 per cent of cases admitted so far are filed by the financial creditors in spite of the introduction of a new circular from the RBI in June 2019 which removed a clause that made it mandatory for cases to be admitted to IBC. Around 51 per cent of the admitted cases were initiated by operational creditors.

Lenders said they are expecting to see a sharp jump in the number of cases being admitted as IBC suspension has now been lifted. But with falling recoveries for the banks, this tool has also lost its steam as compared to previous years.

Lawyers said more promoters are now taking the one-time settlement route on their accounts and the  extent of haircut is depending  on how much cash is being  offered upfront and the rate of interest is being offered on the deferred payment and write off amount. "All this will determine how much hair cut lenders take in an OTS proposal," Nirav Shah, Partner, DSK Legal.

The lenders are also waiting for a long time to get back part of their dues as the average duration of debt resolution is now 406 days for all resolved cases till FY2021. This is excluding the time excluding the Adjudicating Authority. About 79 per cent of ongoing cases have crossed 270 days. Of the total admitted cases till FY21, 41 per cent were from the manufacturing space and 30 per cent from real estate and construction.