Liquidity crunch is impacting debt resolution plans, say lenders

One-time settlements on the decline, say lenders

Liquidity crunch is impacting debt resolution under the Insolvency and Bankruptcy Code (IBC) and outside, several top lenders have said. 

One-time settlement (OTS) with promoters in pre-IBC cases had come down in the last quarter, a top lender said. “Cash is required for OTS and there is no liquidity in the system right now,” he said. 

A senior official at State Bank of India (SBI), the country’s largest lender confirmed that the non-banking financial company (NBFC) crisis had led to problems in OTS. SBI is most active in the space. 

The settlement with promoters is affected in pre-IBC and IBC cases. The April-June quarter data from the Insolvency and Bankruptcy Board of India (IBBI) shows that withdrawals under Section 12A have dropped from the peak level in October-December quarter. 

In the October-December quarter, withdrawals under Section 12A stood at 36, up from 27 in the previous quarter. But in the January-March quarter it stood at 19 and in April-June 18. Section 12A — inserted in June 2018 as an amendment — allowed withdrawal of cases admitted to the National Company Law Tribunal (NCLT). 

“While liquidity is not a problem in the banking sector, it is the slowdown in the overall economy that is impacting OTS. Even if a borrower wants to sell assets and repay the dues, there are not many buyers for the assets,” said A K Goel, managing director and CEO of UCO Bank. 

“Availability of funding is a constraint for potential bidders,” the SBI official said. 

United Bank of India Managing Director and Chief Executive Officer, A K Pradhan, also echoed the views. “There are not many buyers of stressed assets in the market.”

Kumar Saurabh Singh, partner, Khaitan & Co, said the issue with settlement was a trend over the past two quarters. “Banks were using IBC as the last resort and there was a lot of effort on pre-IBC settlement. But now, it has slowed down a bit.” 

Singh, however, said while liquidity was one of the factors holding up settlement, there were others that were matter-specific. 

Saurav Kumar, partner, IndusLaw, said there were instances where cases were on the verge of being settled but then have gone back to the negotiating table. “There have been clear liquidity issues the last two quarters. Availability of funds is an issue,” he said. 

The chief executive officer (CEO) of a steel company that is walking the tightrope between IBC and settlement pointed out that the market was on a decline. “Finished goods prices had come down significantly, whereas raw material prices were still quite high. There is a margin squeeze, so where is the scope for settlement,” he asked. 

Experts also feel market conditions could hammer down valuations of stressed assets. 

ICRA Vice-President Abhishek Dafria said stressed assets in steel sector had seen some competition in the past that led to relatively lower haircuts. “The problem with liquidity could bring down the number of resolution applicants going forward.” 

However, Pradhan pointed out that after the big steel accounts there were not many asset-rich accounts available. 

From the first list of non-performing assets (NPAs) mandated for debt resolution by the Reserve Bank of India (RBI) under IBC, Bhushan Power & Steel and Essar Steel have seen intense competition. The CIRP for both the cases is yet to close though. But among assets that have been resolved from the first list, the steel sector has seen good recovery of claims. The realisation as a percentage of claims for Electrosteel Steels was around 40 per cent and for Bhushan Steel, more than 63 per cent.