Following commercial wisdom will be game changer for resolving bad loans

Insolvency resolution should efficiently redeploy assets. Bankers must bring commercial acumen to negotiations, not bureaucratic rigidity

In banking, we have multiple reasons to don our professional hats with pride. Non-performing assets (NPAs) are down, credit growth is robust, and banks are reaping record profits. The credit for the strength in the banking sector largely goes to interventions by the government and the Reserve Bank of India (RBI). The Insolvency and Bankruptcy Code (IBC, 2016)  stands out as a landmark legislation that shifted the legal balance in favour of lenders. In India, promoters losing control and ownership of their assets to banks was quite rare. The IBC changed that.

As we celebrate these achievements, we must also accept that loan defaults and business failures are an inevitable aspect of the commercial ecosystem. Policy changes, intense competition, technological disruptions, and global politics can cause even the most prosperous businesses to falter. In this context, resolving stressed situations should not become an end in itself, but rather a means to efficiently redeploy productive assets. Banking professionals must bring commercial acumen to the negotiating table, moving away from bureaucratic rigidity. Bhushan Power & Steel and Ruchi Soya are shining examples of decision-making based on commercial considerations, resulting in significant stakeholder value creation.

However, there’s often a temptation to follow precedents blindly. Borrowers with diverse business operations may not find a single suitor interested in all their assets. Instead of creatively restructuring the borrower’s various businesses within a single resolution framework, stakeholders tend to stick to traditional approaches. In a remarkable departure from the norm of law lagging markets, policy responses in several situations have preceded market developments, as seen with the Insolvency and Bankruptcy Board of India’s (Ibbi’s) provisions for auctions between bidders and creditors’ ability to carve and resolve specific businesses.

Market players have been reluctant to adopt global best practices such as stalking-horse bids and Swiss auctions. Government or regulatory intervention, such as making pre-packs more widely applicable, could facilitate these practices. Lenders could identify a bidder privately before initiating an IBC resolution, avoiding speculation of liquidation. This approach would give them priority in the capital structure while providing the bidder with a fresh start and ensuring open price discovery for stakeholder benefit. Even processes under the RBI’s stressed asset resolution framework would benefit from such an innovation.

Global experts often take over management and convert debt into equity to restructure and redeploy assets. Unfortunately, these tools are severely restricted for asset reconstruction companies in India. Liberating the use of such strategies could be a game changer in the Indian debt space.

One distinctive aspect of Indian businesses is the central role played by governments and regulators. They sometimes use their power to grant permits as a means to demand past dues, rendering the concept of a fresh start a joke. Intervention is necessary to address these delays, abuses, and exactions. Clearing the way for acquisitions under the IBC or RBI framework to bypass consent thresholds for leases, concessions, licences, permits or laws would accelerate value maximisation. The state could even pre-clear any national security reviews for existing licence holders and other pre-qualified entities.

Recent government efforts to enhance judicial capacity are commendable but they should go beyond just increasing bandwidth. This needs a sustained training and education programme. A basic tenet of commercial wisdom often takes a back seat, resulting in significant delays. Appreciation of time-value of money should be instilled in judicial and regulatory actors through engagement with legal and commercial experts.

­­It’s widely acknowledged that timely management of stressed assets by lenders can lead to better outcomes and recoveries. Banking professionals, with the support of the government, Ibbi, legal and commercial experts, must continue to work for more efficient and tailored processes in India. We should not allow commercial wisdom to be overshadowed by rigid, precedent-based approaches.

The writer is senior partner, Saraf and Partners