Synopsis–Out of the total 4,300 cases that have been admitted to bankruptcy courts since FY17, only 8% has been resolved and nearly 40% of the cases are still pending. About 30% of the cases have seen liquidation.
Bad loan resolution from bankruptcy cases continued to disappoint with recovery rate at 24% as extended timelines took a toll on recovery and rehabilitation of companies. Recoveries from earlier resolution mechanisms resulted in a loss of nearly 70%.
“While the latest trends and progress banking report from RBI points outs a recovery rate of ~45% for cases under IBC compared to other resolution methods being at sub 25%, a careful examination of data released from IBBI reveals that the recovery rates are swayed by top 9 accounts, barring which the recovery rates are just ~24% under IBC,” said Suresh Ganapathy, associate director, Macquarie Capital. “The top 9 accounts had large steel accounts where recovery rates have been very good. Complex assets, especially in infrastructure sectors like power, have been difficult to resolve as there haven’t been many takers for these assets.”
Out of the total 4,300 cases that have been admitted to bankruptcy courts since FY17, only 8% has been resolved and nearly 40% of the cases are still pending. About 30% of the cases have seen liquidation.
The outbreak of the Covid-19 pandemic and its related effects have further battered the prospects for stressed asset resolution. Also, the suspension of new proceedings under the Insolvency and Bankruptcy Code (IBC) for the entire fiscal resulted in a sharp slow-down in the resolution process. The realisation for financial creditors from the resolution of bankruptcy cases declined significantly in the fiscal year gone by with a total resolution amount of Rs. 26000 crore, almost a quarter of the realisations in FY2020.
Although rating agency ICRA estimates that financial creditors could realise about Rs 55,000 crore to Rs 60,000 crore in FY2022 through successful resolution plans from the IBC. The higher realisation by the financial creditors would depend on the successful resolution of 8-9 big-ticket accounts, as more than 20% of ICRA’s estimated realisation for the year could be from these alone.
“Large accounts mostly see a very high level of delay in closures due to litigations, which is a concern,” said Abhishek Dafria, Vice President and Group Head – Structured Finance, ICRA. “If the second wave of the pandemic does not subside soon, it could have a bearing on our estimates as the difficult operating environment may result in a slowdown in the resolution process, especially for smaller- sized entities, and would also result in an increase in the haircuts for the lenders.”
About 40% of the cases admitted by the NCLT were closed on appeal or settled or withdrawn under Section 12A which highlights that at least some promoters have been more willing to pay their dues to keep the IBC proceedings at bay. The extent of cases being referred to liquidation remains high at about 40% and only a quarter of such cases have seen the liquidation process come to a conclusion. The average realisation through liquidation has been a mere 3% of the claim amount.
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