While 4,540 insolvency cases have been admitted for Corporate Insolvency Resolution Process (Cirp), significant recovery has materialised only in a handful of cases, such as Essar Steel and Bhushan Power and Steel. The average realisation has been 40%; that for the largest 100 cases, 36%.
While 4,540 insolvency cases have been admitted for Corporate Insolvency Resolution Process (Cirp), significant recovery has materialised only in a handful of cases, such as Essar Steel and Bhushan Power and Steel. The average realisation has been 40%; that for the largest 100 cases, 36%. The Videocon resolution, in which creditors accepted a 95% haircut, has evoked a protest from the National Company Law Tribunal (NCLT), which has to approve Cirps.
In the absence of a market for corporate bonds, large projects in India are funded by banks. The project developer needs to convince the loan sanctioning committee or, more realistically, the political masters of the bank or consortium of banks, to sanction the loan. What form this persuasion takes is common knowledge. If the project is financed by the bond market, the bonds issued for the project would be vetted by a variety of analysts and brokerages and any padding in the project cost identified.
Banks have been sanctioning inflated project costs, the project developer takes out the padding while setting up the projects and builds up a war chest with which to buy political patronage, protection and private riches. The inflated project cost makes it difficult for the project to be competitive in terms of the pricing of the project’s output and calls for larger-than-warranted debt servicing. This is a built-in bias towards the project’s failure and its conversion into a non-performing asset on the bank’s books.
When the projects were small, Indian promoters managed to game the system and survive, even if they appeared to be less than efficient in comparison with their rivals in, say, China. When the loan amounts are large, as also the debt servicing obligation, the fungibility of money for a group with many projects and multiple loans from multiple consortia proves insufficient to ward off bankruptcy.
Till the IBC was enacted, promoters continued to be in control of their bankrupt companies, sometimes persuaded banks to restructure loans, thereby righting the project cost and turning viable, and, in any case, went about life and the Alpine heights of Davos with gilded aplomb.
IBC meant that banks could strip defaulting promoters of their companies. This is a good thing. But when banks try to recover their outstanding loans by selling the underlying assets, either as a going concern or via liquidation, they end up with the mirror image of the original sin of sanctioning inflated project costs — that of handing over assets worth thousands of crore rupees for a fraction of their worth to other large industrial groups.
Between the original sin and the terminal sin, it is the common man who gets squeezed and wrung out. He picks up the tab for the recapitalisation of banks that must follow when banks fail to recover the monies they had lent out, along with interest.
Is there no alternative to the people funding the primitive accumulation of capital by entrepreneurs growing from small fry to big tycoon? Should the State in India follow its own 21st-century imitations of colonial loot, in the early days of capitalism, by European powers, the forceful enclosure of the commons by landlords as pastures for their sheep, the signing away of public land for the construction of privately owned railways by American presidents, including Abraham Lincoln?
There is no need to justify large, periodic write-offs of loans to industrial groups as the price to pay for having an industrial sector that produces what society requires, creates jobs and generates taxes. India’s growing numbers of unicorns show that entrepreneurs can grow rich in entirely legitimate ways without having to default on loans or steal from their own companies. Indeed, the world’s richest are what they are because investors are happy to reward them for creating wealth and income by lapping up the shares of their companies.
So, how to tackle the original and terminal sins of Indian banking? Amarket for corporate bonds and a secondary market for bank loans would go a long way in fixing the original sin. Once the scope to pad project costs is curtailed, viability would improve and fewer loans would turn non-performing.
The way to redeem the terminal sin is to revamp our asset reconstruction companies (ARCs). These were set up under the Sarfaesi Act of 2002 and, according to RBI, their regulator, barred from buying the underlying assets of bad loans.
ARCs should be removed from the ambit of Sarfaesi and simply be bodies corporate governed by the Companies Act. They should be free to buy up bad loans and/or the underlying assets of bad loans. Patient capital in ARCs should own NPAs, and resolve the underlying assets, whether as going concerns or by selling them off piecemeal, to the buyer who values each piece the most. That would take time, longer than banks would want to wait. Competition among ARCs should fetch banks a decent price.
The proposed bad bank owned by banks should be a model ARC.
Views expresses are author’s own
3 Comments on this Story
|M M 1 hour agoInformative. However there have been many instances of frauds committed by owners of companies by inflating asset figures in the financials. Such companies had taken huge loans from Banks and had also raised significant amount of capital on the stock market based on these fraudulent financials. When such Companies have defaulted ontheir bank loans it simultaneously became an NPA for… Banks and also eroded investors hard earned wealth on the stock market. Such cases currently referred to NCLT should also be covered in future articles.Read More|
|Sanjeev Gupta 3 hours agohighly useful comments !|
|Ashok 10 hours agoFamily owned groups should take a multi generational view of their businesses. The Tatas and Reliance have serviced their debt scrupulously. In the rush to grow and diversify, why end up like Videocon. Or the businessmen who have fled India.|