Bank haircuts: FM says checks in place against questionable resolution – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/economy/bank-haircuts-fm-says-checks-in-place-against-questionable-resolution/article65270581.ece

Finance Minister Nirmala Sitharaman addresses the Rajya Sabha in New Delhi on Tuesday, March 29

Finance Minister Nirmala Sitharaman addresses the Rajya Sabha in New Delhi on Tuesday, March 29 | Photo Credit: –

Banks have spoken against unreasonable resolution plans, says Nirmala Sitharaman

Finance Minister Nirmala Sitharaman on Tuesday stated that banks have periodically taken steps to counter resolution plans that might force them to take “huge haircuts” on the exposure to companies undergoing insolvency.  Making an intervention to a question in the Rajya Sabha on whether there was a mechanism to prevent excesses in resolution plans, Sitharaman wanted to assure  members that there were enough checks and balances, which are now being “invoked” to prevent misuse. 

“If the resolution is seen to be suspect, there are times when the resolution providers or the Committee of Creditors (CoC) are being asked to review the process and only then finalised. When leading to questionable resolutions, there are avenues for banks in this case to go to the court and say this may not be the best solution available,” Sitharaman said. 

She said there were examples in the recent past where banks have said that the resolution offered was not acceptable — that is, the level of haircut is not acceptable — and asked for a rework. 

“Banks have gone questioning the levels to which banks have been asked to let go (indicative of haircut) and appealed against the professionals’ advice. Therefore there is enough mechanism available and I am happy to say that banks are periodically using to question the resolution arrived at and the resolution professionals’ credibility itself gets questioned subsequently and assignments given to them are done after much scrutiny. It is not that they are let gone and nobody notices it,” she said. 

Banks are saying it is unacceptable and the system is telling the resolution professional that he cannot go on with a compromised solution, she added. 

What is a haircut?

Put simply, when a bank takes a ‘haircut’, it accepts less than what is due from a loan account. For instance, if a bank is owed ₹1,000 from a borrower and it agrees to take back only ₹800, it takes a haircut of 20 per cent. Banks usually resort to haircuts when they think the chance of a full recovery is bleak. 

Why worry?

Critics have frowned on the huge haircuts taken by banks during an insolvency process. Some members of Parliament noted on Tuesday that huge haircuts defeat the purpose of the Insolvency and Bankruptcy Code (IBC).

According to data furnished by the government in reply to a Parliament question in February, bad loans referred to IBC/NCLT stood at ₹5,44,434 crore. Of this haircut (loss to banks) stood at ₹3,53,655 crore (65 per cent) and the resolution amount stood at ₹1,90,779 crore. 

While many banking industry insiders and observers cry foul at the extent of “haircuts”, other experts point out that the main purpose of IBC is “not recovery” but the resolution of the firms faced with stress and bad debts. 

While banks want recovery of the loans, the government wants resolution of the loans, it was pointed out. 

Published on March 29, 2022

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