A law called “The insolvency and bankruptcy code (IBC) 2016” was enacted in the parliament in May 2016 apparently to recover the mounting Non-Performing Asset (NPA) from the corporate sector. This law enables the Banks and other creditors to refer NPA accounts to IBC. On November 30, 2016, the rules have been framed and the law came into force on December 1, 2016.

Formation of IBB

In accordance with this act, a board called Insolvency and Bankruptcy Board of India was formed. The NPAs are taken up with this Board, which in turn refers the cases to NCLT (National Company Law Tribunal) which is supposed to resolve these NPAs either by selling the defaulting firms to others within 180/270 days or by liquidating them and selling the same in parts.

100 per cent provision

As early as June, 2017, RBI told banks to set aside at least 50 per cent of the loan amount as likely losses for all cases referred to the insolvency process; the regulator also said that provisioning should be 100 per cent for those cases that don’t get resolved in the initial mandatory period for loan restructuring and instead are forced into liquidation. Then one can understand the efficacy of this law.

55.5% haircut

The authorities made a tall claim that this act would prove to be highly effective in the recovery of NPAs from the corporates as otherwise, these corporate borrowers would face liquidation.  Under the direction of RBI, in June 2017, banks referred 12 largest NPA accounts amounting to Rs 3,45,000 crores, constituting 25 per cent of the total NPAs of all the banks, to the NCLT. Out of these 12 cases referred to NCLT, only 9 cases were so far resolved even though five years have elapsed. The total amount NPAs of these 9 accounts namely Electrosteel Steels Limited, Bhushan Steel Limited, Monnet Ispat Energy Limited, Essar Steel India Limited, Alok Industries Limited, Jyoti Structures Limited, Bhushan Power and Steel Limited, Jaypee Infratech Limited and Amtek Auto Limited is Rs 2,49,908 crores out of which only Rs 1,38,732 crores could be recovered. This too would not come in a single payment. It would be received by the banks in installments in the form of debentures in 4/5 years. The remaining amount of Rs 1,11,177 crores is fully gone and will never come back. The percentage of hair cut is 55.5%.

2.29 lakh crores written off

In May 2020 the finance minister admitted that In 221 resolved cases resolved so far, only 44 per cent recovery has been achieved since the inception of IBC 2016.  The admitted claims amounted to Rs. 4.13 lakh crores and the realizable amount was Rs. 1.84 lakh crores.  This clearly reveals that an amount of Rs. 2.29 lakh crores was written off to the corporates in these 221 cases alone.  It is further to be noted that the government itself admitted that the amount of Rs. 1.84 lakh crores was only ‘realizable’ and not fully recovered. In this case Rs. 2.29 lakh crores is gone once and for all. This is not the case of technical write off where the written off account will remain in the books of accounts of the Banks.  This is clearly a settlement awarded by the Tribunal and there is absolutely no scope of recovery of this written off amount.

Only 14% cases resolved

According to the daily newspaper-Business Line, dated May 22, 2020, “Financial and operational creditors have managed to recover money in just 221 cases, or 14 per cent of the 1,604 cases resolved by the National Company Law Tribunal (NCLT) till March 2020. The NCLT ordered liquidation in 914 cases (57 per cent) while 312 cases (19 per cent) went on appeal and about 157 litigations (10 per cent) were withdrawn.”

13566 cases withdrawn

Further, it was revealed by the government of India that “13,566 cases involving a total amount of Rs. 5.01 lakh crores (approximately) were withdrawn even before admission under provisions of IBC till February 29, 2020”.  The government did not explain how and why such a large number of cases were withdrawn before admission, the role of the lenders and the RBI in this regard and the alternate mechanism to recover this huge NPA of more than Rs. 5 lakh crores. 

Normally the loss on account of bankruptcy proceedings should be compensated to the bank by the NPA borrower. But it does not happen. Only banks bear the brunt and they suffer huge loss wiping out their huge profit which puts them into great financial strain.  The people’s money is thus looted and plundered. But the NPA borrowers are not at all affected and they escape totally unhurt. The asset of one private company is purchased by another private company, but the loss is incurred by the Banks. Everything is done legally.

95.85% haircut in Videocon case

The three recent cases that are widely discussed in the media are worth mentioning.  A Non-Banking Financial Company DHFL which has NPA of Rs. 91000 crores is sold to Parimal Group of companies for Rs.37250 crores with a ‘haircut’ of 60%. 13 companies of Videocon having NPA of Rs.71433 crores are sold to Vedanta Group of companies for Rs.2962 crores with a ‘haircut’ of 95.85%. The lending Banks which include many Public Sector Banks have incurred huge loss on account of this.

93.5% haircut as OTS in Siva Industries’ case

The third case is that Siva industries having NPA of Rs.4863 crores is settled as One Time Settlement (OTS) to the same company for Rs.318 crores with a ‘haircut’ of 93.5%. Here the lenders lead by IDBI brought the case to the IBB and NCLT. Now under section 12A of the IBC Act, with the approval of 90% of voting share of the Committee of Creditors, the application before NCLT is withdrawn and OTS is made for a paltry sum of Rs.318 crores. The immediate upfront payment by Siva Industries is Rs.5 crores. Remaining amount of Rs.313 crores will be settled within 180 days from the date of order of the NCLT utilizing the assets given as collateral. On payment of this amount, the remaining amount of Rs.4545 crores will be written off and the Siva Industries will be handed over back to its promoter Sivasankaran.

What is the justification for the Bankers to settle with this huge ‘haircut’?  The Committee of Creditors consisting of all the lenders arrives at liquidation value while referring the case to NCLT. That amount would be a small percent of the total NPA. For example Alok Industries with NPA of Rs. 29523 crores was settled for Rs.5052 crores to the purchaser Reliance Industries Limited forgoing Rs.24471 crores with 83% ‘haircut’. But the liquidation value of Alok Industries was worked out to be Rs. 4393 crores and hence it was boastfully claimed by the Bankers and the people at the helms of the affairs that this case was settled for 115% of the liquidation value.

Lending Policy & Recovery Policy to be changed

Why such a low liquidation value is fixed? The lending policy of Reserve Bank of India (RBI) allows lending Bankers to take 10% to 15% of the loan amount as the collateral security. In the case of accredited companies, even that is waived, whereas 100% collateral security is insisted for all the small loans and SARFAESI is utilized to take over the assets without the intervention of the Courts and the NPA is settled.

Bank Employees Federation of India has been in the forefront exposing the hollowness of the claims of the rulers about the effectiveness of the IBC law.  The IBC proved to be helpful to the corporate NPA borrowers to openly loot and plunder the banks.  But it is projected that IBC as an effective law by quoting only the amount recovered and hiding the amount of ‘haircut’ (write off). 

The lending policy and the recovery policy have to undergo drastic changes. If the Banks are able to recover the corporate NPAs fully, then there is no need for capital support from the Government at all.

Centre for Financial Accountability is now on Telegram. Click here to join our Telegram channel and stay tuned to the latest updates and insights on the economy and finance.

Your email address will not be published. Required fields are marked *