Is IBC Not The Best Bet in Resolving Distressed Assets?
IBC Resolution on Distressed Assets: Given that the Indian banking sector is plagued by the NPA crisis, its redressal is the need of the hour. The pandemic has wreaked havoc on the economy which has crippled the financial standing of many, especially in India. Thus, it can quite rightly be stated that the economy will definitely see an increase in non-performing assets in the future.
This will be effective due to various reasons, firstly, as aforementioned financial crippling of the masses, secondly, it will be due to failed repayment of loans due to low job rates and lower quality of jobs. Thus, it becomes absolutely crucial that India’s NPA redressal mechanism is well structured and effective.
A ray of hope that was seen in such a system was definitely the Insolvency and bankruptcy code, but given its invention 5 years ago, it is quite rueful to witness that the resolution of distressed assets through its due process has not made any significant or notable progress. The biggest setback of the policy comes when the central issue of recovering stranded loans at fair value cannot be accommodated by the same.
Other issues that plague the IBC mechanism are the untimely resolution of the problems and the delay in arriving at meaningful resolutions. Also, the massive haircuts, that involve the significant amount that the lenders have to forego on their outstanding loans coupled with interests is also a canker for the deal.
It is to be noted that this comes despite several amendments by courts being made to the law. The other grounds which make IBC not so attractive include matters is low recovery and delays. Such a claim has been corroborated by various data out there, and such data talks volumes about the significant drawbacks of the IBC. Recently light was shed on the dubious matter by the regulator Insolvency and Bankruptcy Board of India. The released dataset showed low recovery and resolution of assets, given IBC’s strategical regime.
According to reports, there were 348 insolvency cases that had been successfully resolved as of March 31. It is to be noted that reportedly, banks and financial institutions had recovered around Rs 2 lakh crore. But if the comparison is made, this was recovered from the total claims of Rs 5.16 lakh crore. This presents a haircut of over 60 percent on average.
Moreover, given the data that was released for the fourth quarter of the financial year 2021, 29 insolvency cases were actually and effectively resolved. This emphatically led the creditors to recover about Rs 4,600 crore. This was out of the total claims of Rs 17,389 crore. This effectively shows that given the reports and analysis, the recovery rate stood at just 26.45 percent.
Talking about the time taken, it is to be noted that the average time that was taken to resolve the cases was 459 days. If scrutinized this is effectively quite a breach of the stipulated 180 days. This effectively makes the recovery time more than a year. This is also coupled with various concerns that have been raised over the grossly high percentage of liquidation after a failure of a viable plan.
This detestable attribute of the IBC strategy can lead to the analysis that India is now making a paradigm shift from the globally followed enthusiastic and strategic practice of debtor in possession to the concept of the creditor in possession.
Additionally, it is worthy of mentioning here that the IBC significantly leaves the responsibility of managing the asset in the lurch by presenting the opportunity in the hands of a resolution professional. It is quite an odious attribute as, in all probability, it strategically has very low or no experience in effectively running the industrial units.
As aforementioned, the time taken for resolution is quite long, thus the assets have to significantly undergo a widespread lack of alignment which is always not along with business interest. This quite odiously leads to a downward spiral in the value of assets over an increased period of time. This time period also works until the case is systematically resolved or liquidated.
Not only the long gestation period pesters the whole process but also the humungous legal and administrative cost actually the system which makes it quite uneconomical. In addition to making it a long and drawn-out process, we also witness erosion in the value of assets. This definitely leads to adding up to the lender’s costs, which again is quite uneconomical.
Given all the odious circumstances that plague the IBC system, it is worth mentioning that a structural adjustment is needed to be made to revamp the IBC. Thus, given all the discrepancies it can be rightfully stated that the IBC has lost its relevance. This can be countered by strategically enabling bankers to make economically efficient decisions that are apt in the domain.
This effectively and invariably calls for fair competition. Fair competition can be promoted by reportedly allowing existing promoters to themselves bid for their assets. However, such a suggestion is not followed when somebody, who is a promoter has been proven guilty of fraud.
Thus, in a gist, it can be stated that various factors such as longer gestation period, low recovery rate, and high incidences of liquidation, IBC is slowly losing its relevance in today’s NPA redressal scenario. Thus, it would be quite prudent for the Indian government to take some effective steps that might help redress the issue. This also means that it is the need of the hour that IBC and the banks and financial institutions are made robust and adaptive.
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