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Banking Central | Are 'haircuts' turning too costly for bankers?

While IBC cannot guarantee the quantum of recovery for banks but it can ensure that the platform is not misused by influential promoters to get back control of their companies through the backdoor.

July 05, 2021 / 11:59 AM IST
NCLT had observed that creditors of Videocon Industries will be taking nearly 96 percent haircut on their loans and the bidder is

NCLT had observed that creditors of Videocon Industries will be taking nearly 96 percent haircut on their loans and the bidder is "paying almost nothing."

A fresh debate has broken out on whether resolutions through the National Company Law Tribunal (NCLT) are turning into a loss-making exercise for banks. In many cases, under the insolvency and bankruptcy code, banks have taken a deep haircut, where the company is either acquired by a fresh promoter or the original promoter offers a settlement through a one-time deal after withdrawing from the IBC court under Section 12A.

The haircut—the reduction a bank makes in the original loan amount during a settlement—range up to 90-95 percent in some cases, leaving only a pittance for the banks at the end of a long and tiring process.

The IDBI Bank-Sivasankaran deal on the settlement of Siva Industries and Holdings Ltd (SIHL) loan is a prominent example. After resolution attempts failed, C Sivasankaran offered a one-time settlement (OTS) to banks under which he agreed to pay Rs 500 crore to banks against a loan amount of Rs 5,000 crore.

Videocon Industries and its 12 group companies had admitted claims of Rs 64,838.63 crore but banks agreed to hand over the company to new acquirer for a 95 percent haircut.

In yet another deal, the Jalan-Kalrock consortium got the troubled Jet Airways for a haircut of 95 percent. In other words, banks don't have much to show for at the end of a long process.


No easy way out

Are these deep haircuts turning too costly for banks? There are two views.

One, a company gets admitted to NCLT under IBC law when lenders run out of all options to make a recovery or are not in a position to make recoveries through usual channels (sell the collateral and recover money).

Hence, pushing the company to the bankruptcy court is the only option. Whatever money comes through NCLT resolution is a “bonus” for banks. In the event of liquidation, lenders would not have got anything.

banking central

Second, the original idea of NCLT was to make sure a time-bound resolution, within a period of 270 days, and meaningful recoveries for banks.

Massive haircuts mean banks are making heavy losses and considering the time and money spent, such small recoveries make little sense.

One of the premises of IBC, under Section 29A, is to make sure old, tainted promoters of bankrupt firms do not get to regain control of the companies under resolution. Smart promoters, however, may have found a way around by launching OTS bids when there is no resolution. Even if such deals commercially make sense for banks, it dilutes the spirit of Section 29A.

Which is the right view?

Both sides have a valid point but the fact remains regardless of the platform used for debt resolution, a wrong credit decision on part of the bank will lead to heavy losses. NCLT courts cannot magically transform a non-performing asset (NPA). It can only facilitate a time-bound scheme under which resolution happens either by management transfer or liquidation.

In other words, be it NCLT or any of the previously used platforms (such as CDR schemes), recovery will remain miniscule if the company's financials have worsened beyond a point.

Also, potential acquirers will look at getting control at a minimum cost, which automatically means minor recoveries for banks.

In some sense, IBC courts are beneficial to make sure that the business survives rather than helping banks make maximum recoveries. The point is neither NCLT nor the IBC mechanism has a big say in how banks recover their money. They only approve or disapprove the scheme presented by the committee of creditors and bidders.

What are the alternatives that banks have to get a better deal? None, as of now. In rare cases such as Kingfisher-Vijay Mallya episode, banks may find themselves lucky to use the personal guarantees of the promoter to get their money back. But using personal guarantees is easier said than done. In most cases, the promoter will take banks to court against using their personal guarantees or there will be other legal cases. As recoveries get delayed, losses widen for banks including the interest component.

But there is another side to this debate. While IBC cannot guarantee the quantum of recovery for banks, where it can act is to make sure the platform is not misused by influential promoters to get back control of their companies through the backdoor.

Where there is a proven irregularity, old promoters should not be allowed to game the system by forcing banks to a settlement, including through one-time deals. If OTS is the idea, then banks needn’t move NCLT and waste their time.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
first published: Jul 5, 2021 11:59 am

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