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Deep haircuts: Comparing realisations with outstanding loans not reasonable to assess IBC effectiveness, says RBI DG

Financial creditors have been able to realise 166 per cent in comparison to the liquidation value of the debtors, indicating that creditors have been better off than the next logical outcome, he added.

April 30, 2022 / 05:29 PM IST

Seeking to address concerns over the deep haircuts taken by banks in some of the insolvency resolutions, Reserve Bank Deputy Governor M Rajeshwar Rao on Saturday said comparing the outstanding loan amounts with the value realised may not be a 'reasonable indicator' to assess the bankruptcy law's effectiveness.

Admitting that there have been concerns, Rao said one needs to understand that the value of the asset may have already deteriorated by the time it comes up at the courts, and added that one should compare the realisations with liquidation, which is the best possible alternative for lenders.

"We miss the fact that in a public auction-based resolution model, the extent of haircut represents a discount the market demands in continuing to invest in an insolvent borrower.

Since significant value deterioration may have happened to the assets of the insolvent borrower, comparison with the outstanding amount may not be a reasonable indicator to evaluate the effectiveness of the resolution.