Bankers pessimistic on recovery of loans after insolvency process

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26 Aug, 2025 12:21

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Debt in the balance sheets of most public sector banks may not get drastically reduced as bankers expect less than 50 percent recovery of the loans under insolvency.

A month after the insolvency and bankruptcy process kick-started, three companies -- Jyoti Structures, Monnet Ispat and Energy and Alok Industries -- have been admitted into proceedings by the National Company Law Tribunal (NCLT), the company court.

A senior State Bank of India executive said, “Insolvency is a process which has empowered us to take decisions. The real test is yet to be seen but I do not expect much recovery in the loans as most of them have been NPAs for more than 2-3 years now. In some cases there may be recovery of up to 50 percent but in some EPC (engineering, procurement, Construction) companies, the economic situation in itself is not conducive.”

On June 13, the Reserve Bank of India identified these companies and nine others including Essar Steel, Bhushan Steel and Electrosteel Steels and Amtek Auto to be immediately filed under the Insolvency and Bankruptcy Code (IBC).

Dipak Gupta, Joint Managing Director at Kotak Mahindra Bank, on the sidelines of the bank’s results announcement, said, “Insolvency is a long shot…It’s like a bullet that is released from the gun once the case is admitted by the NCLT. The purpose ultimately is recovery. It remains to be seen how much of it will happen as there is limited time after the court starts the insolvency proceedings. So, unless we get a good buyer or restructure it, recovery could be long drawn.”

However, Gupta is hopeful that this process would bring in more definite decision-making and the promoter also has something to lose.

There is a considerable fact that Indian banks also need to accept significant hair-cuts that will be required to be taken in order to arrive at a resolution as several of the NPA cases are in sectors where market conditions are still stressed, such as steel, power and textiles.

Lenders may have to forget 60 percent of its outstanding dues or about Rs 2.4 lakh crore from top 50 stressed companies that could not repay their loans leading to insolvency battles, said a Crisil rating agency’s analysis. Total value of bad loans from that universe is about Rs 4 lakh crore.

A majority of the debt requiring deep haircuts belong to companies with unsustainable businesses so asset sales are necessary to recover monies. Companies needing moderate or aggressive haircuts had gone for debt-funded programmes.

"Some of these assets offer M&A opportunities for companies with strong credit profiles," said Ramesh Karunakaran, Director, Crisil Ratings. “Also, potential synergies could allow for a significant reduction in haircut – an aspect that has not been considered in our analysis.”

Finding a new buyer to run the company with the same expertise in this environment at a price acceptable to both creditors and the buyers is a tough nut to crack.

At the end of it, it would be how to reduce the losses on NPAs and create a reform such that it would deter future potential defaulters, the SBI executive added.