It is like scrapping the bottom of the barrel for the country's largest bank, the State Bank of India (SBI), when it comes to liquidation of defaulting companies under the five-year-old Insolvency and Bankruptcy Code (IBC).
The state-owned bank has managed to get a paltry 5 per cent of the outstanding loan amount. Sources suggest the book value of the loan outstanding in such liquidation cases was close to Rs 40,000 crore since the inception of the IBC.
While the SBI's loans locked in liquidation cases may not be big in terms of the bank's gross advances of over Rs 25 lakh crore, the low realisation raises the issue of credit underwriting process, monitoring of public funds, and the value of the collateral.
The low realisation trend has been uniform for the banking industry dominated by public sector banks. The liquidation of a defaulting company is the last option. This happens when there are no bids for the defaulting company to take over or the end of the maximum resolution time frame of 330 days under the bankruptcy code.
Under the new code, the insolvency professional has to declare the liquidation value to financial creditors by appointing two independent valuation firms. This is kept confidential and disclosed only to the committee of creditors (CoC), which takes a final call on restructuring and resolution of the company.
Sources attribute the reasons for low realisation to over-leveraging or unsustainable debt taken by the company, frauds and fund diversion, inadequate collateral, and the overvaluation of assets in the books. "The comparison of liquidation value with total creditors claim is the not the right benchmark of actual realisation for banks. The liabilities often get overstated with claims, interests, and penalties," says a banker.
Many of these defaulting companies are mid-sized companies across manufacturing, real estate, construction, hotel, power, etc. In many liquidation cases, the realisation is almost nothing as compared to the admitted claims of SBI and other lenders.
Take, for instance, a Kolkata-based dealer of mobiles and tablets Gee Pee Infotel Pvt Ltd, which had admitted claims of over Rs 210 crore, had nothing in its balance sheet to recover. Similarly, a Delhi-based cable wire manufacturer Shreeom Wires, which had admitted claims of over Rs 100 crore , yielded 2 crore or 2 per cent of the total claims.
The last five-year track record of the IBC shows that almost half the cases initiated by the financial creditors have resulted in liquidation. The resolution, however, took place in one-fifth of the cases whereas the remaining included withdrawal and the appeal cases.
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