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The new five-point NPA resolution scheme will dilute the bankruptcy code

Anand Adhikari     July 3, 2018

Indian banks facing the huge pile of bad loans are once again being encouraged by the government to kick the can down the road. Months after the defiant Reserve Bank of India (RBI) scrapped all the restructuring schemes from erstwhile corporate debt restructuring (CDR) to newest ones like strategic debt restructuring (SDR), S4A and 5/25; the BJP-led NDA Government has pulled a rabbit out of their hat by announcing a slew of initiatives aimed at avoiding the bankruptcy proceedings for banks as well as defaulting promoters.

The idea behind the scheme may be noble, but it doesn't inspire confidence. A week old panel that was set up hurriedly under the Punjab National Bank (PNB) chairman Sunil Mehta on recommendation from acting finance minister Piyush Goyal and banks, have recommended setting up of a asset management company (AMC) for dealing with NPAs of over Rs 500 crore and more. A bank led approach has been suggested for loans between Rs 50- Rs 500 crore, where a lead bank would work on a resolution six months. For less than Rs 50 crore loans, the banks will work out a resolution within three months. The government has also put its stamp over these proposals.

Dilution of Bankruptcy Code

There is a clear dilution of newly set up bankruptcy code, which comprehensively covers the resolution and restructuring of a stressed corporate by way of insolvency professionals and committee of creditors in a time bound 180 days. The very fact that the RBI scrapped all the restructuring schemes and issued a diktat that even a single day default would trigger a resolution process, culminating in referring the case to IBC, was a clear indication to defaulting promoters to pay up and come to the table. The new schemes provide a breather to both banks and promoters from the tough bankruptcy code.

Potential Loss of Productive Assets

Any deferment of stress will result in potential loss of productive assets, which will also erode the value of assets, if brought later to bankruptcy code. This was the big concern under the earlier restructuring system. The new schemes will only provide a short term breather. Is RBI on board on these new measures? Many say the new scheme is purely a work of bankers. It addresses the concerns of only bankers.

Finally, banks will manage to show better numbers

The banks have a got a huge breather as they were staring at future losses. The triggering of IBC results in a 50 per cent provisioning for bad assets (100 per cent for liquidation cases) from profits. This was eating away capital of the public sector banks. The new scheme means lower provisioning and better profitability or reduced losses. The banks number will look good, but there is a question mark on whether the new 5 point formula will help the economy as a whole in the long run.

Operational Creditors to use IBC

Currently, the operational creditors were using the IBC to get their money back. In fact, more than half the cases were filed by operational creditors. The bank led cases were mostly done at the behest of the RBI as the regulator was forcing banks to take the defaulters to IBC. In the first set of two cases, the RBI actually named the specific 40 plus large corporate from Essar to Jaypee, which were to be taken to the IBC. Later, they mentioned a general 'one day default' rule for triggering IBC if not resolved six months.

AMC Modalities Still Unclear

It is not yet known how the AMC will be structured. There are some hints of a backing by Alternative Investment Fund (AIF). But the question arises; who will put money in an AIF? Ultimately, these stressed assets have to be restructured, resolved or turnaround. Where is the management bandwidth to do an operational turnaround? The global funds are already staying away from the IBC process because of uncertainty in the code and also the challenges in the economy. Why will they invest in an AIF of PSBs?

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