Opinion

Debt recovery — more illusion than real

M Sitarama Murty | Updated on July 01, 2021

What banks are getting under the resolution plans pales in comparison to the haircuts they have taken and the outstanding debt

For a decade now, any discussion on banks invariably veers towards NPAs (non-performing assets). Most banks have become financially weak, reporting unprecedented losses on a continued basis. This has shaken people’s trust in banks, giving rise to fears of losing their life savings and demands for higher cover under the Deposit Insurance Scheme.

The recent episodes of the RBI imposing moratorium on some co-operative banks and a large private sector bank are but a few examples. The current gross NPA ratio of 7.5 per cent is expected to go up to a staggering 13.5-14 per cent by end 2021.

Realising that the judicial system failed to help recover debts, various measures — from Debt Recovery Tribunals (DRTs) in 1993 to Insolvency and Bankruptcy Resolution Plan (IBRP) in 2016 — have been tried with varied degree of success. The SARFAESI Act was passed in 2002, enabling banks to take possession and dispose of the assets to realise their dues.

Banks, anxious to present a better picture of NPAs, filed a large number of cases both in the DRTs and under the SARFAESI Act. DRTs failed to tackle a large number of the cases, plagued by, among other things, shortage of staff. In the process, many deserving cases for rescheduling of loan repayments or grant of additional credit due to unforeseen financial stress were ignored, resulting in even potentially healthy accounts turning sick.

Once again, loopholes in law provided for endless litigation. And courts, which need not have interfered with the process, routinely granting stays led to undue delays. There are cases where the buyers of assets got into trouble as courts subsequently declared the process of possession or disposal of assets as either illegal or defective.

While the statutory auditors and RBI inspectors were raising serious concerns about greening of NPAs by banks, the RBI itself stepped in to give a fresh lease of life to many NPAs through introduction of the Strategic Debt Restructuring (SDR) scheme in 2015 and the S4A scheme in 2016. The operating procedures provided for a hefty 50 per cent haircut.

IBRP is born

With the situation deteriorating further, both the RBI and the government had to come out with a new plan to stem the rot. Thus, the Insolvency and Bankruptcy Resolution Plan (IBRP) was born with all the paraphernalia, such as the adjudicating authority, the insolvency professional agencies, resolution professionals and registered valuers.

The IBC (Insolvency and Bankruptcy Code) was notified on May 28, 2016, and the Insolvency and Bankruptcy Board of India (IBBI), the regulatory body, was created. The Economic Survey 2021 claims that ₹1.73 lakh crore was recovered under the Corporate Insolvency and Bankruptcy Plan (CIRP). The corporate debt of 308 cases was a whopping ₹4.99 lakh crore at the end of December 2020. That the valuation exercises were sketchy became evident with recovery of ₹1.89 lakh crore from the realisable assets valued at ₹1.03 lakh crore.

The lesser-known fact however is, the banks had to take a haircut up to 80 per cent in many closed cases. Suffice to give two examples. Out of the ₹47,000 crore and ₹46,000 crore in two cases, the total recovery is likely to be just ₹8,600 crores. In the maze of statistics, the recovered amount can be shown as a positive outcome of the CIRP.

The illusion of good recoveries becomes clear perusing the figures furnished by the IBBI (Newsletter, July-Sept 2020). Under the resolution scheme, out of ₹4,34,396 crore, ₹1,89,212 crore was recovered with a haircut of ₹2,45,164 crore, which works out to 43.56 per cent recovery. If recoveries under liquidation route are also considered, out of ₹6,13,739 crores till September 2020, only ₹30,680 crore was recovered — a sacrifice of ₹5,83,059 crore. By talking only about the recovered amounts, even the banks are deriving false comfort of reducing NPAs.

It is stipulated in the code that the maximum time for resolution should be 180 days, extendable by 90 days and, in some cases, even up to 340 days. In reality, the average time is 458 days while it was 4.3 years in DRT cases. The main hurdle in early resolution is the number of regulatory bodies involved — such as IBBI, the RBI, the NCLT/NCLAT, High Courts and the apex court — besides the numerous stakeholders, namely, the lenders, the finance creditors, secured and unsecured creditors and the shareholders. Anyone can throw a spanner in the works to cause delays.

Initially, the bickering members of the creditors’ committees themselves delayed the process. Realising their folly, the banks, led by top banks, entered into an inter-creditor agreement in 2018 with more powers to the lead lender. If 66 per cent of creditors agree on a decision it will be binding on all members.

The pandemic has added to the woes as CIRP was stopped until March 24, 2021. It is estimated that ₹2.2 lakh crore has been recovered as against an outstanding of ₹10.48 lakh crore, a mere 21 per cent and a haircut of ₹8.8. lakh crore.

A bad idea

Another idea mooted now for improving the balance sheets of banks is setting up of a Bad Bank. As the name itself implies, ab initio this is a bad idea and bound to fail. It is like old wine in a new bottle. The Bad Bank is like another Asset Reconstruction or Management Company. There are already many ARCs in the private sector which hardly could scratch the surface of NPAs. The Bad Bank is to be sponsored by the banks themselves and would get most large value NPAs from the banks on their books. In effect, the NPAs continue to remain in the banking system, the difference being that the Bad Bank doesn’t do any retail banking business and is expected to focus on recoveries.

Canara Bank with a stake of 12 per cent in the proposed Bad Bank, is the lead bank with other major players such as SBI, ICICI, HDFC, PNB, BOB also picking up shares. Is the exercise only to create an illusion of cleaning the balance sheets of banks? Where the banks failed, the new institution is expected to succeed. It is an admission that the focus in banks on recoveries was poor.

The only task for the proposed bank being recoveries, it is hoped to show better performance. Executives with proven track record have to be recruited to fulfil the expectations. It is possible that the haircuts and sacrifices would continue and the owner banks have to foot the bill in indirectly in another name — recapitalisation.

The writer is a former Managing Director of State Bank of Mysore

Published on July 01, 2021

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