Banks and bankruptcies

The decision by Jet Airways’ lenders to infuse ₹1,500 crore into the beleaguered carrier gives stakeholders a breather to explore turnaround options. However, the introduction of this lifeline at this late stage, with the airline’s debt estimated at over ₹8,000 crore, gives rise to an obvious question: Do lenders generally wake up rather late in the day? Lenders in recent times have been forced to come clean on the extent of non-performing assets, but at the same time are equipped with powers to proceed against defaulters. Regarding the first, the Asset Quality Review process was initiated in 2015. This was soon followed up by an RBI ‘master circular’ on red flagging accounts after identifying ‘early warning signals’ (EWS). The circular lists 45 EWS, such as default in payment to statutory bodies, income-tax related issues, frequent changes in scope of the project being undertaken by the borrower, large number of transactions with interconnected companies and significant rise in working capital borrowings, among others. On the second aspect, the Insolvency and Bankruptcy Code is meant to empower creditors, by achieving speedy and reasonable realisations. The IBC is also meant to bring the ailing concern back on track as opposed to liquidating it. In February 2018, the RBI issued a stern circular in banks’ favour, directing that an NPA account be resolved in 180 days or sent into the IBC process. If bankers are still unable to proceed decisively, it is perhaps because the new institutional order, while being a huge step forward in allocating capital efficiently, brings its own uncertainties.

It is not clear whether lenders are acting along the lines of the May 2015 EWS circular, even though the subsequent classification of accounts (Special Mention Accounts-1 and 2 for loans that are stressed) has brought about an element of transparency. Questions of mismanagement are scarcely asked. That said, lenders too face their own dilemmas. They are wary of dispatching a firm to the IBC, fearing a huge haircut on their dues and the prospect of delays in resolution. They would rather explore the revival prospects of a concern outside of IBC and bet for a better recovery rate. This is despite the fact that the recovery rate under IBC (nearly 50 per cent) is far better than its forbears such as debt recovery tribunals, Lok Adalats and SARFAESI. The IBC, as a quasi-judicial process, would spare banks of the vigilance risk that has come to accompany major decisions.

However, the IBC has come to be viewed as a liquidation rather than revival agency, not least because of its track record (79 revival plans approved against 302 liquidations as on December 31, 2018). This bias should change, so that the IBC wins the confidence of the lenders. Meanwhile, the RBI should keep provisional restructuring plans handy, giving recoveries a chance while punishing errant promoters.

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