A promising start

In a recent social media post, Finance Minister Arun Jaitley went all out to commend the progress under Insolvency and Bankruptcy Code (IBC). Terming the “early harvest through the IBC process as extremely satisfactory”, Jaitley lauded the NDA government for expeditiously legislating the IBC, while accusing the Congress of leaving behind the legacy of an “anachronic system”. Politics apart, the IBC has indeed been a giant leap forward from the earlier regimes, when there was no organised resolution process, and different stakeholders approached different forums. Judicial intervention and the inefficacy of the Debt Recovery Tribunals (DRTs) had prevented lenders from expediting recoveries. The interest of all parties — lenders, borrowers and even operational creditors — is now addressed under a unified law under the IBC. The IBC has given more teeth to lenders. This has led to a sea-change in the credit behaviour of borrowers. Earlier, bankers had little ability to threaten promoters; now, there is a heartening trend of defaulters paying up dues before the case is admitted for insolvency under IBC.

That said, it may be difficult to entirely share Jaitley’s optimism on the progress of cases under IBC. According to data put out by the Insolvency and Bankruptcy Board of India (IBBI), of the 1,198 companies admitted under the Corporate Insolvency and Resolution Process (CIRP) until September 2018, only 52 had seen approval of resolution plan; Jaitley’s recent statement suggests that that number has inched up to just 66 in the past three months. Undue delays in the IBC process is starting to hurt banks, already weighed down by steep provisioning and litigation costs. IBBI data suggest a chunk of cases (about 400) have been under CIRP for over 180 days. It is also hard to ignore the steep haircuts that banks have been taking on these cases. The amount realised against claims fell substantially in the September quarter as against the June quarter, when two of the 12 big cases —Electrosteel Steels and Bhushan Steel — bumped up the realised amount. Subsequent resolution of large cases such as Monnet Ispat and Amtek Auto at less than a third of their total claim amount, suggests that lower realisation could become an issue as we move down the pecking order of cases. Jaitley’s enthusiasm over ₹80,000 crore realisation from IBC cases so far, does not factor in the low recovery rate, critical to assess the true success of the IBC process. While the deadlocked Essar Steel or Bhushan Power and Steel cases are expected to make some headway, the fact that they have been under the IBC process for over 500 days lends little comfort.

If cases are allowed to drag on, it would erode the value of the assets substantially — a key concern under earlier resolution regimes. Speedy resolution is critical, if IBC has to serve its intended purpose.

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