In an interview with Bloomberg, SBI Chairman Rajnish Kumar had said ‘It is important that we give a message that if potential bidders are trying to suppress the values, then banks are not going to accept it’, obviously referring to the resolution process effectiveness being pursued against debtors under Bankruptcy act. We, here, look at the effectiveness till date.
In May last year, the RBI was empowered under the bankruptcy act to direct banks to initiate insolvency process against defaulting debtors. Did it achieve its immediate objective in terms of quicker & more effective way of NPA recovery? Let us try & see data till Dec 2017 from IBC to analyze the same.
Are FC/ Financial Creditors availing this facility? Is there a increasing adoption of insolvency process by FCs? (OC: operational creditors and CD- Corporate Debtors are 2 other party that can raise insolvency process against a debtor defaulter)
The answer looks to be “Yes“. From a low 24-25%, the CIRP cases initiated by FC has now spiked to 41-43%
Oct-Dec17 quarter saw a better closure rate (appeal + approval of resolution process + commencement of liquidation process), which is logical considering that with passage of time, more will get closed under CIRP (Corporate Insolvency Resolution Process). Also Oct-Dec qtr saw lesser new ‘Admits’ and hence that also contributed to a higher closure rate.
Recovery Rate (or Haircut- invert of Recovery rate)
The recovery/ realization rate stands at 43%, till Dec-17 end. This is amount realized at the end of a closure proceeding expressed as a %age of the original claim by FC’s. Consider this vis. a vis, the 20-25% recovery that PSB’s and 42% that Private sector banks have seen generally as recovery rate normally. Pls. refer to our earlier article on NPA recovery rate.
Also the realization rate against the Liquidation value stands at 115%, which is quite good. (The case below includes those initiated by OC & CDs as well, including FCs)
TAT/ Turnaround time for closure
These are early days and hence difficult to arrive at an judgement. Kindly note that ‘The current law allows a maximum 270 days for resolution — an initial 180 days and 90 days of extra time on top of that.’ Considering that, having an average of 219 days for resolution and 199 days for liquidation is not that bad.
Resolution TAT (in below chart) is defined as the difference between Date of CIRP Commencement and Date of Approval of resolution process. Similarly, Liquidation TAT is defined as the difference between Date of CIRP Commencement and Date of Liquidation order.
Currently, a few concerns have been raised by banks on the purported lower bidding price/ suppression of bidding price for some of the cases under resolution. That will actually drive down the recovery rate (in value). Banks may then start preferring liquidation instead unless the resolution promises significantly higher recovery rate compare to resolution rate. A strong governance and a strict follow of deadlines by IBC will be crucial to success and also the effectiveness of our courts to handle these matters quickly and judiciously to prevent corrupt corporates going for prolonging litigation to delay justice delivery.
Source: Raw data for above was sourced from Insolvency and Bankruptcy News for Oct-Dec2017 quarter released by Insolvency and Bankruptcy Board of India.