3 May 2019: Banks have put up nearly Rs 1.3 lakh crore of bad loans for sale to asset reconstruction firms (ARC) in the last fiscal, amid delays and legal challenges in cases admitted for resolution in the National Company Law Tribunal (NCLT) under the bankruptcy code.
State Bank of India, Central Bank of India and numerous other banks have decided to sell these assets that would require lesser provisioning and reduce the hassle of long litigation in the NCLT, said people familiar with the thinking.
“There was an acceleration in assets put up for sale by banks to the ARCs in March FY19 quarter,” said Hari Hara Mishra, director, UV ARC. “Among others, in view of protracted litigation in some large cases under IBC and consequent time overrun, the banks wanted to get a clean exit and reduce the NPAs in their books.”
Despite the Insolvency and Bankruptcy Code being in place for more than two years, resolution plans are getting delayed.
The record filings in those courts have also burdened the system, leading to long waits for the resolution plans to get approved. It also consumes bank’s time which would have otherwise been spent on growing its business.
Estimates show that Bank of India and State Bank of India had around Rs 25,000 crore to Rs 30,000 crore on the block, while Andhra and Dena were around Rs 10,000 crore.
Around 70% of the cases that are admitted to NCLT have missed the deadline set by the Insolvency and Bankruptcy Code of 270 days. The numbers also went up because in the fourth quarter, State Bank of India had put its entire loan to Essar Steel on sale. SBI had put up Rs 9,588 crore Essar Steel on the block after almost reaching resolution as the process was taking too long. It went on for over 500 days while the maximum stipulated was 270 days.
Based on the data for all 94 cases resolved under the insolvency resolution process till the fourth quarter, financial creditors faced a haircut of 52%, said Kotak Institutional Equities. The premium received on resolution (2X of liquidation value) compared to opportunity cost on liquidation is high but decreasing sequentially.
“The haircut on resolved cases in the fourth quarter was high at 90% (barring Essar Steel) but this was owing to an 83% haircut observed in a large account — Alok industries,” the Kotak report said. “The average premium to liquidation value was high at 1.5X for accounts resolved in the fourth quarter.”