IBC cases: For every ₹100 of claims admitted, banks took haircut of ₹69

Banks continue to be under a disproportionately large “haircut”, with an average loss of ₹69 for every Rs 100 of their claims accepted for resolution of stressed assets under the IBC process, as latest for the end of June 30 IBBI data is shown.

Experts say that though the picture looks somewhat better when the quantity is measured relative to the fair value of the property, the actual estimate should be measured on the basis of accepted claims.

IBBI data shows that as of June 30, 2022, creditors have recovered ₹2.35-lakh crore through resolution plans in about 517 cases totaling claims of ₹7.67-lakh crore. With a liquidation value of ₹1.31 lakh crore, the total recovery of creditors in the resolution plans was about 179 per cent of the liquidation value.

Haircuts are losses incurred by banks (creditors) on resolution of stressed assets.

reduced recovery

Some of the major factors that have contributed to the reduced recovery under IBC are the delay in the insolvency process. The main reasons for the delay are non-filling of vacancies in the Tribunal, increase in the backlog of cases before the Tribunal, inadequate knowledge and training of stakeholders. For complex cases, the COVID-19 pandemic further slowed insolvency and bankruptcy proceedings. The inordinate delay in the resolution process is also reducing the willingness of potential investors to acquire stressed properties in India.

The corporate insolvency provisions came into effect from 1st December, 2016. A total of 5,636 CIRPs have been commissioned till the end of June 2022. Of these, 3,637 have been closed.

Experts opinion

Insolvency law experts say that the current trend of disproportionately large haircuts requires immediate regulatory changes to introduce the concept of benchmark (for volume of haircuts) in resolution planning.

Siddhartha Srivastava, Partner, Restructuring & Insolvency, Khaitan & Co, said, “Lenders will ideally always give returns on the outstanding amount (as opposed to fair value) from the IBC resolution process… so it is advisable to address the issue.” To be addressed decisively by amending the regulations to provide a benchmark for the amount of haircuts in the resolution plan. Any plan that does not comply with the benchmark should be considered ineligible.

Mukesh Chand, senior counsel for economic law practice, said that the haircut should be seen in terms of the time value of the amount received. He said that IBC was never conceived or meant as a recovery mechanism, so the original approach to haircuts is flawed.

Preetika Kumar, Founder, Cornelia Chambers, said that in recent years, there has been an increase in bankers accepting bigger haircuts. “The NCLT Bench has also been questioning the lenders approving such voluminous haircuts in recent cases and seeking clarifications behind it. One reason for this could be the inordinate delay in the completion of CIRP proceedings, due to which lenders are accepting bigger haircuts,” she said.

Dinesh Pednekar, Partner, Economic Laws Practice, said, “Although the data shows that lenders have taken huge deductions relative to their accepted claims, such comparison with respect to outstanding and recoverable amounts may not be rational. Settlement Value vis–vis Liquidation Value The emphasis should be on detection.”

Published on

24 August 2022

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https://www.thehindubusinessline.com/money-and-banking/ibc-cases-for-every-100-of-claims-admitted-banks-took-haircut-of-69/article65806562.ece

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