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Currently, the committee of creditors that has the power to approve resolution plans under the IBC evaluates the resolution plans based on ad hoc scoring models. Photo: HT
Currently, the committee of creditors that has the power to approve resolution plans under the IBC evaluates the resolution plans based on ad hoc scoring models. Photo: HT

IBA weighs scoring model to help bankers choose insolvency resolution plans

According to experts, there is room to develop a scenario-based model from each sector, which will not only detail what score should be assigned but also define certain parameters

Mumbai: The Indian Banks' Association (IBA) is planning to develop a broad scoring framework to help lenders objectively choose resolution plans for assets under insolvency proceedings, according to two people aware of the development.

IBA has already held rounds of consultation with legal experts as well as bankers, these people said. 

“We have suggested IBA to develop comprehensive models based on different scenarios. Since there are different companies from various sectors, which are undergoing insolvency proceedings, it is not possible to have a set model. We are looking at a reference or guiding model which can help us assess bids in a better way," said one of the people cited earlier, an official with a large state-owned bank on condition of anonymity.

IBA chief executive V.G. Kannan, declined to comment.

Currently, the committee of creditors that has the power to approve resolution plans under the Insolvency and Bankruptcy Code (IBC) evaluates the plans based on ad hoc scoring models.

These typically have various parameters such as how much upfront cash will be paid, plan on repayment of remaining debt and business strategy, allotment of equity to lenders and its potential upside, fresh capital infusion to run the unit, how much sacrifice lenders will have to take, rating, experience and financial position of the bidder and schedule of clearing dues of vendors, employees, among others. For each parameter, a score is assigned.

According to experts, there is room to develop a scenario-based model from each sector, which will not only detail what score should be assigned but also define certain parameters.

This is because the evaluation criteria also include qualitative factors, it involves subjectivity and, hence, there could be a possible error of judgement. 

“The score to a resolution plan will usually be given on the basis of a mix of quantitative and qualitative criteria. Certain parameters will be quantifiable and, hence, it will be relatively easy to assign score. But there could be qualitative criteria such as a track record of the resolution applicants and their group entities in the banking system, their experience in managing or turning around companies in the past and, therefore, providing a score for such criteria could be subject to different interpretations," said Aashit Shah, a banking and insolvency law partner at law firm J. Sagar Associates.

Lenders are in the middle of finalizing resolution plans for 11 of the 12 accounts that were referred to the National Company Law Tribunal for early insolvency proceedings following the Reserve Bank of India’s directive in June 2017

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