BackWhat’s holding up recovery of defaulted loans?
It has been nearly three years since the corporate insolvency resolution process came into force. As of 30 September, 2,542 CIRPs have commenced. Of these, 156 have ended in approval of resolution plans and 587 in orders for liquidation. Mint takes a look
PremiumHave banks been able to recover their loans?
When a corporate default occurs, lenders such as banks, or the company defaulting, can initiate the resolution process. However, only 156 of the 2,542 CIRPs initiated between 1 December 2016 (when CIRP came into effect) and 30 September 2019 have led to approval of resolution plans. Several things can happen within the ambit of a resolution plan but, typically, the firm that defaults on a loan is sold to another company. Till now the total admitted claims of financial creditors, primarily banks, have been ₹3.32 trillion. The total recovery is 41.6% of this, or ₹1.38 trillion. Prima facie, this does not seem very bad.
What, then, is the twist in the insolvency tale?
The recovery of ₹1.38 trillion includes the seven of the 12 large accounts that make up for a bulk of the corporate default. The total claims with regard to these were ₹2.14 trillion, of which 47.6%, or ₹1.02 trillion, has been recovered by selling these companies to other companies. If these seven companies are left out of the analysis, the total claims stand at ₹1.18 trillion. Of this amount, ₹36,013 crore has been recovered. This implies a rate of recovery of 30.4%, much lower than the overall rate of 41.6%. This, in turn, shows that the rate of recovery in the case of smaller defaults has been lower.
What does this say about the total recoveries made?
The recovery in the case of a few large companies has distorted the data. The recoveries made by selling the two largest defaulters—Bhushan Steel and Essar Steel—props up the total recovery number. It also indicates there is demand for companies in the steel sector, but the same cannot be said about those in other sectors such as textiles (Alok Industries).
What if the firm hasn’t reached resolution?
Of the 2,542 CIRPs, orders have been issued for 587 companies to be closed by liquidation. The recoveries in this regard have been minimal. This is primarily because 427 out of the 587 companies closed by liquidation were already part of the Bureau for Industrial and Financial Reconstruction and their economic value had already eroded by the time a CIRP was initiated against them. It remains to be seen if the situation will change in the future. Only 24 of the 587 companies have actually been closed by liquidation.
What does this tell us about the process?
In the case of 193 companies, the liquidation process has been on for more than 360 days; for 90 others, it has been on for between 270 and 360 days. If a company is put up for liquidation, the chances of a significant recovery happening are negligible. One reason for this is that India does not have an active organized market for used industrial assets. This significantly limits the redeployment of these assets and, thus, the potential to ensure better recovery for banks.
Vivek Kaul is an economist and the author of the Easy Money trilogy.
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