Nirmal Gangwal, managing partner at investment banking firm Brescon & Allied Partners, speaks about the challenges with the new bankruptcy regime and possible measures to improve stressed asset resolution
Five years since India introduced the Insolvency and Bankruptcy Code (IBC), resolutions are few and haircuts high, even as the process itself stretches far beyond deadlines. In an interview, Nirmal Gangwal, managing partner at investment banking firm Brescon & Allied Partners LLP, spoke about the challenges with the new bankruptcy regime and possible measures to improve stressed asset resolution. Edited excerpts:
Despite the introduction of IBC in 2016, the resolution of distressed assets hasn’t made any significant progress. Although there have been a number of amendments to the law and the ground-breaking judgments of courts to resolve contentious debt disputes, delays and low recovery rate have been adversely affecting IBC. According to the regulator Insolvency and Bankruptcy Board of India (IBBI) dataset, 348 cases of insolvencies have been successfully resolved as of 31 March 2021. Banks and financial institutions (FIs) recovered approximately ₹2 lakh crore out of the entire claims of ₹5.16 lakh crore, taking a haircut of over 60% on an average. In addition, in Q4FY21, 29 insolvency cases were resolved and creditors recovered ₹4,600 crore, out of total claims of ₹17,389 crore. The recovery rate is a meagre 26.45%. In addition, the average time taken to resolve the cases is 459 days, which stretches much beyond the ideal time of 180 days and the mandatory upper limit of 330 days. Because of the long gestation period for resolving cases under IBC, the assets witness lack of alignment with business interest. This has led to a decrease in the value of assets over a period of time until the case is resolved or liquidated. The scenario has led to the erosion in the value of assets, adding to lenders’ expenditure.
What changes are warranted in addressing the problem of non-performing assets (NPAs)?
Offering incentives to local capital to take risk is one way to address the NPA issue. Existing promoters should be allowed to acquire enterprises. In addition, there should be regulatory forbearance in which banks can lend money to such acquisition through another investor, asset reconstruction company or financial investor, based on adequate debt-equity mix.
Most banks seem to be hesitant in allowing loan restructuring for companies. Are the banks painting everyone with the same brush here?
In my view, banks’ reluctance to offer relief to companies under debt restructuring schemes is akin to a knee-jerk reaction. Their inability to get to the bottom of the issue because of the lack of in-depth sectoral know-how often makes them cautious while going for restructuring. In such situations, banks are unable to ascertain the borrowers’ skin in the game as well as the time span needed to execute the loan restructuring process. Having said that, if borrowers bring in additional equity along with personal guarantees to the loan restructuring process following the Reserve Bank of India guidelines, it encourages banks to look at the prospect of restructuring rather than directing stressed assets to National Company Law Tribunal for resolution.
What kind of safeguards can lenders adopt when allowing the corporate debt restructuring (CDR) process?
First of all, lenders must deep-dive into the sector performances to develop a nuanced understanding. They should take into account future cash flow of the borrowers as well as ensure borrowers’ contribution to make the restructuring work. Moreover, the CDR mechanism being a coordinated programme requires lenders’ participation to improve its effectiveness. Therefore, lenders need to back the process wholeheartedly, be it taking haircuts, bringing in new management for stressed companies, etc.
What will make the CDR process achieve its objective?
There is an urgent need to address the trust deficit between lenders and borrowers as well as between regulators and lenders. Although assessing the viability of a firm or project is critical for banks to take a call on restructuring, the underlying theme of trust and cooperation can’t be ignored.
We haven’t seen too many pre-pack transactions. Do you feel there is enough scope here?
The pre-pack or pre-packaged insolvency can resolve cases. But for that, lenders should not be compelled to make provisions beyond the untenable portion of the loan. In addition, the regulations should make it mandatory for the existing management to invest a part of sacrifices made by the lenders, as their input to run the business. In addition, the scope of pre-packaged insolvency can be broadened further as the present legal framework restricts the scope of pre-pack resolution mechanism to defaults not exceeding ₹1 crore for micro, small and medium enterprises (MSMEs).
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