Why IBC success in recovering bad loans is middling
2 min read.Updated: 12 Aug 2019, 12:53 AM ISTVivek Kaul
The Insolvency and Bankruptcy Code was primarily enacted to help banks recover a higher amount of bad loans than they had earlier
Bad loans are largely loans that haven’t been repaid for a period of 90 days or more
The overall bad loans of Indian scheduled commercial banks peaked at ₹10.36 trillion as of March 2018. In May 2016, the Insolvency and Bankruptcy Code (IBC) was put in place to deal with this problem. Three years later, its success has been middling. Mint takes a look.
What are the total recoveries IBC made?
The Insolvency and Bankruptcy Code was primarily enacted to help banks recover a higher amount of bad loans than they had earlier. Also, the idea was to quicken the process. Bad loans are largely loans that haven’t been repaid for a period of 90 days or more. The question is how well the insolvency legislation has done on this front. Since it started operating and until 30 June, financial creditors (primarily banks whose loans had been defaulted on by corporates) had filed claims worth ₹2.53 trillion under IBC. The total recovery has been at ₹1.08 trillion. This means a rate of recovery of 42.8%.
How good is IBC’s rate of recovery?
On the face of it, IBC’s recovery rate of 42.8% sounds quite good. In 2017-18, the rate of recovery from non-IBC methods was around 12.4%. In 2012-2013, the rate of recovery was 22%. It has come down since then. Now a rate of recovery of 42.8% sounds much better than 12.8%. But there is a twist in the tale. The biggest recovery for banks was when Bamnipal Steel, a unit of Tata Steel, bought Bhushan Steel. Bhushan Steel had defaulted on loans worth ₹56,022 crore. Bamnipal Steel paid ₹35,571 crore for the company. The rate of recovery was 63.5% of the defaulted loans.
What is the recovery rate if this deal is ignored?
The rate of recovery falls to around 36.9% from 42.8%, if we ignore Bamnipal Steel taking over Bhushan Steel. The rate of recovery in other cases hasn’t been as high.
How soon are recoveries made?
According to IBC, the entire process needed to be completed in 270 days. As of March, the average time taken in cases that were resolved, typically, with the company that has defaulted on a loan being sold to another company, was 324 days. This was longer than the 270-day deadline, but much less than the 4.3 years it used to take before IBC was implemented. In July, the government extended the deadline for the corporate insolvency resolution process to 330 days.
What about the cases that are not resolved?
Until 30 June, of the 2,162 cases that have been referred to the corporate insolvency resolution process (CIRP), only 120 have seen resolution plans; 1,292 are still under CIRP. Hence, of the 870 cases that are out of CIRP, only 13.8% have seen resolution plans. This is very low. As many as 475 cases have been closed by liquidation. Of these, liquidation has happened in only 11 cases and the recovery is next to nothing.
*Vivek Kaul is an economist and the author of the Easy Money trilogy.