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Banks pay the price for delay in resolution of insolvency cases

17 June 2019

End up losing interest income of Rs. 19,400 crore in Essar Steel and Bhushan Power cases alone

Inordinate delay in resolution of stressed assets through the Insolvency and Bankruptcy Code (IBC) is proving to be costly for banks, as it not only drains precious capital but also stops the inflow of interest income.

The interest to be paid by these companies stops once the insolvency case is accepted by the National Company Law Tribunal (NCLT).

Two years after the RBI approved insolvency proceedings against top 12 defaulting companies, only three cases – Bhushan Steel, Electrosteel Steels and Monnet Ispat & Energy – have been resolved. The case of Jyoti Structures is also delayed due to judicial proceedings.

Banks have lost interest income of about Rs. 19,400 crore in Essar Steel and Bhushan Power cases alone. These two companies went to the insolvency process in 2017 and remain stuck in courts, despite lenders approving the resolution plan of winning bidders.

The loss of interest income from the nine large default cases alone would be about Rs. 40,000 crore, as they together account for bad debt of Rs. 3.45-lakh crore, said a banker.

The winning joint bid of JM Financial ARC and Reliance Industries for distressed textile company Alok Industries hit a roadblock after its operational creditor Gail India challenged the plan at the National Company Law Appellate Tribunal (NCLAT), as its dues of Rs. 500 crore were not considered.

In the cases of Jaypee Infratech, Amtek Auto and Era Infra and Engineering, the NCLT had to restart the insolvency proceedings since the first round saw lenders either rejecting the bidders or final bidders pulling out of the proceedings. The NCLT has ordered liquidation proceedings against ABG Shipyard and Lanco Infratech.

Anxiety attack

Mukesh Jain, founder of law firm Mukesh Jain and Associates, said the IBC is the most progressive legislation. However, it is heavily loaded in favour of financial creditors and leads to prolonged litigation by the operational creditors as they get a pittance, while the financial creditors recover most of the dues like in the case of Essar Steel.

After frequent amendments, IBC has reasonably settled down, and a balanced approach of the Committee of Creditors (CoCs) in protecting the interest of operational creditors should yield good results, he said.

Recovery by lenders

According to the latest Insolvency and Bankruptcy Board of India report, lenders have managed to recover Rs. 2.02-lakh crore of debt from 4,452 default cases even before admission into the insolvency process. In contrast, lenders have recovered Rs. 70,000 crore from 94 cases resolved in the financial year ended March 2019.

Ranjitha Godbole, Partner (Business Restructuring Services), BDO India, said one of the major concerns is the delayed admission of cases by the NCLT. A lack of adequate support to the NCLT benches is also a matter of concern, added Godbole.

Source: https://www.thehindubusinessline.com/todays-paper/tp-money-banking/article28024092.ece