Since the Insolvency and the Bankruptcy (IBC) 2016 came into being in December 2016, banks have got about 43% returns from the bad loans that were referred to the National Company Law Tribunal (NCLT).
Under the strained circumstances, the haircut of 57% taken by the banks is reasonable, considering that India has a large amount of liquidation.
"The bankruptcy courts have given about 43% realisation. It is not bad," Zarin Daruwala, chief executive officer, Standard Chartered Bank India, told DNA Money.
According to Insolvency and Bankruptcy Board of India (IBBI), about 1,800 debtors have been admitted into the NCLT. Of these, 152 cases have been closed on appeal or are under review. About 91 cases were withdrawn and 378 cases or companies have been liquidated. About 94 cases have been resolved or have a resolution plan in place. The Board also puts the recovery rate at 43%.
The problem, Daruwala said, is not so much about recoveries, but the infrastructure of the bankruptcy courts.
"The issue is that a large number of cases are going to IBC. I think the infrastructure of IBC courts need to be beefed up so that they can handle the deluge of cases," she said.
The bankruptcy court has been an effective mechanism in improving the credit behaviour of corporate clients, Daruwala said. "The fact remains that IBC has created a fear among defaulters. Earlier, it was a bank issue. Now it is also a client issue. There is a fear among promoters that one can lose their companies. The clients are conscious of their credit behaviour."
Asked whether the new RBI circular has diluted the bankruptcy process, she said: "I don't think there is any dilution. It is a nice carrot and stick regime. It gives you 180 days to resolve the debt, which is what it would take normally, and you also have the option of taking the case to IBC. Failing to take it to the bankruptcy court is attracting higher provisions, so banks will be forced to act."
On RBI's removal of the one-day default clause for automatically moving companies to the NCLT, Daruwala said, "One-day default was a bit too stiff. The default could have happened due to a fund mismatch. If there is a default for 30 days, then that is really the beginning of a problem. Now RBI says if there is a default for 30 days, a resolution should be in place by 180 days or six months, which is reasonable."
RBI has also made it mandatory for sharing of data on defaults, stress, fund diversions and other company developments. "With this transparency, the arbitrage is no longer available. It has resulted in much better repayment record in the last few years," Daruwala said.
