The Finance Ministry has issued an advisory to the Indian Banks’ Association (IBA) asking it to avoid referring companies with loans defaults of less than Rs. 200 crores to the bankruptcy tribunal, two bankers familiar with the matter said.
The ministry has also proposed that the banks work with promoters to ensure that under no condition would the companies be forced into closure which leads to job losses.
According to the two-page advisory sent to IBA on Friday, later circulated by the association to its members on Monday, there is a need to create an atmosphere where government servants work to protect against the closure of companies and loss of jobs. “Around 19,000 cases have been referred to NCLT and 10,000 have been admitted,” the finance ministry advisory note said. “While there have been successes in the cases of some large companies and a few smaller accounts as well, majority of the Rs. 200 crore and below companies are in a very vulnerable position. The collapse of so many companies will cause an exponential job loss and thereby further economic slowdown.”
Latest Insolvency and Bankruptcy Board of India data showed 58% of all closed cases under bankruptcy till date were via liquidation while only 14% cases were resolved with an average haircut of nearly 57% on admitted claims. The number of cases admitted to NCLT in the December quarter was the second highest so far, 50% of which was referred by financial creditors. This clearly indicates that despite the new RBI rule on stressed asset resolution, bankers continue to use IBC as a framework of resolution. The note also expressed concern over indiscriminate use of the NCLT route which was only meant as a deterrent.
“Once faced with NPA, banks, instead of arriving at a balanced resolution, end up referring the matter freely to the NCLT as the concerned bank officers find that a safer option rather than the option of taking the onus upon themselves and thereby making themselves vulnerable to a CVC/CBI or other inquiry at a later stage,” it said. “As a result, most banks are using NCLT as escape route rather than a tool to empower and keep companies running.”
The ministry also raised concern over the NCLT infrastructure which was proving to be woefully inadequate for the quantum of cases flooding the system and suggested that lenders take bold decisions without the fear of investigative authorities which will help declogging bankruptcy courts. Data shows that out of 1,961 ongoing admitted cases, 635 cases have passed 270 days since admission, while another 247 cases have crossed 180 days. Bankers that ET spoke with said that while their preferred choice was the NCLT route, they were looking at other options like the one-time settlement schemes to ensure better recovery.
“While investors, both foreign and Indian, are eyeing an opportunity in Indian distressed debt market, the minimum ticket size they look at is well above Rs. 200 crores, and so in small ticket loans, there is virtually no financial investor interest,” said Hari Hara Mishra, director, UV Asset Reconstruction Company.
Source: The Economic Times, February 18, 2020