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The fate of NPA’s after the Bankruptcy Code

Ali Azar

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The Insolvency & Bankruptcy Code (IBC) was passed in the Lok Sabha on 5th May 2016 & received the assent of the President of India on 28th May 2016. Nobody knew what to expect, least of all, debt-burdened promoters of corporate India who weren’t expecting a one-stop shop for all things that spell “resolution”. The IBC ushered in a new era of accountability and gave a clear message to over-leveraged promoters, who for decades have got away with manipulating banks into providing finance to their ambitious and often unviable plans. Such loans, more often than not, ended up as Non-Performing Assets (NPA’s) in the books of the banks. Slowly, but surely, India’s mountain of debt grew taller and according to a report by CARE ratings published in December of last year, India had the highest level of NPA’s among the BRICS nations and is ranked 5th worldwide behind Greece, Italy, Portugal & Ireland.

With banks having to accept massive haircuts to resolve the largest NPA accounts in the country, the so-called “Dirty Dozen” (12 largest NPA accounts that constitute 25% of the country’s bad debts), IBC has made it aptly clear that promoters of the beleaguered companies i.e. those who contributed to the default of a company, or are otherwise undesirable, should be ineligible from bidding for stressed assets. This triggered a fear among promoters of losing control of their firms, and of being banned from bidding for other distressed assets. A report published last quarter suggests that over 2,100 companies settled  Rs 83,000 crore worth bank dues for fear of losing control over their companies before action was initiated under IBC. This sends a clear message to the promoters, that lawmakers are serious about holding them accountable for their frivolous and fraudulent borrowings and does not intend to give them the slightest leeway even though it may come at the cost of improved recovery.

The recent arrest of Neeraj Singhal, promoter of Bhushan Steel, has proved that even the most influential promoters can be made to part with their beloved companies and the past sins of these promoters will not be forgotten even after the company has undergone resolution/liquidation under IBC. Sale to buyers will not mean the closure of the case. With forensic audits and rigorous investigations being conducted by various agencies such as CBI, ED, SFIO, IT Authorities etc. the noose can be felt tightening around the neck of willfully defaulting promoters.

As we usher in this new era of debt resolution and accountability to stakeholders, the ground realities of borrowing money will see a massive transformation, where bankers will insist on the full value of the security for assets, increased mortgage coverage & promoter guarantees before disbursement of funds. The age-old adage, once bitten twice shy, will hold true going forward.

Things will see an improvement on the procedural side as well, with the law getting clearer & frivolous petitions being avoided going further. Better valuations are also more likely to be offered, meaning less haircut for banks. The overall recovery process is set to become more transparent and regulatory authorities will have a better understanding of the problems faced by banks, promoters and recovery agencies which will lead to a smoother transition of the bankruptcy law.

On the recovery front, while banks are now assured that promoter frauds will not go unpunished, they will also have to be pragmatic in their expectations of recovery and will be willing to accept haircuts if reasonable amounts can be guaranteed in a time-bound manner. Offers from prospective buyers will not always meet the banks’ forecast and immediate offers will come only where stalled plants can be revived.

The culture of borrowing & lending is changing because of IBC. It has the potential to bring about a seismic change in the landscape of corporate accountability, but like any massive system overhaul which has long-term benefit as its objective, the code will have its fair share of trial & error which might expose chinks in the IBC’s armour. This major step taken by the NDA government is in the right direction, though only time will tell if it can be implemented effectively in a country whose borrowers are not accustomed to such strict scrutiny.

 

Indian Economy

Krishnamurthy Subramanian appointed as the new Chief Economic Advisor

News Desk

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Krishnamurthy Subramanian

New Delhi | The Union Government on Friday appointed Krishnamurthy Subramanian as the new Chief Economic Advisor (CEA) for the term of three years.

Krishnamurthy Subramanian who is the associate professor and executive director (Centre for Analytical Finance) of Indian School of Business, Hyderabad will replace former CEA who resigned from the post on June 20 this year.  Arvind Subramanian who was supposed to retire on as in May 2019 returned to academic research and writing in the US, apart from discharging the new responsibilities of a grandparent. Arvind Subramanian had got an extension of one year in September last year after his tenure got ended on 16 October 2017.

Krishnamurthy Subramanian a Ph.D. from Chicago-Booth currently serves as a member of Sebi’s standing committees on alternative investment policy, primary markets, secondary markets and research. He is also on the boards of Bandhan Bank Ltd, the National Institute of Bank Management, and the RBI Academy.

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Indian Economy

Raghuram Rajan says RBI is a seat belt for govt; autonomy must be respected

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New Delhi | Amid mounting tension between the Reserve Bank and the finance ministry, former RBI governor Raghuram Rajan Tuesday said the central bank is like a seat belt in a car, without which accidents can happen.

Pitching for respecting the institutional autonomy of the RBI, he said the central bank has the liberty to say no if the government pushes it to be lenient.

Ahead of the November 19 meeting of RBI Board, he said the objective of the board is to protect the institution and not serve others’ interests.

“The RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt but of course if you do not put on your seat belt you get into an accident and the accident can be quite severe,” he told CNBC TV18.

Historically, the relationship between the RBI and the government has been precisely this the government wants to focus on improving growth and it does all it can within the limits set by the RBI which are based on financial stability.

“So, the government will push, will try and get the RBI to be more lenient,” he said, adding the central bank would examine them in close details and in reference to risks to financial stability. “We (RBI) have responsibility for financial stability and therefore we have an authority to say no,” he said.

The RBI led by Governor Urjit Patel and the government have not been on the same page on different issues for some months now. The disagreements came out in open when RBI Deputy Governor Viral Acharya in a hard-hitting speech said failure to defend (rpt) defend central bank’s independence would “incur the wrath of the financial markets”.

It later emerged that the government had used a never-before-used provision of the law to seek resolution of issues, including the easing of NPA norms, so that banks can kick-start lending and support growth, and transferring more dividend to boost liquidity — issues which the central bank thinks cannot be relented.

“Of course the RBI doesn’t say no out of petulance. It says it because it has examined the situation and believes that this take implies too much financial instability,” Rajan said. “I think that relationship has gone on for a long and the fact that the RBI says no is not new. The government can keep asking and say please consider this, please consider that but at some point, it says okay I respect your decision, you are the financial stability regulator and I back off”.

“Once you have appointed these Deputy Governors and Governor, you have to listen to them because that is what you have appointment them for, they are your safety belt,” he said.

On the issue of the government citing Section 7 of the RBI Act that gives it powers to issue directions to RBI Governor on issues of public interest, Rajan said it would be best if each side respected each other’s motivation and thoughts.

“And ultimately the RBI after listening to the government and hearing what the government’s issues were provided the best professional answer it could and historically it has done that. I have no doubt it is doing that today. It has a responsibility to fulfill to the nation. It has to listen of course but at the end of it, after listening it has to make a decision because ultimately it has that responsibility,” he said.

On the role of the RBI board, he said its role historically has not been to take operational decisions but to focus on broader strategy as well as ensure good governance. “So, they are there to ensure that the government’s money is well spent in the RBI, for example, the RBI doesn’t pay itself inordinate salaries and so on but also to serve as a sounding board which is why we have people from different walks of society, very eminent people,” he said.

“So, my sense is the objective of the board is to protect the institution, not to serve others’ interest; it is to protect the health of the institution but also to provide wide, sensible advice. The aim of the board is to be Rahul Dravid — sensible, thoughtful and not, with due respect, Navjot Sidhu,” he said.

On the state of the economy, Rajan said the situation is “much better” on the inflation front, for which both the government and the RBI deserve credit.

Also, India is growing faster than most other countries but there is a need to create jobs and there is “probably need (to do) somewhat more than where we are today.

“Where there is more worry is on the fiscal deficit front and here I am not talking just about the central government fiscal deficit which has been coming down but the aggregate fiscal deficit. Even as the central government is bringing it down, the states are taking it up. When you look at the total you find that over the last 3 or 4 years the aggregate fiscal deficit has actually gotten slightly worse and not better,” he said.

Besides, the current account deficit (CAD) is blowing out partly because of the relatively weak exports and partly because of the price of oil has gone up. “It has come down recently but it is a risk that we cannot ignore at this point,” Rajan said.

On the problems facing non-banking finance companies (NBFCs), he said the central bank needs to examine the liquidity problem much closer and solve the issue by putting liquidity in the market.

“I think the markets are somewhat nervous but I don’t think given that NBFCs account for 17 to 18 per cent of assets, that this is an unmanageable problem. I think we can manage it, we have to look carefully at it, see what is really a solvency issue, what is a liquidity issue.

“Certainly on the solvency front, it is up to these privately managed entities to raise equity at this point when they still have the capacity and shore up their balance sheets. There is a tendency sometimes to run to the government and say please bail me out. I think first they have to exhibit everything they can do on their own before the government even contemplates anything on that sort,” Rajan added.

In general, central banks, he said, avoid lending to direct entities. Lending to direct entities involves credit evaluation and central banks are not in fiscal function of bailing out entities.

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Rupee does U-turn, nosedives 67 paise against US dollar

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Mumbai | After two sessions of massive gains, the Indian rupee on Monday again tumbled by 67 paise to close at 73.12 against the US dollar on increased demand for the American currency from importers and unabated foreign fund outflows.

On Friday, the rupee clocked its biggest single-day gain in over five years, surging by 100 paise to close at 72.45 against the US dollar. The domestic currency had gained 150 paise in the previous two sessions.

Forex traders said the strengthening of the American currency against major global currencies overseas and weakness in the domestic equity market weighed on the local unit Monday.

After opening lower at 72.76, the rupee plunged to the day’s low of 73.13 and finally settled for the day at 73.12, down 67 paise over its previous closing price.

“The rupee continues to remain under pressure, but the pace of depreciation has slowed somewhat as the crude oil prices have softened in the international market,” Anand Rathi Shares and Stock Brokers Research Analyst Rushabh Maru said adding that “tension still exists between the RBI and government which is a matter of concern”.

Dealers said unabated capital outflows by foreign funds dampened the sentiment, even as easing crude oil prices restricted the rupee fall to some extent.

Foreign funds pulled out Rs 196.90 crore from the capital markets on a net basis, while domestic institutional investors bought shares worth Rs 852.99 crore Friday, provisional data showed.

Globally, Brent crude, the international benchmark, was trading 0.30

per cent lower at USD 72.61 per barrel.

According to a Crisil Research report, the rupee has fallen sharply against the US dollar this fiscal, losing nearly 13.8 per cent during April to October 31, as global headwinds multiplied and the current account deficit widened.

“Risks are tilted on the downside because rising interest rates in the US could continue capital outflows from India, putting pressure on the rupee,” the report noted.

Meanwhile, the benchmark BSE Sensex dropped 61 points and settled below the 35,000 mark Monday, tracking weak Asian stocks amid uncertainty around the China-US trade war. The broader NSE Nifty settled 29 points, or 0.27 per cent, down at 10,524.

The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 73.0740 and for rupee/euro at 83.2566. The reference rate for rupee/British pound was fixed at 94.9845 and for rupee/100 Japanese yen at 64.50.

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