Recovery through IBC to get better as macros look up: RBI
Dec 27, 2022
Synopsis
RBI argued that since significant value destruction may have already happened in stressed assets, a comparison of realised value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process.
The Reserve Bank of India (RBI) believes that the Insolvency and Bankruptcy Code (IBC) is probably the best mechanism for creditors to recover their dues and said the right way to look at its effectiveness would be to compare the resolution value to the liquidation and not the total loans. RBI, in the latest report on Trends and Progress of Banking, said that the realisation value through IBC was close to 201% of liquidation value.
RBI argued that since significant value destruction may have already happened in stressed assets, a comparison of realised value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process.
“Rather, the resolution value may be compared with the liquidation value of stressed assets,” the central bank said in its report. “Data indicate that at end- September 2022, in cases where the corporate insolvency resolution processes were initiated by financial creditors, the realisation through the IBC was close to 201 per cent of the liquidation value.”
The regulator also said that while the declining rates of recovery in comparison to their claims admitted through bankruptcy courts has raised concerns, the rate of recovery is contingent on overall macroeconomic environment, perceived growth prospects of the entity and its sector, and the extent of erosion in the intrinsic value of the entity.
The central bank also noted that as broad-based recovery gains traction, several macroeconomic factors will turn favourable for financial resolution.
Though it raised concern over the time taken for admission of resolution application, the final resolution and delay in liquidating assets.
Recently in an interview with ET, billionaire banker Uday Kotak had said while the insolvency code is fine in principle, the signs of meagre recoveries from the insolvencies of conglomerates and non-banking finance companies (NBFCs) such as Reliance Capital and Srei call for a review of the law.
“I am not saying we need to junk the IBC (Insolvency and Bankruptcy Code) option,” said Kotak had said. “There has to be a policy think on this. We have to figure out that for large national assets, we must think about the public interest route. The objective of the public interest board is to optimise value for stakeholders, which we have demonstrated in IL&FS. And IBC may not be the only route. It needs to be relooked at even for NBFC resolutions.”
The Insolvency and Bankruptcy Board of India (IBBI) recently amended the insolvency regulations aimed at improving realised value, reducing delays in the process, enhancing efficiency of available time, and improving information availability.
Through another amendment to the IBC, performance- linked incentives have been introduced for insolvency professionals, with am to maximise the realised value of stressed assets beyond their liquidation value.
[The Economic Times]
