Banks are planning to seek regulatory exemption from taking the second lot of defaulters to bankruptcy courts as such proceedings tend to erode value of assets, said three bankers familiar with the discussions.
About 30 companies with loans amounting to Rs 1.25 lakh crore are set to be referred to bankruptcy courts by December 31, if a resolution is not found. At a meeting this week, top bankers decided they would tell the Reserve Bank that they would provide for 50% of the value of assets, but won’t try the defaulters under the Insolvency and Bankruptcy Code (IBC) since that would lead to potential acquirers putting in low bids.
“Instead, we are willing to make additional provisions if the regulator thinks banks’ books are not clean,” said a banker who sought anonymity. “There are cases which show that value drops dramatically once an account reaches the bankruptcy courts.”
RBI had dropped a second bombshell on banks in August, when it directed them to refer 30 large defaulters to bankruptcy courts by December 31if they fail to arrive at a resolution plan by December 13.
Banks, which are struggling to make headway in 12 of the biggest cases mandated by RBI in June, are hesitant to take the next batch to the National Company Law Tribunal.
Under IBC, lenders and promoters have to arrive at a resolution plan within 270 days, failing which courts can order liquidation of assets. Banks have to ensure 50% provisioning once an account is referred to NCLT and 100% if the company is liquidated.
Bankers say some of the past resolution efforts under bankruptcy courts show that asset values are a fraction of what’s on their books. For instance, builder VNR Infrastructure, with a loan of Rs 1,000 crore, was valued at just Rs 80 crore. And Innoventive Industries, which defaulted on Rs 1,500 crore of loans, was valued at Rs 140 crore.
The second list of companies sent by RBI includes Videocon Industries, Nagarjuna Oil, Uttam Galva, Jaiprakash Associates and Essar Projects.
While bankruptcy proceedings are new to India, the sheer size of the companies and interconnected transactions between promoter group companies keep away potential bidders. This leads to very low bids, which erodes banks’ loan value, leaving the promoter in a position to keep the asset.
Bankers say the condition that at least two rating companies provide investment grade to the restructured debt also proves to be a Herculean task. They believe most of the companies on the second list may not qualify for investment grade rating, which would force banks to refer these to NCLT.
“Due to the slowdown, it’s difficult to get investors even in cases that are recast outside bankruptcy court. So things may get tougher after cases are taken to NCLT,” said a bank chief.
About 30 companies with loans amounting to Rs 1.25 lakh crore are set to be referred to bankruptcy courts by December 31, if a resolution is not found. At a meeting this week, top bankers decided they would tell the Reserve Bank that they would provide for 50% of the value of assets, but won’t try the defaulters under the Insolvency and Bankruptcy Code (IBC) since that would lead to potential acquirers putting in low bids.
“Instead, we are willing to make additional provisions if the regulator thinks banks’ books are not clean,” said a banker who sought anonymity. “There are cases which show that value drops dramatically once an account reaches the bankruptcy courts.”
RBI had dropped a second bombshell on banks in August, when it directed them to refer 30 large defaulters to bankruptcy courts by December 31if they fail to arrive at a resolution plan by December 13.
Banks, which are struggling to make headway in 12 of the biggest cases mandated by RBI in June, are hesitant to take the next batch to the National Company Law Tribunal.
Under IBC, lenders and promoters have to arrive at a resolution plan within 270 days, failing which courts can order liquidation of assets. Banks have to ensure 50% provisioning once an account is referred to NCLT and 100% if the company is liquidated.
Bankers say some of the past resolution efforts under bankruptcy courts show that asset values are a fraction of what’s on their books. For instance, builder VNR Infrastructure, with a loan of Rs 1,000 crore, was valued at just Rs 80 crore. And Innoventive Industries, which defaulted on Rs 1,500 crore of loans, was valued at Rs 140 crore.
The second list of companies sent by RBI includes Videocon Industries, Nagarjuna Oil, Uttam Galva, Jaiprakash Associates and Essar Projects.
While bankruptcy proceedings are new to India, the sheer size of the companies and interconnected transactions between promoter group companies keep away potential bidders. This leads to very low bids, which erodes banks’ loan value, leaving the promoter in a position to keep the asset.
Bankers say the condition that at least two rating companies provide investment grade to the restructured debt also proves to be a Herculean task. They believe most of the companies on the second list may not qualify for investment grade rating, which would force banks to refer these to NCLT.
“Due to the slowdown, it’s difficult to get investors even in cases that are recast outside bankruptcy court. So things may get tougher after cases are taken to NCLT,” said a bank chief.