Seeking to address concerns over deep haircuts taken by banks in some of the insolvency resolutions, Reserve Bank Deputy Governor Mr Rajeshwar Rao said on Saturday that comparing outstanding loan amounts with realized value was perhaps not a “reasonable indicator” for evaluating bankruptcy law. efficiency.
Admitting there have been concerns, Rao said it should be understood that the value of the asset may have already deteriorated by the time it appears in court, and added that it should be compare the achievements with the liquidation, which is the best possible alternative. for lenders.
“We miss the fact that in a resolution model based on public auctions, the magnitude of the discount represents a discount that the market demands to continue investing in an insolvent borrower. Since a significant deterioration in the value may have occurred to the assets of the insolvent borrower, the comparison with the amount outstanding may not be a reasonable indicator for assessing the effectiveness of resolution.
“Rao, resolution values should be compared to the next best alternative for creditors, which in this case is liquidation,” Rao said, addressing an event at IIM-A.
Financial creditors were able to realize 166% against the liquidation value of debtors, indicating that creditors were better off than the next logical outcome, he added.
It may be noted that some resolutions like Videocon, where the new owner secured the asset for just Rs 2,900 crore against admitted claims of Rs 46,000 crore from creditors, had raised concerns about the effectiveness of the process. . Industrialist Harsh Goenka had alleged that public money was being stolen through such resolutions.
Rao mentioned the Videocon resolution but in the context of improving group resolutions under the IBC.
The CEO said Videocon’s resolution took place through discretionary powers available to the contracting authority rather than through a feature of the Insolvency and Bankruptcy Code.
“Such a process (in code) is particularly vital in an economy like India, where traditionally credit agreements have been embedded with cross-bonds and credit mitigation blankets provided by parent and group companies. ‘a borrower,’ he noted.
Rao also said there was a need to expand “pre-pack resolutions” to all borrowers, beyond the currently licensed small businesses to make it more effective.
He also added that bankruptcy law should be used as a last resort by all lenders in the system.
Filing for insolvency as a negotiation tactic appears to be working for operational creditors, Rao said, noting that as of Dec. 31, 2021, corporate insolvency resolution process data suggested that more than 51% of the cases had been filed by operational creditors, but they accounted for 71 percent of the total withdrawal cases.
The IBC also acts as a credible threat, he said, pointing out that 19,800 requests to open CIRPs with an underlying default of around Rs 6.1 lakh crore were resolved before admission before courts.
Drawing the attention of researchers, Rao said that efforts should be devoted to studying the average time between default by a borrower and eventual filing for insolvency resolution by creditors.
“It should also be interesting to see the relationship between such filing delays and the depreciation in value that creditors are required to recognize afterwards,” he added.
The IBC has had a “profound impact” on the creditor-debtor relationship in India over the past five years and the RBI will continue to engage with stakeholders to improve resolution frameworks and adopt more sophisticated risk management practices. and updated to take care of the systemic concerns that arise from the activities of the various credit intermediaries, he assured.
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