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The Great Indian NPA Tamasha

The Insolvency and Bankruptcy Code is looking like a circus at this point, but it seems to be the only way to get both banks and unscrupulous promoters to behave

It was supposed to be the magic pill that would revitalise the Indian banking system, curing the $210-billion bad loan problem. Instead, the Insolvency and Bankruptcy Code (IBC) is creating more chaos and confusion rather than clarity and clean-up.

It’s not a joke — the IBC is heralded as the biggest reform in the Indian banking sector thus far. Introduced in 2016, the IBC replaced existing schemes such as Corporate Debt Resolution (CDR) and Strategic Debt Restructuring (SDR). Under the IBC, stressed assets are referred to the National Company Law Tribunal (NCLT) to find a resolution for their insolvency, failing which they will be sent to liquidation. As a first step, in June 2017, the Reserve Bank of India drew up a list of 12 large accounts, which made up 25% of the industry’s gross non-performing assets (NPAs), for resolution under the IBC. It included names such as Essar Steel, Bhushan Steel, Binani Cement among others. A 270-day deadline was set for lenders to find a resolution plan. With deadlines ending this month, we finally have one resolution to show.

Tata Steel has taken a controlling stake of 72.65% in Bhushan Steel after settling Rs.35,200 crore of the loans owed by the latter. The lenders, who will hold 12.25% of Bhushan Steel, have taken a 37% haircut on their outstanding loans (Rs.56,079 crore). SBI, which has the highest exposure of Rs.12,872 crore to Bhushan Steel followed by PNB (Rs.4,904 crore) and ICICI Bank (Rs.2,499 crore), will see its profits bump up during the first quarter of FY19 due to provision write-backs as the asset turns standard in its books. Tata Steel will now deal with lawsuits filed by L&T, that wants to be treated as a secured creditor, and the erstwhile promoter, Neeraj Singhal, who has challenged Tata Steel’s eligibility as a bidder under Section 29A. Being the first case to be successfully resolved under IBC, Bhushan Steel is probably a silver lining among several murky clouds. All the 11 pending cases have a sob story of their own. Vedanta’s Rs.5,320-crore-bid for Electrosteel is under the NCLT scanner because it implies a haircut of 60% for the lenders. The total exposure of the banks to Electrosteel stands at nearly Rs.14,000 crore. 

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