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BW Businessworld

Stressed Assets Bloat Five-fold To $133 Bn Over 2011

The average duration for insolvency resolution is at a high of 4.3 years compared to the south-Asian region’s average of 2.6 years and that of Organisation for Economic Co-operation and Development high-income countries (1.7 years)

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Stressed assets in the banking system have risen five times over since fiscal year 2011 to $133 billion in fiscal, says consultants Alvarez & Marsal (A&M).

“Stressed assets have been building in the banking system as over half of all scheduled commercial banks (contributing to approximately 88 per cent of advances) witnessed an increase in the stressed asset ratio in the first half of fiscal 2015. Total stressed assets grew to $133 billion in fiscal 2015, an increase of five times from $27 billion in fiscal 2011, an an increase of five times (Figure 1). During the same period, total advances grew by 1.8 times, pointing to significant asset quality deterioration at Indian banks”, says Nikhil Shah, managing director at A&M.

A&M also says the average duration for insolvency resolution is at a high of 4.3 years compared to the south-Asian region’s average of 2.6 years and that of Organisation for Economic Co-operation and Development high-income countries (1.7 years). “Indian insolvency outcomes typically result in a piecemeal sale rather than sale as a going concern, which is more common in developed economies”, notes Shah.

As per World Bank estimates, recovery rates in India (25.7 cents on the dollar) are also considerably lower than the south-Asian average (36.2) and OECD average (71). By the way, the World Bank’s “Doing Business” ranking, which uses insolvency resolution as a key parameter, has placed India at 137 out of 189 countries.

Recognising the above and other wide-ranging problems, the Centre set up the Bankruptcy Law Reform Committee (BLRC) in 2014, which released an interim report in February 2015 to invite feedback from the industry. The BLRC had made comprehensive recommendations to strengthen the bankruptcy-related sections in the Companies Act (2013).

The key findings of the A&M report are:

* 40 per cent of industry practitioners surveyed rated execution difficulties as the biggest challenge with respect to revival of a stressed asset. Challenges in building consensus among creditors and lack of adequate legal rights and infrastructure followed closely on the list of impediments

* 33 per cent said in practice, raising additional working capital is one of the biggest execution challenges during revival; replacing existing management and maintaining promoter cooperation are other issues

* 40 per cent agreed that fear of vigilance action is a primary impediment in creating creditor consensus; other reasons cited were policy differences across banks and vacancies in senior leadership roles at certain banks

* 33 per cent blamed insufficient bandwidth of the Debt Recovery Tribunal and Debt Recovery Appellate Tribunal as a major legal gap. They also highlighted some of the laws that are detrimental to the revival of stressed assets

While opinions differed between respondents on specific clauses, there was indisputable support for the direction being set by the BLRC, both in terms of the legal provisions as well as infrastructure. In terms of initiation of rescue proceedings, nearly all respondents agreed that obtaining a decision within two months of the initial application to the National Company Law Tribunal (NCLT) is a “must have.”

Respondents unanimously welcomed the committee’s recommendation on adopting the Company Administrator role similar to western countries and agreed that involvement of secured creditors in the appointment of the Company Administrator is of utmost importance. A significant majority of the practitioners were similarly of the view that the Company Administrator should have the power to take over management of the assets of the borrower suo moto. Most respondents also expressed the need to introduce a bench of the NCLT in every state that has a High Court.