Deep haircuts: Comparing realisations with outstanding loans not reasonable to assess IBC effectiveness, says RBI DG
The Hindu
‘Must compare realisation with liquidation, the only other alternative for creditors’
Comparing outstanding loan amounts with the value realised may not be a 'reasonable indicator' to assess the bankruptcy law's effectiveness, said Reserve Bank Deputy Governor M. Rajeshwar Rao, while seeking to address concerns over deep haircuts that banks had taken in some of the insolvency resolutions plans.
Admitting that there had been concerns, Mr. Rao said one needed to understand that the value of the asset may have already deteriorated by the time it comes up at the courts, and added that one should compare the realisations with liquidation, which is the best possible alternative for lenders.
"We miss the fact that in a public auction-based resolution model, the extent of haircut represents a discount the market demands in continuing to invest in an insolvent borrower. Since significant value deterioration may have happened to the assets of the insolvent borrower, comparison with the outstanding amount may not be a reasonable indicator to evaluate the effectiveness of the resolution.
"Rather, the resolution values must be compared with the next best alternative for the creditors, which, in this case, is liquidation," Mr. Rao said, addressing an event at the IIM-A.
Financial creditors have been able to realise 166% in comparison to the liquidation value of the debtors, indicating that creditors have been better off than the next logical outcome, he added.
It may be noted that some resolutions such as in the case of Videocon, where the new owner got the asset for only ₹2,900 crore as against admitted claims of ₹46,000 crore from creditors had led to concerns about the effectiveness of the process. Industrialist Harsh Goenka had alleged that public money was being “stolen” through such resolutions.
Mr. Rao did mention the Videocon resolution but in the context of improving the group resolutions within the IBC framework.
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