Reform that isn’t
A policy on paper may convey a grand vision. The key, however, is its successful implementation. Ground realities must be taken into account before making path-breaking policy announcements. The failure of the NDA has been its inability to anticipate pitfalls in implementing policies. Demonetisation, without understanding its likely consequences, proved to be an unmitigated disaster. The same applies to a flawed GST.
The Insolvency and Bankruptcy Code (IBC) passed in May, 2016 was hailed as a path-breaking economic reform. Its object was to clean up the balance sheets of banks, make the corporate sector pay for its sins, prosecute those who manipulated and conspired to manipulate the banking system and, above all, transfer non-performing assets to more responsible corporate successors. On February 12, the RBI abolished half a dozen loan restructuring schemes and instead provided for a strict 180-day timeline to agree in case of a default on a resolution plan or else refer the account to be dealt with under the IBC — the Supreme Court has now stayed the RBI’s February 12 circular and asked banks not to initiate insolvency proceedings against the loan defaulting companies.
To process cases under IBC, 1,300 insolvency professionals are registered under three insolvency professional agencies. Over 525 cases of corporate insolvency have been admitted across the National Company Law Tribunal (NCLT) benches. One hundred and eight voluntary liquidation proceedings have taken place and the underlying defaults for different sectors under IBC include steel, construction, mining and others involving approximately Rs 1,28,810 crore. Despite these large numbers, since 2014, only a few have undergone resolution under IBC.
Of the first 10 cases for which resolution plans were approved under IBC between August and December, 2017, financial creditors were able to recover only 33.53 per cent of the total outstanding claims from defaulting borrowers. On June 13, 2017, the RBI identified 12 large loan defaulters where IBC procedures were initiated. More than one year later, except Bhushan Steel and Electro Steels Ltd., only two of the 12 companies, no other company has seen resolution.
Against those 12 large loan defaulters, the claims admitted amount to Rs 3,12,947 crore. It is unlikely that we may see resolution of these large defaulters as contemplated by the policy pronouncement. Time spent on litigation is excluded from the 180 days time-line which was the outside limit for resolution. The only beneficiaries in such protracted high-stake litigation would be the resolution professionals and members of the legal fraternity.
The power sector, which has around 34 stressed accounts worth Rs 1.5 lakh crore, is the biggest worry for the banks since resolution through IBC will erode the true value of assets. The RBI had threatened banks with severe consequences if its new norms specified in the February 12 circular were not adhered to. The Allahabad High Court, in response to a challenge to the circular, has asked the Union government to talk to the RBI for relief to the power sector since it is feared that the hair-cut that banks might have to take in the process of resolution would be around 85 per cent.
The dark side of this entire resolution process is that there are very few players in the corporate sector who have the capacity to raise capital and buy assets even at 35 or 15 per cent of their valuation. The bidding process for resolution in the steel sector has seen only two big domestic players and key global players who are eying assets that are likely to be taken over at throwaway prices, somewhat like the manner in which public sector disinvestment during the Vajpayee regime saw favoured players picking up assets for values far below their true value.
In the steel sector, only two large corporate players seem to be the beneficiaries of stressed assets. Near monopolies will be created in the steel sector, a fatal blow to competition. In the power sector, too, there are two key players and with one suffering disqualification, the sole beneficiary will be a single large corporate entity. In both steel and power, banks as secured creditors will be unable to recover the loans extended. Recovery through the IBC process in the steel sector will be about 35 per cent of the loans advanced and in the power sector, only 15 per cent of the loans advanced. This is a scandal in itself. Even the beneficiaries will raise loans from banks to pay for acquisitions.
It is a pity that the government did not and could not anticipate these perhaps unintended consequences. While the February 12 circular of the RBI was operative, the minister of power, on July 19, informed of the debt restructuring Samadhan scheme of State Bank of India to resolve stressed assets in the power sector. That scheme has come to naught. A scheme similar to Samadhan to bail out the Rural Electrification Corporation, an NPA (Rs 17,000 crore), is also likely to come to naught.
The RBI has also been issuing guidelines from time to time, which too reflect the hiccups that have taken place in the absence of understanding of the consequences of policy pronouncements. The Standing Committee on Energy in March, 2018 in its report stated, “…simply applying RBI guidelines mechanically by various banks, financial institutions, joint lender forums will push these plants further into trouble without hope for recovery.” This is an indictment of the policy itself and reflects on the poor management of policy prescriptions in the process of implementation.
The Standing Committee further opined that “180 days to find an optimal solution and resolve is almost impossible”. It also stated that when all such projects land up in the NCLT, the pipeline will be choked and resolution will not be easy. The Committee further stated that the power sector is in transition and that the RBI in its framework is only addressing financial issues but not the “whole range of issues that are external to financing matters.” It said that these stressed assets in the power sector are “national assets” and “at the end of the day need to be protected, preserved and conserved.”
The policy is in a shambles. Handing over valuable assets to two or three individual entities is the highest form of crony capitalism. Such policies implemented without analysis are much worse than the allegations of policy paralysis which gave us 8.2 GDP between 2004 and 2014.