Don't liberalise default rule PDF Print E-mail
Wednesday, 24 April 2019 06:29
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Shobhana edit


Given how more than half the companies that have been processed under the Corporate Insolvency Resolution Process (CIRP) till December, 2018, have been liquidated, fetching banks pitifully small sums, it is not surprising the latter are pressuring RBI to ease the rules. In fact, even where new buyers were found—just 13% of the 586 cases—the average haircut was a very high 52% of the value of claims admitted by the court. The problem is the cases are turning out to be very time-consuming and yielding little, and bankers believe that the one-day default rule should be scrapped and a 30-day period to be allowed before the stress is recognised. If the central bank agrees—and that is very likely given how banks are pressuring it—it would be a very bad move. The rules for dealing with stress in companies, laid out by the central banks in the circular of February 12, 2018, are strict. But, that is the way it should be. It is because the rules were so lax that banks got away by ever-greening loans. The current guidelines require banks to recognise stress immediately and act quickly so that, unless a solution is found within 180 days, the company must be subjected to the Insolvency and Bankruptcy Code(IBC). Unless stress is flagged off on day one and the system is alerted—as also the ratings agencies—neither lenders nor borrowers will be disciplined. Borrowers must be penalised for delaying a payment, even if the delay is of one day. A 30-day grace period will simply defeat the purpose because they will go back to their old ways.

It is true the IBC process has taken much longer than was imagined; the Essar Steel case, for instance, has already taken 660 days and the resolution could take another month at the very least. However, now that the initial phase is over and precedents have been set, cases should be resolved more speedily. The fact is banks tend to be too lenient towards borrowers, both at the time of assessing credit requirements and, later, while monitoring repayments. Jet Airways is a good example of how lenders failed to react to adverse movements in crude oil prices, the carrier’s rising wage costs and the intense competition in the aviation sector. It is true that, from now on, 40% of borrowers’ fund-based requirements would be structured like a term loan with a fixed repayment schedule, forcing them to be prompt in repaying loans. Nonetheless, a one-day default rule is needed. Also, the 180-day period within which a solution must be found before insolvency proceedings are initiated must not be increased. Banks must learn to be more alert about their exposures and initiate action as soon as they spot the first signs of trouble. It has to be prevention, not cure.



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