Debt to Flow in from IBC
INR4.2 trillion Debts to Flow in From IBC Resolutions by 2019!
Mahaveer Shankarlal, Associate Director & Jinesh Rajpara, Analyst India Ratings and Research (Ind-Ra) believes around 45% of total bad loans of INR10.2 trillion pertaining to the top 500 debt heavy corporates is likely to be resolved by the end of 2018 under the Insolvency and Bankruptcy Code (IBC) Act, while the balance is to be resolved largely during 2019.
Furthermore, the agency expects INR4.2 trillion of the total stressed debt to become sustainable as the outcome of the resolution process by the end of 2019. For analysis, the bad loans include total borrowings of entities within the top 500 borrower universe as at March 2017, with either a credit rating of ‘C’ or ‘D’.
The total stressed debt resolved (including pre-National Company Law Tribunal (NCLT) restructuring or highest bidder identified under NCLT) totalled to INR0.82 trillion with an average haircut of 43% lower than the overall estimate of 59% on the entire bad debt portfolio, given some of the resolved bad debt were large-sized assets in iron and steel, and a cement asset with lower haircut.
The agency expects approximately INR3.8 trillion of bad loans could potentially be resolved during the remainder 2018. Of this, about INR1.6 trillion debts will become sustainable if the resolution proceeds as per the defined timelines. During 2018-2019, Ind-Ra believes INR4.2 trillion of the total stressed debt will be turned good as an outcome of the resolution.
According to World Bank, India is among few countries, which has the longest bad debt resolution turnaround time of 4.5 years. The Reserve Bank of India has been proactive to lay down the resolution time frame in the circular dated 12 February 2018.
Going by the success of the resolutions so far, the agency believes the outer line for the timeline could be reduced to about 2-2.5 years including litigations. Of the Reserve Bank of India’s first and second lists of NCLT including about 37 corporates, only three are resolved within the timeframe (first list: 270 days, second list: 180 days) notified.
As the process is evolving, the resolution pace is likely to pick up in the next 6-12 months. The agency believes that success of the Insolvency and Bankruptcy Code (IBC) 2016 lies in substantial reduction of the overall resolution time, which is in turn critical for the development of debt capital markets in India.
