MOSL: FINANCIALS-Insolvency and Bankruptcy resolution – Speed set to accelerate

​FINANCIALS: Insolvency and Bankruptcy resolution – Speed set to accelerate

Although the Insolvency and Bankruptcy Code (IBC) was approved in May 2016, the activity under this code has picked up significantly only from July 2017 after the Reserve Bank of India (RBI) identified 12 large accounts forming 25% of the banking system’s GNPAs for resolution under the IBC. With the resolution timeline on these cases coming close, we met several bankers and relevant industry personnel to assess the progress and understand the implications of this powerful law. While the recovery rate on the announced resolution stands paltry (~90% haircut in some cases), the outlook for certain metal and power assets is much more promising. The government and Insolvency and Bankruptcy Board of India (IBBI) have amended the IBC and tightened the eligibility norms in bidding for stressed assets. While these measures might lead to higher haircuts, we believe that, over the longer term, it would prevent the re-entry of willful defaulters in the system and promote transparency. According to our scenario analysis, resolution of NCLT cases (RBI’s list 1 & 2) at 65% base case LGD should positively impact PSU banks’ FY19E ABV by 6% to 26%, while private banks will see a modest ABV impact of 3% to 5%.

376 cases referred to NCLT; only one-third from financial creditors

A total of 376 cases have been referred to the NCLT over the first nine months of CY17. A majority of these cases (i.e. 187) have been filed by the operational creditors, 122 cases by the financial creditors and the remaining cases by the corporate debtors. Resolution of these accounts is expected to be a major trigger for corporate lenders. However, the beginning appears to be modest, with only 2 accounts taken up for resolution (at hefty haircuts), 7 accounts directed to undergo liquidation, and another 14 witnessing further appeals.