Total stressed assets in India surged fivefold to about $133 billion in FY 2015, from $27 billion in FY 2011, according to a report by global consultancy Alvarez and Marsal. A survey of Indian companies by the consultancy also found that there are systemic problems in the way stressed assets are relieved currently.
“The average duration for insolvency resolution in India is 4.3 years, significantly higher than that of South Asia region (2.6 years) and that of Organisation for Economic Co-operation and Development (OECD) high-income countries (1.7 years),” the consultancy said in the report, adding that according to World Bank estimates, recovery rates in India (25.7 cents on the dollar) are also considerably lower than the South Asia average (36.2) and OECD average (71.9).
The survey — of about 40 organisations including banks, PSUs, hedge funds, law firms and foreign companies — found that the ‘top three challenges in the current set up with respect to revival of stressed assets’ had to do with all three parties involved: the companies themselves, the banks, and the government’s regulatory structure.
“Industry practitioners named numerous execution difficulties as the biggest challenge with respect to revival of a stressed asset. Challenges in building consensus among creditors and lack of adequate legal rights/infrastructure followed closely in the list of impediments,” the report said.
The execution difficulties include inability to raise working capital as lenders are unwilling to put additional capital at risk. Other execution difficulties, the survey found, were in replacing the existing management.
“Although SARFAESI [Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act] gives secured lenders the legal right to replace ineffectual management, this is practically impossible to achieve (and sometimes not desired by lenders) as promoters tend to litigate and the long time taken for resolution in the current judicial system leads to severe degradation in value of the assets,” the report said.
Raising working capital and ousting existing management accounted for 65 per cent of what the respondents considered were key execution difficulties.
Building consensus among creditors is also another major challenge mentioned by the report. “Bilateral or consortium lenders tend to not work cohesively together to drive recoveries. Survey respondents say that bank executives are wary of such decisions as they may be construed as being soft on delinquent borrowers, thus potentially inviting regulatory or vigilance action. Banks also differ in terms of their approach and internal policies with respect to addressing stressed accounts,” the report said.
Another factor mentioned by the survey respondents is that banks with smaller exposure hold out for better deals.
In the regulatory space, the survey respondents said that the Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal didn’t have sufficient bandwidth to deal with the volume of applications filed every year.
Apart from capacity constraints, the respondents also highlighted capability constraints as a major problem. “While Presiding Officers are highly qualified in the legal profession, their experience limits them from making quick and reasonable decisions on matters of insolvency and commercial viability,” the report said.
Regarding the legal infrastructure to deal with insolvency and bankruptcy, the report recommends that the proposed National Company Law Tribunal should have a separate bench for handling bankruptcy cases.
“Once the proceeding begins, only the bankruptcy court should have full jurisdiction over all the cases related to the debtor and should be empowered to dispose of all the matters. This provision is critical in the Indian context, given the history of multiple laws and overlapping jurisdictions. It will be necessary to subsume all existing laws into the new Insolvency Code,” the report said.
