It is unacceptable that banks should take a hefty haircut on loans that go through the resolution process under the Insolvency and Bankruptcy Code (IBC), Finance Minister Nirmala Sitharaman said on Saturday, calling for greater efforts from resolution professionals (RPs) to avoid fingers being pointed at such deals.
The Minister also sought steps from the Insolvency and Bankruptcy Board of India (IBBI) for early identification of rising stress in some companies due to the global disruptions underway and asked for an assessment of why pre-packaged insolvency packages approved by Parliament for small businesses were yet to find traction.
“The resolution value should stand out so that nobody can point a finger and say, ‘oh my god, look at the banks. They have taken this kind of a haircut’… is that acceptable?” she said at the IBBI’s sixth annual day, noting that she faced such questions every time she spoke about amendments to the IBC in Parliament.
“The first question is, haven’t banks been given a raw deal? Haven’t they been given a very high haircut? Is this what IBC can do? These are questions of honourable parliamentarians and I am duty bound to answer all of them,” she noted to emphasise why resolution professionals’ attempts to maximise value and give a good resolution package ‘matter every bit’.
“I cannot afford to say sorry, 95% haircut for the bank is the best resolution I can give you. Impossible. Is that what we’re capable of?” she asked. While conceding that some cases may be ‘so pathetic’ that only ‘junk value’ can be derived, she indicated that this could not be a feature of the IBC or RPs’ abilities.
Seeking more attention on ‘systemically important’ companies that are ‘very critical to the economy’, the Minister said that the IBC and IBBI were set up before the COVID-19 pandemic, while the external environment had changed significantly since then, triggering greater disruptions and stress and affecting companies’ health.
“Many of the companies are facing new worse situations: they are solvent, they’re a running business, but the global disruptions which have nothing to do with us in this country, which have nothing to do with our legal framework or institutional mechanisms, is also resulting in a situation where many of the banks themselves are wondering how they’re going to take it forward in terms of their clients and the distress some of their clients have started feeling,” Ms. Sitharaman said.
“Early resolution, early highlighting of distress and therefore because distress gets highlighted earlier, seeking help is something which should become a part and parcel of our mindsets. I’m not speaking of a doomsday, only of those companies which are few and far between but can experience such a situation for whom a timely and early detection and help would help us to know how to handle it if it were to be a few more companies,” she emphasised.
Calling for regulators to keep their ‘ears to the ground’, she explained that many companies were linked to their global peers or group companies and even small enterprises were dependent on foreign players for some technology or some equity.
The IBBI should be kept ‘on its toes’ so that they were conscious about the necessary interventions. “This is a very critical area for India’s economy. We can’t afford to have liquidation suffer or early stress warnings which are coming up, kept unnoticed,” she concluded.