OVER 94% VALUE IN 165 IBC LIQUIDATION CASES
It is surprising as the lenders mostly lend loans keeping in mind the margin and the promotor’s contribution
Businesses that filed for liquidation after getting bankrupt saw a value erosion of 94 per cent of the creditor claims, a report by TheTimes of India (TOI) said, citing data from the Insolvency and Bankruptcy Board of India (IBBI).
The bankruptcy framework was introduced in 2016. Since then, there have been 165 borrowers with claims of over Rs 1,000 crore each. The total claims of these borrowers were worth Rs 6,94,000 crore. However, the on-ground valuation of the assets was just Rs 40,000 crore.
TOI report said that this is surprising as the lenders mostly lend loans keeping in mind the margin and the promotor’s contribution. If the loans are not backed by security, they ensure that the business has enough cash flow. The bankers ensure that a business’s valuation does not fall below the loan amount.
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The value erosion is surprising because lenders always make sure there is a margin or promoter’s contribution before granting a loan.
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If a bank extends a loan for a Rs 1,000 crore investment, it ensures a promoter contribution of Rs 200 crore.
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As a result, the creditor claims rise even as the value of the underlying business shrinks.
According to experts, there can be several reasons for the fall in valuation. “Once an account becomes NPA, the valuation of its assets starts deteriorating while claims like interest continue to grow at a compounded rate. The asset coverage ratio nosedives for several reasons, including cases where the assets may have had inflated valuation at the time of sanction or the assets got siphoned off by unscrupulous borrowers when they foresaw losing control of the unit…It will be a good case study to examine the role of various factors in the decline of asset coverage at different intervals to help improve credit monitoring and recovery processes,” Hari Hara Mishra, director of UV ARC, told TOI.
The report further added that most cases that go for insolvency now end up in liquidation. Out of 4,198 cases resolved under the IBC since 2016, 1,901 have ended in liquidation. Of these, 1,229 liquidations were because the lenders did not get valid bids. In 600 cases, there was no resolution plan at all.
The Centre is working to improve the insolvency framework in India, the report further added.
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