The coronavirus pandemic and the suspension of new proceedings under the Insolvency and Bankruptcy Code (IBC) will likely drag down the amount of recovery by 30-40% for financial creditors in 2020-21, ratings firm ICRA Ltd said.
The financial creditors might realise about Rs 60,000-70,000 crore in the current fiscal year through successful resolution plans under the IBC compared with almost Rs 100,000 crore last year, ICRA said in a report.
The ratings firm also said that while the number of insolvency cases will fall in the current financial year, lenders may also have to take bigger haircuts.
The recovery amount could fall further in 2021-22 as insolvency proceedings typically take several months to complete, ICRA said, adding that new cases are unlikely to get resolved in the same year.
ICRA also said that, in the current fiscal year, successful resolution of a large housing finance company would be the key determinant of the extent of amount the financial creditors would realise. The ratings firm didn’t name the housing finance company, but it was likely referring to Dewan Housing Finance Corp, the only lender undergoing bankruptcy proceedings.
The report comes after the government decided to suspend fresh insolvency proceedings for up to one year to prevent a surge in bankruptcy cases in the wake of the pandemic that has disrupted economic and corporate activity. The IBC holiday, many experts say, will result in accumulation of liabilities and depletion in the value of companies.
The IBC came into effect in December 2016. Since then, about 3,770 cases have been admitted into insolvency courts.
“The pandemic has thrown up new operational challenges for the various parties involved in a resolution process,” said Abhishek Dafria, vice president at ICRA. This could result in limited cases yielding a resolution plan, especially in the April-June quarter, he added.
According to him, in the current environment, the ongoing and even future insolvency cases are likely to suffer from lower valuations and limited interest from bidders due to the uncertainty across many sectors.
“This, in turn, may result in creditors having to agree on higher haircuts,” he said. The time period required for successfully concluding an insolvency case would also increase, he added.
On the other hand, suspension of fresh insolvency proceedings would ensure relief for the companies that are severely impacted by the pandemic and are unable to meet payments to their creditors.
However, if the severity of the pandemic were to increase, thus delaying economic revival, then there would be a sudden surge in cases being referred under the IBC after the one-year period. This would be detrimental to the resolution process, which is already facing challenges from over-burdened tribunals, ICRA said.
Until March 2020, financial creditors had realised Rs 174,200 crore—or 45% of their claims—from insolvency cases that had yielded a resolution plan. This is mainly due to resolution of eight companies out of the Reserve Bank of India’s first list of 12 large defaulters. These eight companies helped creditors recover about Rs 136,000 crore, said Sankha Banerjee, assistant vice president at ICRA.