Banking

Moral Hazard if Dubious Promoters Bid for Their Own Distressed Assets: IBBI Chairman

While stakeholders within the system have complained that the rules may hurt clean bidders too, the insolvency and bankruptcy board appears in no mood to review the ordinance.

IBBI Chairman M S Sahoo. Credit: ANI

IBBI Chairman M S Sahoo. Credit: ANI

New Delhi: Despite resentment within Indian industry, the Insolvency and Bankruptcy Board of India (IBBI) appears in no mood to review the amendment made in the bankruptcy code recently to prevent wilful defaulters from bidding for their own assets which are to be auctioned soon.

Talking to The Wire, IBBI chairman M.S. Sahoo has strongly defended the change in bidding norms for stressed assets, saying there was a moral hazard involved in allowing dubious promoters to participate in bidding.

Sahoo said if such promoters (wilful defaulters) were allowed to buy their own assets, it could have led to a cycle of defaults and haircuts for financial creditors. The amendment had prompted some concern by both the financial press and India Inc as being too heavy handed, raising the possibility of a review.

However, Sahoo’s strong defence shows that there is no such thinking within the IBBI and the government.

Following a diktat by the Reserve Bank of India, lenders have dragged 12 large corporate defaulters including Essar Steel, Bhushan Steel, Bhushan Power and Steel and Monnet Ispat to the National Company Law Tribunal (NCLT). Assets of some of the defaulters are to be auctioned soon as part of the bankruptcy proceedings.

Ahead of the forthcoming auction, the government has brought an ordinance to amend the bidding guidelines to bar dodgy promoters or those whose loan accounts have been classified as non-performing asset (NPA) for than a year from bidding for their own assets.

However, promoters whose companies defaulted on loan repayments due to loss of revenue and profitability under unfavourable market conditions have become collateral victims of the changed norms.

The combined bad loans of 21 public sector banks (PSBs) are estimated at Rs 7.33 lakh crore as at the end of September this year. PSBs have written off loans of Rs 55,356 crore during April-September 2017, nearly 54% more compared to the same period last fiscal, as per data compiled by rating agency Icra. PSBs had written off Rs 35,985 crore in loans during April-September 2016.

According to RBI, PSBs had written off Rs 2.28 lakh crore in bad loans in nine years to fiscal 2015-16.

The spurt in PSBs’ asset write-offs is a consequence of bankruptcy proceedings.

The government amended the Banking Regulation Act in May this year to empower the central bank to issue directions to PSBs to resolve their bad loans. The extraordinary step was taken by the government as bankers were shying away from taking decisions on the resolution of loans which would necessitate accepting deep haircuts for lenders. Bank officials feared that they could face probes in the future if their decisions were seen as favouring borrowers.

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