Category: Banking & Finance

So, Harsh Goenka tweeted asking why businesses get 80-90% haircuts on their loans, but no banker will afford the common man the same cut on a home/personal loan. What are your thoughts on the matter?
I’ve not read what Harsh has said, but as far as the process is concerned, IBC was introduced in November 2016; before that, the remedies available to bankers with regards to sick industries and companies were BIFR – where the existing promoters continue to get a case on the matter for years and years with no outcome – or there was DRT SARFAESI, which was not a pleasant experience for bankers.

In any capitalist society, the exit mechanism for inefficient firms is only through bankruptcy; all countries have a form of this law and India bought this in only five years ago. These five years have been a learning experience — for resolution professionals, NCLT themselves, members, committee of creditors, lenders and borrowers.

So, when we talk about IBC, its success cannot be measured by what you recover. If success has to be determined on that basis, then the kind of paradigm shift it has brought in the debtor-creditor relationship should be the benchmark. Till this law came, the promoter or a defaulty promoter would tell the banker on their face that it is your NPA, your problem, you resolve it. But that’s not the case anymore.

Two, as far as recovery is concerned, it depends on the buyers. What value they see in the purchase; why did we see such a fierce fight for Binani Cement? Why did we see one recently, between Piramal and Oaktree for Devang Housing? Bidding started from Rs 12,000 odd crores it went as high as Rs 35,000 crore. In the service sector, what do you buy? In an airline, they don’t own aircraft, they don’t have slots in the airport, it is a service industry.

So, something is better than nothing? Earlier there was this evergreening going on and bad loans were piling up, at least this put a stop to that culture?
I’m not saying something is better than nothing, it is not the case when lenders lose money; they also feel bad, but the question is that for the buyers it is a transparent process. It is a bidding process, EoIs are invited, it is a fully governed process. If there is no buyer for any asset, what do you do? For example, take the global aviation sector, look at bankruptcies and what they get. Five cents against the dollar? So it’s very common.

In the services industry asset recovery/ resolution will be very difficult. If you have assets – like in a steel plant – the job becomes easier. There were very good plants, with identical debts — Essar Steel, Bhushan Power and Steel — but, recovery differed because the buyer saw more value in Essar, which was a port-based plant, rather than Bhushan Steel. And they saw more value in Bhushan Steel than Bhushan Power and Steel, so it is a process and I think we should not run down or decide on the process in this manner. It has only been five years; there are certain deficiencies in the process but the success of the law or the process cannot be determined by making it into a recovery efficiency question, it is not. It is a resolution mechanism and itd intent is to preserve the value of the enterprise and as far as promoters are concerned, if they’ve done something wrong,the agencies are there. The Enforcement Directorate has done a fantastic job in the three cases you were mentioning.

So, enterprise and promoters are different and that is recognised in the case of IBC lenders; creditors are concerned with preserving the value of the enterprise to any extent possible and if a promoter has done something wrong, there are enough laws to deal with it.

In financial terms, it is completely incorrect to compare a business loan to a personal loan and to other categories, but I think we must address this general perception that if a business fails then the liability and pain is much less and the bank can still walk away with 60-70% of a haircut and call it a success, but if there is an inability to return a loan — especially in the context of a pandemic — taken by an individual creditor, it becomes a whole different ballgame. Can you explain to us why you feel that that’s the wrong way to look at it?
See even in the case of retail creditors – like agriculture – how much loan has been paid back? Because it is not economically viabl, not because farmers don’t want to pay. Because they don’t have sufficient earnings to service debt, so it is the same situation, more or less. Periodically, governments come and provide relief, manage debt.

About housing loans you can say that because people put their house up as security or they put gold as security, lenders obviously like assets. If a company’s assets are mortgaged, then the haircut is not as high as what you’ve mentioned. When a haircut or the losses to lenders are more, then those assets lose their value. For example, take a power plant; today, if you want to setup a power plant, it will cost – for a thermal power plant – anywhere between Rs 7.5 to 8 crore. But, if the power plant is incomplete or if there are no coal linkages or if there are no PPAs or something happens and it goes through the NCLT process, then you cannot recover the same amount of money.

So, it is ultimately dependant on the the hard assets, the debt, the planted machinery; there are valuation methodologies so you cannot equate the two loans. A good bank gets a housing loan for 6.75% which is equal to a AAA so there is no discrimination in that sense, because it is presumed that the probability of default and enforcement action in case of a secured loan will be very low. Accordingly, it is priced also.

Banking is not such a simple thing, there is risk, there is a risk reward matrix; that’s why there are laws around the process and companies are managed so that comparison is absolutely invalid. If we set up a limited liability company, then there will be no company left in this country that also we should understand.