DNA Edit: Expensive haircut – NCLT treatment is less profitable than the cure

Either which way, it is the lenders who are doomed to take the hit. India’s biggest lender, the State Bank of India (SBI), has recovered less than half the amount it had lent to 25 companies after it sent the accounts to the National Company Law Tribunal (NCLT) for resolution. It is a perfect double whammy, adding as it does to the banks’ substantial load of non-performing assets (NPAs), which is ironical because it was to get these loans off their back that banks are lending money in the first place. This is, by no means, confined to the SBI. Though resolution for stressed corporate loans in NCLT is picking up, it is coming at a rather heavy price as banks are forced to take massive haircuts to bring about a change in management. In other words, they are paying heavily for the cheap sale of companies. 

The principle reason for this dysfunctional state of affairs is the lack of bidders and poor bids that have, willy-nilly, led to a situation where banks are compelled to sacrifice a big chunk of the principal and interest component. Just how seriously this intervention is costing the SBI - as reported in this paper - is this: while the principal amount of these accounts stood at Rs 29,047.75 crore, SBI could only lay their hands on Rs 13,005.18 crore. The rest is gone with the wind. The RBI had last year released a list of 12 companies that constituted 25 per cent of the Indian banks’ NPAs. Together, these accounts had an outstanding claim of Rs 3.45 lakh crore, while the liquidation value was pegged at Rs 73,220 crore. Quite clearly then, while the process is transparent, the valuations are so low that the cost has to be low as well. Clearly, for the companies, treating the disease is turning out to be less profitable than the cure.