Rs.4.2 trillion Debt Resolution Game

By the end of 2018, Rs.3.8 trillion of bad loans are likely to be resolved. Of this, Rs.1.6 trillion will become sustainable, if the resolution proceeds as per the defined timelines.
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<p> The India Ratings and Research (Ind-Ra) believes around 45 per cent of the total bad loans of Rs 10.2 trillion pertaining to the top 500 debt heavy corporates is likely to be resolved by the end of 2018 under the Insolvency and Bankruptcy Code (IBC) Act, while the balance is to be resolved largely during 2019. Furthermore, the agency expects Rs 4.2 trillion of the total stressed debt to become sustainable as the outcome of the resolution process by the end of 2019. </p>
<p> <span style="font-weight: bold;">Success so far</span><br />
The total stressed debt resolved (including pre-National Company Law Tribunal (NCLT) restructuring or the highest bidder identified under NCLT) totalled to Rs 820 billion with an average haircut of 43 per cent lower than the overall estimate of 59 per cent on the entire bad debt portfolio, given some of the resolved bad debt were large-sized assets in iron and steel, and a cement asset with lower haircut.</p>
<p>The agency expects that approximately Rs 3.8 trillion of bad loans could potentially be resolved during the remainder 2018. Of this, about Rs 1.6 trillion debt will become sustainable if the resolution proceeds as per the defined timelines. During 2018-2019, Ind-Ra believes Rs 4.2 trillion of the total stressed debt will be turned good as an outcome of the resolution.</p>
<p> <span style="font-weight: bold;">Sector concentration</span><br />
Infrastructure including power and metals, and mining sectors have the most concentrated stressed debt pending resolution followed by real estate, telecom and petrochemicals. The real estate sector may have a high requirement of debt refinancing to avoid falling into the stressed category. </p>
<p> <span style="font-weight: bold;">Resolution time frame</span><br />
According to the World Bank, India has the longest bad debt resolution turnaround time of 4.5 years. The Reserve Bank of India (RBI) has been proactive to lay down the resolution time frame in the circular dated February 12, 2018. Going by the success of the resolutions so far, the agency believes the outer line for the timeline could be reduced to about 2-2.5 years including litigations. Of the RBI’s first and second lists of NCLT including about 37 corporates, only three are resolved within the timeframe notified. </p>
<p>As the process is evolving, the resolution pace is likely to pick up in the next 6-12 months. The agency believes that the success of IBC 2016 lies in the substantial reduction of the overall resolution time, which is in turn critical for the development of debt capital markets in India.</p>