Thread by @deepakshenoy

Even if the system is gamed in a few cases (Videcon, Siva etc), I think the IBC process is a very good thing for India to develop. Quoting low "recovery" rates is not the correct way to look at it, IMHO. (Thread)

Often quoted are recovery rates like 20%, 10% or even 3%. We must note that banks often pile up penal charges, interest after the account was NPA, and other fees as part of their "ask" - and this can be more than 50% or 60% of the amount they want!

The banks are also gaming this by demanding as high as they can. Penal interest and interest after account turns NPA are not to be accounted, but banks can demand them in a resolution process. This inflates the amount demanded, but banks don't expect this to be paid.

And then, assets go into bankruptcy when they are worth very little, or if the value realizable is far into the future (no one knew such a good steel cycle was ahead, otherwise the steel cos apart from Bhushan and Essar would have had higher bids)

A low bid asset is usually because it cannot be sold. Mostly, it's already a "loss" asset in bank books, inviting a 100% provision (meaning banks have written it down to 0 effectively)

At this point, if the bank could have recovered anything, it should have.

The bankruptcy process protects the company, not the banks. The company then can write off the debts and resume under a lower debt regime, and perhaps continue. If this means a bid that's very very low, then so be it, anything that doesn't force the company into liquidation.

Think of an i3 machine with 2G ram. It had a lot of value maybe 8 years back. If you didn't sell then, today it has little value - someone has to upgrade HDD, Ram and the os just to make it workable. A bid for 5K isn't a "oh he's underbidding". It's the best you can get.

What's the alternative? Strip it and sell it for parts. The hard disk is X, the RAM is Y etc. This will be worth less. But then you refused to accept even 5K, so there.

A bankruptcy act protects the company, not its creditors. The act allows it to live again.

I will do a separate thread on the IL&FS recovery, which doesn't belong in this argument. This is primarily to do with why I think IBC is the correct way. Lemme add a few things: Why do we have bankruptcy protection?

Imagine you took a home loan from a builder that absconded after taking 75 lakh on land that wasn't his to sell. Now, the bank can't sell the collateral so they can come after your life forever. Every rupee you make, they can claim.

This is a "with recourse" loan.

For you this means there's no point working - the bank can take every rupee you make. Forever till they get their 75 lakh back.

A bankruptcy act protects you. You file, the courts says "Ok what assets do you have" - say 25 lakh. You pay it (or promise to) and then no more loan.

Bankruptcy allows you to live from then on with the bank having no recourse beyond the 25 lakh. Your future income is now not claimable by the bank, as the settlement has come through bankruptcy court.

Yes, banks can settle outside court but what if it's five banks? Each one has a little claim? And what about claims of bribe?

A court mandated process keeps the resolution process clean - everyone gets a chance to be heard.

Why we need an IBC is to check if the company can survive - either a buyer revives it (not the current promoter), or they just sell it piece by piece.

And we need an IBC so that the buyer doesn't get haunted by bankers saying oh wait, the last fellow owed us something more.