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Reserve Bank of India (RBI) Governor Shaktikanta Das flagged the issue of inordinate delays in resolution of stressed assets through bankruptcy courts that erodes the value of assets.
He cited data to highlight time taken to even admit a case in the counts.
“As of September 2023, 67 per cent of the ongoing corporate insolvency resolution process (CIRP) cases have already crossed the total timeline of 270 days, including possible extension period of 90 days,” Das said while speaking at the Conference on Resolution of Stressed Assets and Insolvency and Bankruptcy Code (IBC) organised by the Centre for Advanced Financial Learning.
“More concerning is the fact that the average time taken for admission of a case during FY21 and FY22 stood at 468 days and 650 days, respectively. Such a long degree of delays will substantially erode the value of the assets.”
The IBC requires the completion of CIRP within 180 days, with a one-time extension by up to 90 days in exceptional circumstances.
Das said the recovery rate from IBC processes, which was enacted in 2016, was 32 per cent.
“Creditors have realised Rs 3.16 trillion out of the admitted claims of Rs 9.92 trillion as of September 2023, which works out to a recovery rate of 32 per cent,” he said.
He said it needs to be emphasised that significant value destruction would have already happened in these assets prior to their admission under the IBC.
Das said comparison of realised value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process, rather, the resolution value may be compared with the liquidation value of stressed assets or the fair value at the time of admission into IBC.
“When evaluated from the prism of these two parameters, namely, the liquidation value and the fair value, the realisation rates are 169 per cent and 86 per cent, respectively, which appears quite encouraging,” Das said.
According to Das, there are a number of factors for the delay in resolution – the evolving jurisprudence related to the Code; litigation tactics adopted by some corporate debtors, lack of effective coordination among the creditors, bottlenecks in the judicial infrastructure, among others.
In this context, he raised the issue of the conduct of the committee of creditors.
“…the Adjudicating Authorities (AA) have raised concerns regarding the conduct of the CoC in the insolvency proceedings,” Das said.
Some of the issues raised include lack of participation in the CoC meetings, lack of engagement or effective coordination among creditors, disproportionate prioritisation of individual interest of creditors rather than their collective interest while designing the resolution plans which can be detrimental to the resolution plan itself, Das said.
While commenting that there appears to be a trend in recent years towards balancing the rights of operational creditors with those of financial creditors under the Code, Das said financial creditors risks need to be commensurately compensated, on priority basis.
“While the focus on ensuring equity among all stakeholders may be appreciated, there needs to be some distinction in weightage attributed to different categories of creditors, depending upon the degree of risk absorbed ab initio. It has to be recognised that the financial creditors take the maximum risk and hence their risk needs to be commensurately compensated and with priority,” he added.
Cybersecurity concerns
Speaking at the Mint’s BFSI Summit, Das said cybersecurity was going to be a major challenge in the coming days and that the regulator had alerted its supervisory apparatus to identify the gaps.
“Going forward for all financial institutions, the robustness of their IT systems and threat from cybersecurities can become a major challenge,” he said.
He said a dedicated team of RBI supervisors look deep into the banks’ and NBFCs’ IT systems and any loopholes are brought to the notice of the bank management.
Das said the primary emphasis of the regulator was to ensure that the Indian financial system remains resilient and robust and fully prepared to support India’s journey to become an advanced economy.
“The remarkable turnaround in the Indian banking system has been the cornerstone of India’s success story in recent years. Today, the Indian banking system is well placed to support India’s growth story in the years ahead. The RBI has committed itself to safeguard the trust factor in the Indian financial system,” Das added.
Warning against crypto
On a day when the US Securities regulator allowed first US-listed exchange traded funds to track bitcoin, the RBI governor once again warned against crypto currency saying the world or the emerging markets (EMs) cannot be blown away with crypto mania.
The Securities and Exchange Commission approved 11 applications, including from BlackRock, Ark Investments/21Shares, Fidelity, Invesco and VanEck, despite warnings from some officials and investor advocates that the products carried risks.
“What is good for another market need not be good for us. Therefore, our views, both that of the RBI and personally that of mine, remain the same. The RBI’s position on cryptocurrency remains unchanged. Travelling down that path will create huge risks. I don’t think the world or EMs can take a crypto mania like the Tulip mania,” Das said.
The RBI has been vocal in his criticism of cryptocurrencies, as Das considers it would be a serious threat to financial stability. “How will you regulate it, whom will you regulate, and what will you regulate?” Das asked, on the suggestions made by several quarters of regulating cryptos.
On the issue of central bank’s strategy regarding Central Bank Digital Currency (CBDC), Das said: “We are extending the reach of wholesale CBDC and investigating the feasibility of incorporating programmable features in retail CBDC, allowing senders to specify particular end uses.”
RBI had launched a pilot for both segments of CBDC – retail and wholesale in 2022. On December 27, CBDC transactions crossed 1 million for the first time.
While answering a question on the upcoming vote-on-account and its potential inflationary impact, Governor Das said that based on the government’s track record, he does not anticipate inflationary pressures arising from the interim budget.
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