Bankruptcy: For 90% Haircut Try India Bankruptcy Salon
The numbers were a mixed bag. According to a REDD Intelligence analysis, of the more than 4,300 stressed debtors who were subject to the 2016 corporate insolvency law, 48% were liquidated, half of them in less than 314 days. Of the 13% that were sold to bidders, half emerged from bankruptcy in less than 425 days. These, as the REDD researchers note, are not bad results, given that the wait times were previously five years and more.
However, if the insolvency law has indeed led to the timely extraction of large sums of money, one should also see the redeployment of credit in new businesses. The evidence on this front is weak. At 6%, loan growth is anemic. Businesses do not want to borrow even at negative real interest rates; Corporate leverage is at an all-time high 0.46 times equity, according to the Boston Consulting Group.
Incomplete bankruptcy reform isn’t the only reason Indian banks don’t lend more to new businesses, choosing instead to finance unsecured personal loans, which doesn’t create many more new jobs. Over the past year this could be seen as a trust issue. As a deadly second episode of the pandemic recedes, businesses likely need reassurance that the economy will no longer be hit by the lockdowns. This would require a much larger proportion of the population to be fully vaccinated than the less than 5% currently.
Yet the bankruptcy code does not deserve the full benefit of the doubt. Its biggest flaw is its institutional infirmity. Aside from a few large sales, mostly from steelmakers like Essar Steel India Ltd., the collection rate for creditors was only 24%, according to Macquarie. While India may be able to extract capital faster than before, it still cannot get much from dead companies.
Even the insolvency court is surprised that metal mogul Anil Agarwal “pays next to nothing” to wrest control of Videocon Industries Ltd. manufacturer and its 12 group companies. The bankers of Siva Industries and Holdings Ltd. approved a single settlement with the majority shareholder of the investment company, taking a 93.5% impact on their $ 650 million outstanding debts. In the case of Ruchi Soya Industries Ltd., the lenders initially agreed to a harsh haircut. Then they gave the yoga guru Baba Ramdev, Patanjali Ayurved Ltd. money to take over the bankrupt edible oil maker.
The low collection rate does no favor for India’s state-owned banks, which hold most of the bad loans. Several of them will now hold a stake in Jet Airways India Ltd., whose last flight dates back more than two years. The airline’s landing slots at airports have been allocated to other carriers, and the pandemic has devastated the aviation economy. All this drama to recover 5% of loans when creditors only had to oust Naresh Goyal, the founder of what was once India’s dominant airline, in time. They did not do it. Even now, the Indian joint venture of Vodafone Group Plc is struggling to stay afloat due to the government’s extractive demands, but bankers are doing little to protect their exposure to the indebted telecommunications operator.
Political constraints never allowed Indian public institutions to save capitalism from powerful capitalists, which a harsh bankruptcy law was supposed to change. This is not the case. Thus, employees and salespeople suffer, as do the taxpayers who fill the capital hole of state banks. For nine years, the Punjab National Bank, the second-largest in terms of assets, has traded only fleetingly above its book value, a reflection of what investors do with the quality of the assets of public sector lenders.
In hindsight, giving poorly governed state banks power over assets was a bad idea. An American-style debtor-in-manager bankruptcy might have been much more suited to the Indian reality on the ground. The abuse of productive capital for the benefit of a small, politically connected capitalist class has exacerbated injustice and cast the dice against workers in a labor-surplus country.
As Observatory Group analyst Ananth Narayan notes, India’s employment-to-population ratio, which was stable at 55% in 2005, has fallen to 43%. Bangladesh and Vietnam fared better. All the blame for the inhibition of employment cannot be blamed on a flawed bankruptcy law. By ignoring low-skilled textile and footwear manufacturing and placing too much emphasis on high-skilled software, India has set its own goal.
Yet the large-scale insolvency resolution game has cost India. Even before the pandemic the financial system was creaking, now it is simply kept in a pattern of waiting. Banks are assured of government guarantees on loans to small businesses affected by the pandemic. The interest they have to pay savers is also kept artificially depressed by the central bank in the face of persistent inflation. Even then, 9.8% of their loan portfolio could tumble by March 2022, the central bank warned. The plan now is to transfer at least $ 11 billion in failed business loans from commercial lenders to a newly formed bad bank.
A heist for businesses that have very little recoverable capital won’t do much for new investment. The rehabilitation of assets that still have some value will require urgent legal correction. A bankruptcy salon offering 90% haircuts is a sad joke on Indian taxpayers, savers and working people.