Ever since the government introduced the bankruptcy law, host of companies right from steel, power, cement and construction have put their distressed assets on sale and potential bidders are chalking out deals to snap up assets of loan defaulting companies. The wave of deal-making can push mergers and acquisitions (M&A) at a record high level this year.

With banks pushing for change in management of loan defaulting companies, that will result in bigger corporate assets which will be available for acquisition at a throw-away price. Swift, time-bound resolution or liquidation of stressed assets will be critical for de-clogging bank balance sheets and for efficient reallocation of capital. Stressed assets are in multiple sectors, so M&As are expected to happen in multiple sectors.

Rising stressed assets with banks

The Reserve Bank of India has mandated early bankruptcy resolution of 12 cases, which account for a bulk of the stressed assets of banks.  These cases are in advanced stage of auctioning assets at National Company Law Tribunal (NCLT) courts. These cases have NPAs worth about Rs 2.5 trillion. Cases in NCLT are also piling up since the Insolvency and Bankruptcy Code (IBC) came into effect from December 2016. Overall, banks have Rs 10 trillion in stressed assets of which Rs 7.8 trillion is bad loans and Rs 2.2 trillion of restructured ones. The government’s plan to inject Rs 2.1 trillion into state-owned banks in two years should give the lenders sufficient capital to write off bad loans weighing down their balance sheets.

During the boom period, many companies in sectors like real estate, power, infrastructure expanded their business by borrowing heavily. Companies got funding from banks at cheaper rates, private investors pumped in money in the business and foreign investors, too, bought their greenbacks. In many cases, companies ended up biting more than they could chew, which led to debt in balance sheets and wide-scale default. However, with the slowdown in the economy, many companies could not keep their revenue stream going and instead started selling their non-core assets. The situation got complicated as various government policies changed and there were a lot of activism over environmental issues by non-governmental organisations. Many loans given by banks turned bad assets and the recovery process just did not happen.

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  • andrew bishop says:

    good analysis on IBC.