Fewer banks may mean faster debt resolutions

  • The time taken to get necessary approvals from the boards of banks to approve a resolution plan is likely to shrink
  • Experts also said that stronger banks may able to go for bolder resolutions, thereby taking larger haircuts

The proposed merger of state-run banks announced by finance minister Nirmala Sitharaman on Friday could speed up the resolution process of bankrupt companies, experts said.

Fewer lenders will mean that the time taken to get necessary approvals from the boards of banks to approve a resolution plan will shrink and the process is more likely to be completed on time, according to bankers and legal experts.

For a resolution plan to be accepted, 66% of creditors to a stressed company have to approve it, according to the Insolvency and Bankruptcy Code (IBC).


Sitharaman’s move to merge govt lenders may help them go for bolder resolutions. (Pradeep Gaur/Mint)

“The IBC process initiated before the National Company Law Tribunal will certainly receive a boost with the merger of banks as not only will the balance sheet of all these banks be bigger, but the decision-making ability of the merged banks will also be significantly high. As a result, the committee of creditors (CoC) will function more effectively and work on a fast track,” said Rajesh N. Gupta, partner at law firm SNG & Partners.

Experts also said that stronger banks may able to go for bolder resolutions, thereby taking larger haircuts. For instance, Allahabad Bank, which has a capital adequacy ratio (CAR) of 12.5%, has been merged with Indian Bank, which has a better CAR of 13.2%, resulting in a combined CAR of 12.89% for the merged entity.

Union Bank of India, which has a CAR of 11.78%, has been merged with Andhra Bank (13.69%) and Corporation Bank (12.3%), which will result in a combined CAR of 12.39% for the combined entity.

These banks, which earlier found it difficult to agree to a substantial haircut because of capital constraints, will be in a position to expedite the resolution process.

“Consolidation may result in aggregation of exposures for decision-making. Also, adequate capital may enable bolder resolutions. Their willingness to take a larger haircut will, therefore, improve,” said Abizer Diwanji, partner and national leader, EY.

Experts said fewer companies are likely to be liquidated as the ability of banks to take haircuts improve, provided there is some visibility on the resolution plan. There were 458 cases under liquidation as on 30 June, of which 330 cases have been pending for at least 360 days.

After the consolidation, lenders that merge with anchor banks will have to give their mandate to anchor banks for voting in the consortium. Both Dena Bank and Vijaya Bank have mandated Bank of Baroda, with which they merged, to take decisions on their behalf where they have exposure. The voting rights of the anchor bank will increase accordingly in the CoC.

In the short-term, however, there could be delays because of name changes and other procedural issues, according to legal experts.

There may be administrative delays post merger when the formalities related to change in name and numbers will be officially recorded. However, this short-term pain is insignificant in the light of long-term gains that are bound to happen,” Gupta said.