Bankruptcy law will be tested in courts:Uday Kotak
, ET Bureau|
Feb 26, 2018, 03.05 PM IST
MUMBAI: India is at the crossroads of a clean up which will determine the future of finance and business but will also lead to some headwinds, Kotak Mahindra Bank vice chairman Uday Kotak told investors at the Kotak Institutional Equities investor conference.
"I do not rule out litigation and courts with respect to the bankruptcy law. It will be tested in courts at some point. This 270 day limit for a resolution will be challenged at some point and either the law will be changed or the courts will allow liquidation," Kotak said while referring to the Insolvency and Bankruptcy Code which gives lenders 270 days to find a solution or a buyer for a company or take it to liquidation.
Kotak also said that it will take two or three years to figure out whether barring promoters from bidding for sick companies was beneficial or not.
"We will only know in two to three years whether lenders would have got better valuations if existing promoters were allowed to bid. I know that there is a strong moral hazard argument which is well understood but finally will it lead to lower valuations to lenders. Ultimately the promoter is the best insider and with some of the players out what will be the loss ratio for banks?," Kotak asked.
Kotak estimates the total stressed loans of the banking sector at Rs 14 to 15 lakh crore out of which 50% has been provided for. "There is also a significant non funded exposure which has to be taken into account. Assuming a loss ratio of 60%, Rs 9 lakh crore has to be provided for out of which, my estimate is, that 50% has been provided for, which is about Rs 4 lakh to Rs 5 lakh crore," he said.
Public sector banks have got a lot of capital from the government and have also raised some from the market but there are still holes to be filled, he said.
"Where will growth capital come from? The hope is that the RBI and the government would have figured this out. But the recent notification from the RBI, which will come into effect from March 1, will ensure that the stress comes out faster than earlier anticipated," said Kotak.
"I do not rule out litigation and courts with respect to the bankruptcy law. It will be tested in courts at some point. This 270 day limit for a resolution will be challenged at some point and either the law will be changed or the courts will allow liquidation," Kotak said while referring to the Insolvency and Bankruptcy Code which gives lenders 270 days to find a solution or a buyer for a company or take it to liquidation.
Kotak also said that it will take two or three years to figure out whether barring promoters from bidding for sick companies was beneficial or not.
"We will only know in two to three years whether lenders would have got better valuations if existing promoters were allowed to bid. I know that there is a strong moral hazard argument which is well understood but finally will it lead to lower valuations to lenders. Ultimately the promoter is the best insider and with some of the players out what will be the loss ratio for banks?," Kotak asked.
Kotak estimates the total stressed loans of the banking sector at Rs 14 to 15 lakh crore out of which 50% has been provided for. "There is also a significant non funded exposure which has to be taken into account. Assuming a loss ratio of 60%, Rs 9 lakh crore has to be provided for out of which, my estimate is, that 50% has been provided for, which is about Rs 4 lakh to Rs 5 lakh crore," he said.
Public sector banks have got a lot of capital from the government and have also raised some from the market but there are still holes to be filled, he said.
"Where will growth capital come from? The hope is that the RBI and the government would have figured this out. But the recent notification from the RBI, which will come into effect from March 1, will ensure that the stress comes out faster than earlier anticipated," said Kotak.
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