Deep haircuts: Comparing realisations with outstanding loans not reasonable to assess IBC effectiveness, says RBI DG

Comparing outstanding loan amounts with the value realised may not be a 'reasonable indicator' to assess the bankruptcy law's effectiveness, said Reserve Bank Deputy Governor M. Rajeshwar Rao, while seeking to address concerns over deep haircuts that banks had taken in some of the insolvency resolutions plans. "Rather, the resolution values must be compared with the next best alternative for the creditors, which, in this case, is liquidation," Mr. Rao said, addressing an event at the IIM-A. Filing of insolvency proceedings as a negotiating tactic appears to be working for operational creditors, Mr. Rao said, pointing out that as of December 31, 2021, the corporate insolvency resolution process data suggested that more than 51% of the cases had been filed by operational creditors but that they accounted for 71% of the total withdrawal cases. Drawing researchers' attention, Mr. Rao said efforts must be devoted to study the average time taken between default by a borrower and the eventual filing of an application for the insolvency resolution by creditors.