Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao on Saturday said that comparing the outstanding loan amounts with the value realised might not be a “reasonable indicator” to assess the bankruptcy law’s effectiveness. Mr Rao was seeking to address concerns over deep haircuts taken by banks in some of the insolvency resolutions.

Admitting that there had been concerns, Mr Rao added that one needed to understand that the value of the asset might have already deteriorated by the time it came up to the courts. He further added that one should compare the realisations with liquidation, which was the best possible alternative for lenders. 

“We miss the fact that in a public auction-based resolution model, the extent of haircut represents a discount the market demands in continuing to invest in an insolvent borrower. Since significant value deterioration may have happened to the assets of the insolvent borrower, comparison with the outstanding amount may not be a reasonable indicator to evaluate the effectiveness of the resolution. 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. 

Financial creditors had been able to realise 166 per cent in comparison to the liquidation value of the debtors, indicating that creditors had been better off than the next logical outcome, he added.