Something very strange has been seen in the Indian Banking Sector in recent years is that large corporate houses like Adani group in particular have been purchasing distressed entities using the so-called haircut method. Their funding sources include P2P lending institutions which are integrated with traditional banks. Consequently, while corporates enjoy this system, ordinary investors who have their funds in the banks that issue these loans suffer the consequences. This phenomenon, which has been brought to light by the All India Bank Employees Association, raises significant concerns about the integrity of the financial system injustices that such practices perpetuate.
What is the Haircut?
To put it simply in the context of economic language, a haircut refers to the percentage of the degree of debt forgiveness granted against the amount that is owed. A cut of such 90% on a debt of ?100 crores, where only ?10 crores need be paid back, qualifies as a 90 percent haircut. The leftover sum is practically written off compounding the losses on the part of out banks which in turn as it always goes down adversely affects the retail taxpayers.
Such banks are in effect lending out the finances that have been generated from its depositors, including those made by the common retail investors, to business enterprises. If these loans default for any reason such companies go through insolvency within the national company law tribunal where such companies often get sold for pittance to new owners – usually other business bigwigs like Adani.
The Acquisitions of The Adani Group
One of the most amazing pieces of information provided by AIBEA is data on how it's possible for the Adani group to take over ownership of other companies that were sunk deep in debts, at a bargain. The companies involved include some heavyweights such as HDIL, Radius, National Rayon Corp, Essar Power, Dighi Port Ltd, Coastal among others. Such takeovers have been with cognoscente cuts of even about 96%, which means Adani bought these companies for much less than they were worth.
For example, though the total claim value of these companies was ?61,832 crores, the Adani Group managed to buy them at approx ?16,000 crores. This leads to a huge 74% average haircut across all the acquisitions when calculating the average of the total tax benefits and acquisition cost. Such a thin valuation base is hugely advantageous to the corporate entity making the acquisition. However, for the banks and by extension ordinary investors, it is a case of value erosion.
Contributions of Institutions and Individual Investors
So in what way does this process affect you, one who invests for the sake of it?The responsibility for making loans rests with banks’ borrowers who use depositors’ funds. If companies do not repay the given out loans, the money is either recovered through the legal means or banks are forced to charge the loss off. In most circumstances, they opt for the second one, taking the companies through NCLT whereby the haircut process begins.
So if a fire sale of distressed assets does take place, then one can expect organisations like Adani to come in and buy such distressed assets at fire sales. When making the growth of the corporate entity, it also results in huge losses to the banks (including depositors) who are left in this scenario. This loss is usually made up for in one way or another through the different fees that banks actually charge their retail clients in return for services.
To begin with, the end result of such excesses is that whenever a corporate dragnet draws a major debt and defaults, people like you who invest at the retail level, pay and pay again even more for increased bank fees, lower bank deposit interests or lose their own investments, into the picture.
A link has been provided below which you can refer to for a detailed video analysis of the same topic.
Same information from AIBEA’s Perspectives:
All India Bank Employees Association (AIBEA), which is a voluntary trade union formed back in 1946, has actively worked in bringing such anomalies to the fore. The primary focus is the protection of the interests of the employees of the various banks as well as of the members of the public who keep their funds with such banks. One question that worries them is how the privatization and corporatization of banks has made it possible for such vices to thrive without any hindrance.
AIBEA has remained firm in supporting reasonable proposals for change in the banking sector’s operations, especially concerning equity and social justice. As is the case in respect of the gender issue, so too in respect of the haircut issue, the Association’s members have employed the most responsible balance of perspective subject to its natural limits. The Association has put forth some irrefutable evidence to substantiate their arguments where it has been shown how many crores of loans have been written off in favor of certain large corporations that buy these bankrupt firms at pennies on the dollar.
The Change that is Required:
All the steps that constitute the process, for example loan default then the subsequent buying at a lower cost raises several concerns in their fairness. Isn’t it absurd that companies benefit from a situation while the country’s investors and ordinary people watch helplessly? Should there be no more crooked ways of dealing with such issues whereby it is the banks or the public who suffer in the end?
The data of AIBEA collections shows that the existing regime has its advantages only for the rich corporate bodies. Those plans which result in the offering of such large haircuts leave retail investors with the impression that they are peripheral to politics. The time has come for the legal provisions regarding NCLT and corporate debt restructuring to be reinstated to the principle of equitable consideration of stakeholders.
What Needs Improvement?
In the first instance, such remodel methods as haircuts and the NCLT procedure should be out rightly prohibited or made stringent. For example, people should be protected from such practices of deceit. For more effective and long term solutions, well defined acceptable levels of loan extensions to big business should be maintained and other mechanisms established that will help minimize the chances of loan default.
Additionally, it is necessary another way in which such situations are managed especially with respect to retail investors. Given the fact that a great deal of taxpayer dollars is within the banking system, it is only right that the retail investors should be afforded the opportunity to have a say in how these matters are resolved which is too much…
Conclusion
In India where haircuts are commonly practiced and corporations such as Adani walk away with sick companies there is a problem that requires peutetic safeguarding. Anytime the rich and corporations are able to acquire increasingly cheap discounted companies, the retail investor is the most hit. It is obvious that appropriate measures need to be taken as a matter of extreme urgency to curtail such cycles of financial imbalances for the sake of the society at large.
As retail investors, it is worth mentioning how your investment is utilized and that there should be implacable efforts to increase accountability and openness in the financial system. Without that goal in mind, it will be impossible to change the existing norms in society so that not only a small group of people who serve the undocumented interests will benefit from the system but all the stakeholders will benefit.
