KAAND 23: The NPA Restructuring Kaand TACTIC: Loans that cannot be repaid are restructured, haircuts are taken by public sector banks, promoter keeps the asset
THE TACTIC IN ONE PARAGRAPH A company takes a large loan from a bank, often secured by its assets. When it defaults, instead of initiating recovery proceedings, the bank "restructures" the loan—extending the repayment period, reducing interest rates, or converting debt into equity. If the company still cannot pay, the bank takes a "haircut" (a partial write-off) and sells the asset to a new entity, often controlled by the same promoter or a related party. The original loan is written down, the bank’s books take a hit, but the promoter retains control of the asset at a fraction of its original value. The tactic relies on regulatory forbearance, weak enforcement of security interests, and the bank’s reluctance to recognize losses upfront. A smart 22-year-old might think of Kingfisher Airlines, Videocon, or Jet Airways—all cases where promoters walked away with assets while banks absorbed the losses.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic thrives in India due to a combination of legal, regulatory, and institutional weaknesses. First, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, while designed to speed up recovery, is often delayed by judicial challenges. Promoters exploit the Debt Recovery Tribunals (DRTs), where cases drag on for years, allowing them to retain control of assets while negotiations continue. Second, public sector banks (PSBs), which dominate lending, are politically influenced and reluctant to recognize NPAs (non-performing assets) upfront, preferring "evergreening" (rolling over loans) to avoid balance-sheet stress. Third, the Insolvency and Bankruptcy Code (IBC), 2016, was meant to fix this, but its implementation is uneven—promoters use legal loopholes to delay resolution, and the National Company Law Tribunal (NCLT) is backlogged. Fourth, related-party transactions are poorly regulated; promoters often transfer assets to shell companies before default, leaving banks with little recourse. Finally, auditors and rating agencies frequently fail to flag these risks, either due to conflicts of interest or regulatory capture. The result: a system where default is not a failure but a strategy.
THE HISTORICAL RECORD The tactic has been documented in multiple high-profile cases. In Kingfisher Airlines, Vijay Mallya’s company defaulted on loans worth ₹9,000 crore from a consortium of banks. Instead of recovering assets, banks restructured the debt multiple times, even as Mallya diverted funds abroad. When the IBC was invoked, the resolution process dragged on for years, and banks eventually took a haircut of over 90%. Mallya fled the country, but his assets—including the Kingfisher brand—remained intact, later sold to a related entity. In Videocon Industries, the Dhoot family defaulted on ₹64,000 crore in loans. Banks took a 95% haircut in the IBC process, while the promoters retained control of key assets through related parties. The Jet Airways case followed a similar pattern: banks took a 95% haircut, and the airline’s slots and brand were acquired by a new entity linked to the original promoters. In each case, the mechanism was the same—delay, restructure, haircut, and asset retention.
THE INSTITUTIONS THAT ENABLED IT No tactic works in isolation. Public sector banks, particularly the State Bank of India and Punjab National Bank, have been the primary enablers, often lending without adequate collateral or due diligence. Auditors like Deloitte, PwC, and EY have repeatedly signed off on financial statements without flagging diversion of funds or related-party transactions. Rating agencies such as CRISIL and ICRA have maintained investment-grade ratings for companies even as their debt levels became unsustainable. Regulators like the RBI and SEBI have been slow to act—RBI’s Prompt Corrective Action (PCA) framework was often bypassed, and SEBI’s disclosure norms for related-party transactions were weak until recent reforms. Judicial delays in DRTs and NCLTs have allowed promoters to game the system, while political interference in PSBs has ensured that loans are not classified as NPAs in time. Even the IBC, meant to be a solution, has been undermined by delays and legal challenges.
THE CURRENT STATE The tactic is still in use, though with some modifications. The IBC has made it harder to delay resolution indefinitely, but promoters now use pre-packaged insolvency (a faster, debtor-in-possession model) to retain control. Banks, wary of large haircuts, have started selling bad loans to asset reconstruction companies (ARCs), but these often end up in the same hands—promoters buy back their assets at a discount. Recent amendments to the IBC, such as the preferential treatment of financial creditors, have helped, but the system remains vulnerable to gaming. The RBI’s framework for resolution of stressed assets has reduced evergreening, but PSBs still hesitate to recognize losses. The tactic persists because the incentives remain unchanged: promoters know that default is not the end, but a negotiation.
WHAT TO WATCH FOR Three warning signs that this tactic is in play: First, frequent loan restructuring—if a company’s debt is repeatedly extended or converted into equity, it’s a red flag. Second, related-party transactions—if assets are being sold to entities with the same promoters or directors, the company may be preparing for a default. Third, auditor resignations or qualifications—if auditors suddenly quit or flag going-concern risks, the company may be in distress. Watch for these in annual reports, credit rating actions, and regulatory filings.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.