Why do corporates get haircuts while farmers face debt noose?

While the government claims IBC has facilitated the rescue of companies and closure of unviable ones, the reality seems to be a different story. Many large corporations, like those acquired by the Adani Group, have been able to walk away with valuable assets at significantly discounted prices, leaving creditors bearing the brunt of the losses

Finance Minister Nirmala Sitharaman recently said that the seven-year old Insolvency and Bankruptcy Code (IBC) has facilitated the rescue of 3,171companies and also helped the closure of the unviable ones.

Contrary to the Finance Minister’s claim that the IBC code has brought a paradigm shift in resolving insolvencies, it is often believed the insolvency resolutions have come in handy to legally walk away with assets at dirt cheap prices. The All India Bank Employee’s Association for instance has come out with an eye-opening chart that tells us how the insolvency proceeding have helped a single corporate to gain control over valuable assets at a throwaway price.

Earlier, industrialist Harsh Goenka had alleged that public money was being ‘stolen’ through such resolutions. He had in a tweet (now X) said: “Promoters stash away money on the side, take the company to the cleaners, get an 80 to 90 per cent haircut from bankers/NCLT – that’s the new game in town. A lot of institutions cleansed by the government – NCLT next please @PMOIndia. We can’t have our hard earned money being stolen!” Coming from an eminent industrialist I thought this should have opened up the can of worms. I expected at least the business media to thrash this issue. But it preferred to keep quiet.

Meanwhile, the bank employee’s presentation shows 10 companies faced with insolvency, and after completing the proceeding have been purchased by the Adani group. Against the admitted claimed value of Rs 61,832-crores, the Adani group acquired these companies for Rs 15,977-crore. The banks silently suffered a haircut of 42 to 96 per cent (there are other financial creditors who suffer haircuts as well) on the different entities. Take the case of Radius Estates and Developer which had offered its assets at Rs 1,700-crore. It has been purchased by Adani Goodhomes at a mere Rs 76-crore, making the banks take a haircut of 96 per cent. In another case, Adani Properties has bought BKC Project of HDIL for Rs 285-crore against the admitted claim value of Rs 7,795-crore, again at a haircut of 96 per cent. In other words, with such a steep haircut, the assets have landed almost free in Adani’s basket.

Similarly, when Harsh Goenka had expressed concern, it was thought to be in the backdrop of Videocon Industries and its 12 associated companies, filing for bankruptcy with an admitted claim for Rs 62,833-crores, and walking away with a whopping 96 per cent haircut, leaving the creditors literally bleeding.

Technically speaking, a haircut is the lower-than-market value placed on an asset. It is seen as the last resort when there is no more hope for recovery. But in recent times, it has becomes a legal mechanism to run away with cheaply available resources. The cost is borne by the creditors who obviously have little choice but to feel content with the haircuts imposed. In fact, banks are left nearly bald after the haircuts are imposed.

According to the CareEdge Ratings, the haircuts have increased to 68 per cent in the first quarter of this fiscal. This was probably because of less interest shown in the smaller assets. Once a borrower becomes insolvent, as M Rajeshwar Rao, deputy Governor of RBI had said while delivering a keynote address some years back at IIM Ahmedabad, the natural instinct of a creditor is to cut their losses by rushing for the biggest possible piece of the remaining pie of marketable assets of the concerned borrower.

While the purpose of this article is not to go into the merits and demerit of the insolvency and bankruptcy code, the legitimate question that arises is that why doesn’t a similar kind of mechanism work for farmers when they get into an unrecoverable default. When a farmer defaults, the lower courts have often put the defaulting borrower in jail for a petty amount outstanding. With farmers increasingly living under debt, the growing demand for farmer unions is to waive outstanding farm loans. Several states have waived farm loans only to invite criticism from bankers and business media.

Although a former finance minister of Punjab, Manpreet Badal, had some times back suggested an innovative way to bear the burden of farm loan waiver. He says the state will ‘takeover’ the farmers’ outstanding loans, and work out a long-term agreement with the banks under which the state government will repay the farmer’s dues. I wonder why such benevolence is not shown by the State governments when it comes to corporate bad loans. Why the Reserve Bank as well as the Ministry of Finance have to step in to come out with a mechanism that makes companies escape the burden of massive defaults. They continue with their lavish lifestyle as if no9thing has happened.

But why isn’t the same approach adopted for defaulting farmers?

This is where I want to bring in the only successful model for debt relief to farmers that have been crafted by Kerala. The Kerala Farmers Debt Relief Commission was set up in 2006, and amended later in 2013. While 5.30-lakh farmers have availed of debt relief till 2022, with a maximum relief of Rs 2-lakh for loans availed by them from cooperative banks and societies, I wonder why can’t debt relief Act of Kerala be reformulated by Indian Parliament. After all, mounting indebtedness has been cited as the primary reason for farmer suicides in successive reports of the National Crime Record Bureau (NCRB). Almost 4-lakh farmers have ended their lives by suicides ever since the NCRB began documenting the statistics.

If banks can take generous haircuts from bankrupt companies from whom it will be almost impossible to recover any due, why doesn’t the RBI suggest constituting a National Debt Relief Commission for farmers. Why shouldn’t the same facility like for corporate be also extended to farmers? Why should only the outstanding farmer loans against State Cooperative Banks and societies get a one-time waiver, why shouldn’t the indebted farmers whose outstanding dues are pending against the nationalised banks, also be extended the same provisions?

This dichotomy between the financial largesse extended to corporate and strangulating the neck of farmers who are unable to pay back their loan instalments, must end. In both the cases the outstanding amount is unrecoverable. But it is quite obvious that the government imposes two different yardsticks when it comes the companies and farmers. This discrimination must be put to end.

(The author is a noted food policy analyst and an expert on issues related to the agriculture sector. He writes on food, agriculture and hunger)