Toxic loans have choked the Indian banking and financial services system so badly that, in some cases, there’s hardly anything left to salvage.

Synergies-Dooray Automotive, an auto ancillary company that used to manufacture car components for auto giants like Ford, was taken to the bankruptcy court by its creditors. On Aug. 02, the National Company Law Tribunal (NCLT) passed a judgement in the case, making it the first approved bad-loan resolution plan under the newly formed Insolvency and Bankruptcy Code (IBC).

However, it hardly came as a respite for the company’s creditors. For they will now get back only Rs54 crore ($8.45 million) out of the total debt of Rs972 crore—a loss of 94%.

The four creditors in this case were the EXIM Bank, boutique financial services company Millennium Finance, auto ancillary firm Synergies Castings, and the Alchemist Asset Reconstruction Company (ARC). With EXIM Bank transferring its share of the loan to Edelweiss ARC, the latter will now take the hit.

The IBC code came into effect from December 2016 and was aimed at fast-tracking the bad-loan resolution process. This happened in the backdrop of the piling up of non-performing assets (NPAs)—loans on which debtors have stopped paying either the principal amount or the interest—in the Indian banking system. By March 2017, NPAs stood at a whopping Rs7.29 lakh crore, equivalent to 5% of India’s GDP.

Stressed assets, which include NPAs, restructured loans, and written-off assets, paint an even more grim picture of the sector. At nearly Rs10 lakh crore, these account for about 12% of the total outstanding loans. So out of every Rs100 lent out, banks are unlikely to recover Rs12.

At such a time, the IBC was expected to help banks tackle their distressed assets quicker. But the judgement in the Synergies-Dooray Automotive case has been dampener.

Disappointing start

Even in a worst-case scenario, lenders were expected to take a haircut of not over 60%; but a 94% hit is shocking, according to Ashvin Parekh, who runs Ashvin Parekh Advisory Services. In terms of recoveries by banks, a haircut is the difference between the total outstanding loan amount and the amount the borrower finally agrees to pay.

“This (the Synergies-Dooray Automotive case) is as good as not getting anything. And if such surprises keeps coming up even in future then both banks and the regulators need to go back to the drawing board and assess what can be done and, if required, figure out an alternative solution,” Parekh said.

Ominously, a recent report by rating agency CRISIL noted that out of the Rs4 lakh crore owed by the top 50 defaulters, banks will be able to recover only Rs1.6lakh crore, which is around 40% of the total amount.

This does not augur well. “Banks don’t have a healthy capital position right now and these haircuts may lead to further hit in their profit and loss accounts,” said Karthik Srinivasan, an analyst at credit rating firm ICRA. However, Srinivasan believes the first NCLT ruling may be a one-off case and that haircuts aren’t likely to be over 60% in other cases.

One analyst, requesting anonymity, explained that some cases may involve siphoning of funds, with no assets created. Therefore, during liquidation, there’s hardly any value left, resulting in such high haircuts.

It’s also possible that without the bankruptcy court’s intervention, lenders may not recover even 6% of their dues. “Most of the cases referred to NCLT are accounts which had turned non-performing and were deeply restructured before slipping. Restructuring for these accounts goes back three-five years. Effectively, restructuring for these accounts has been a failure. Hence, resolution is the only way forward,” explained Udit Kariwala, senior analyst at India ratings & research, a credit ratings firm.

Meanwhile, Edelweiss ARC is not happy in the Synergies-Dooray Automotive case and has decided to approach the National Company Law Appellate Tribunal, reports say.

This judgement also gains importance in light of the fact that, in June, the Reserve Bank of India had directed banks to approach the bankruptcy court to resolve the pending dues problem of the top-12 loan defaulters in the country. This dirty dozen accounts for 25% of the bad loans in the country.

The banking industry is now hoping that this rocky start was an aberration.