The government is working to provide a framework to save small and medium businesses from the long legal hassles, two officials close to the growth said on Wednesday. Lenders are free to initiate new insolvency and bankruptcy proceedings against financially stressed companies from Thursday, as the one-year moratorium period has expired.
The law states that the moratorium, which expired on March 24, can only be renewed for a year. It is also not wise to leave lenders in the dark and encourage the accumulation of non-performing assets (NPAs) by refusing to allow new cases to be filed under the Insolvency and Bankruptcy Code (IBC), according to the authorities, who spoke on the condition of anonymity.
The government has temporarily suspended the initiation of corporate insolvency resolution procedures, initially for six months to provide relief to businesses affected by the Covid-19 pandemic. It was extended twice more, each time for three months.
According to the people cited above, the government is anticipating a flurry of default cases in the National Company Law Tribunal (NCLT) right now and is putting together a framework to allow the lender and the borrower to settle outside of the tribunal. The total number of pending cases in the National Company Law Tribunal (NCLT) has risen to over 21,250, up from 19,844 on July 31, 2020, with 12,438 of these cases relating to the IBC.
One of the officials said, “The ministry of corporate affairs (MCA) is willing to provide all support to companies, especially small and medium businesses, so that they do not face legal hassles and can reach an amicable settlement under a framework in the making.” The framework will include a pre-pack mechanism, according to the second official, which lenders and investors will use to reach an amicable resolution.
On further extension, according to Rajiv Chandak, a partner at Deloitte India, would not alleviate the stress in banks’ loan portfolios. “The government should look to speed up the implementation of pre-pack provisions that will allow for a consensual resolution of the case between the corporate debtor and the lenders,” he said.
The move comes on the heels of a Supreme Court decision on Tuesday allowing lenders to reclassify bad debt. The combination of the two steps provides investors with a better understanding of the pandemic’s effect on local bank asset quality. The move also gives lenders more options for collecting on delinquent borrowers’ sour debts, giving them more tools to handle one of the world’s worst bad loan piles.
According to the Reserve Bank of India’s (RBI) most recent Financial Stability Report (FSR), the gross nonperforming assets (NPA) ratio of all planned commercial banks will rise from 7.5 percent in September 2020 to 13.5 percent by September 2021 in a baseline scenario, and to 14.8 percent in a serious stress scenario. Delays in the resolution of IBC cases, according to officials, are hampering banks’ and financial institutions’ efforts to recover non-performing assets.
