Skip to main content

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default.
Lenders can take a haircut as part of a one -time settlement of dues though experts say that, considering the overall environment, it is unlikely that any bank will opt for this course of action.“Such an option could be scrutinised and investigated, especially under existing circumstances where banks have been under the scanner for giving loans without a proper risk assessment,” said a top executive of a private equity fund.Lenders also have the option of restructuring the loans. “For instance, they can convert a 10-year loan tenure to 20 years and tweak interest rates lower.But they might still not recover the loan has had been the case in many CDR schemes which did not work. However, there would be cause for concern if lots of banks were to use this route in lots of cases,” said a banking expert.
He pointed out that the government will be keeping a close watch for a greater use of these two options as it could derail the whole IBC process and put off potential investors.There are others, however, who say that there will hardly be any incentive for a bank to do this because, under the RBI rules, the loan will remain a non-performing asset (NPA) on the books of the bank until 20 per cent of the principal is paid off by the company - only then could it be designated as a non-NPA. The third option open to lenders dealing with defaulting companies is referring them to the IBC if a resolution cannot be found. “While under the earlier RBI circular, banks had 180 days to resolve the default issue, they now have 90 days to do so. But earlier, they had no option but to go to IBC, Now they have three options — a one-time settlement, restructuring of loans and also the IBC,” said a PE fund executive.
The Business Standard, 4th April 2019

Comments

Popular posts from this blog

GST Refund of Rs 20,000 Cr Pending: Exporters’ Body

GST Refund of Rs  20,000 Cr Pending: Exporters’ Body Refund of over Rs 20,000 crore on account of Goods and Services Tax (GST) is pending with the government with more than half the amount stuck as input tax credit, Federation of Indian Export Organisations said on Tuesday. While claims over Rs7,000 crore were cleared in March, the amount was Rs 1,000 crore in April.However, after exporters’ request, the GST council and tax department are organizing a second phase of Special Refund Fortnight starting May 31, which will enable exporters to draw their refunds at a speedy pace. Many exporters have been unable to file the refund of input tax credit due to technical glitches, exports and claim happened in different months. The major challenge lies on ITC refund especially because the process is partly electronic and partly manual which is cumbersome and add to the transaction cost, the exporters’ body said. On IGST, refunds are getting delayed due to airline and shipping companies not submitt…

RBI rushes in to prop up falling rupee

RBI rushes in to prop up falling rupee India’s central bank reportedly intervened in the currency markets on Monday to prevent a further slide in the local unit, which breached the 67 mark to a dollar for the first time in 15 months amid a widening trade gap and runaway import bills fuelled by high crude-oil prices. Some state-owned banks were seen selling dollars aggressively, interventions that market dealers attributed to the central bank’s strategy to stem the decline of the Indian rupee against the US currency. The rupee is the worst performing among a dozen Asian monetary units in the past three months. It lost 4.25 per cent to the dollar during the period, show data from Bloomberg. On Monday, the Reserve Bank of India (RBI) is said to have sold about Rs 800 million collectively on the spot and exchange traded futures markets, dealers said. An email sent to RBI remained unanswered until the publication of this report. The currency market has seen such a strong central bank interven…