As Banks Deny Working Capital To Insolvency Cases, Resolution Professionals Turn To Funds
Wary of increasing their exposure to firms which have been referred for insolvency proceedings, Indian banks are saying no to sanctioning further working capital for these companies, at least four people in the know said. With access to bank credit being cut off, these companies are approaching special situation funds in order to keep operations going, these people said.
In June, the Reserve Bank of India (RBI) asked banks to refer 12 large accounts, which made up 25 percent of the bad loans in the system, for resolution under the Insolvency and Bankruptcy Code. 11 of these 12 accounts have been admitted for insolvency, their boards dismissed and interim resolution professionals (IRPs) appointed.
An unforeseen fallout of this process has been the increased reluctance of banks to provide working capital finance due to the uncertainty around the future of these firms.
For instance, Ajay Joshi, who has been appointed the IRP for Alok Industries approached lenders for Rs 200 crore in working capital needed to pay salaries and clear dues. Banks, however, were reluctant to clear this request, the recovery head of a large public sector bank told BloombergQuint on the condition of anonymity.
Similarly, in the case of Amtek Auto Ltd, the IRP, Dinkar Venkatasubramanian, sent a notification to the stock exchanges on August 18, saying that there is an “immediate” need for working capital in the company.
In his notification to the stock exchanges, Venkatasubramanian points out that as an IRP for Amtek Auto, he is required to make every endeavour to protect and preserve the value of the property and manage the operations of the corporate debtor as a going concern during the insolvency proceedings.
...I sincerely and earnestly request for your cooperation in keeping the company a going concern...Dinkar Venkatasubramanian, Interim Resolution Professional, Amtek Auto
On their part, lenders are being cautious about increasing exposure to accounts which have turned non-performing, said the second banker quoted above, who also spoke on the condition of anonymity. While there is no restriction against fresh lending to bad loan accounts, bankers fear that such approvals could attract the attention of investigative agencies at a later stage.
High provisioning requirements against accounts that are undergoing insolvency proceedings are also a deterrent. On June 26, BloombergQuint reported that the regulator has asked banks to set aside 50 percent provisioning on all secured loans and 100 percent provisioning against all unsecured loans given to these 12 companies. Bankers are still not clear if this rule applies to any interim exposure as well.
With banks turning down demand for working capital, IRPs are turning to special situation funds, said two of the four people quoted above. Special situation funds such as those from the Edelweiss Group, Piramal Enterprises Ltd, AION Funds and the Goldman Global Special Situations Group are in advanced stages of discussions to fund some of the working capital needs of the 12 insolvency firms.
Godman SSG and AION declined to comment, while Edelweiss and Piramal did not respond to queries.
According to a stressed asset turnaround professional, the third of the four people quoted above, special situation funds are considering providing small amounts of debt to these large companies and are looking at investing in cases where there is a possibility of resolution. The average interest rate charged on this funding could range between 15-20 percent, this person said.
However, even any interim financing would require the permission of the committee of creditors, which has been slow to come by. Some bankers are concerned because all interim financing gets clubbed as insolvency costs and gets preference in repayment under IBC rules.
It is not surprising that some hiccups would emerge at the time of implementing a resolution plan, said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP.
Only at the time of implementation of our reforms, do we find that we have missed out minor details and suddenly these minor details bring the entire reform to almost a knot. What is required is the ability on the part of the bankers, regulator and the policymakers to envision the entire process right through to achieve the stated objectives.Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services LLP