Insolvency Ordinance Meets With Cautious Cheer From Bankers

The move to amend the Insolvency and Bankruptcy Code, in a manner which effectively bars defaulting promoters of large stressed accounts from bidding for their assets, is a step in the right direction even though it may hurt the immediate prospects of recovery from bad loan accounts. That’s the view emerging from lenders and central bank officials in response to the changes which were cleared by the President of India on Thursday.

Bankers and former regulators who spoke with BloombergQuint said the ordinance would ensure that promoters come to the discussion table to negotiate a deal, as a referral to the IBC would mean a high probability of losing their assets.

G Padmanabhan, non-executive chairman of Bank of India (BOI) and a former executive director at the Reserve Bank of India (RBI), said that the amendments will strengthen the insolvency process.

“To my mind, this has to happen because it doesn’t make sense for this entire detailed exercise to be put in place if in eight out of 10 cases, the companies go back to the promoters,” said Padmanabhan. “People who have played the system would definitely be out of the picture,” he added.

The amendment lists at least 10 ‘ineligibility criteria’ for those wanting to submit a resolution plan. This includes those whose loan accounts have been classified as non-performing assets (NPAs) for a year or more and wilful defaulters.

There is, however, a small window for promoters to submit a resolution scheme if they are able to regularize their accounts before the resolution process begins. This, according to VG Kannan, the CEO of the Indian Banks’ Association and a former managing director at the State Bank of India (SBI), would be key, since it forces promoters to pay the lenders in order to stay relevant in an insolvency process.

There may still be a near term hit for banks to take, cautioned analysts at Credit Suisse.

Rajnish Kumar, chairman, SBI doesn’t agree with that view.

There is plenty of interest in the cases which are being resolved under the IBC, said Kumar on the sidelines of an event on Thursday. The assets, Kumar said, would be sold only at the fair value.

The amendments to the IBC come at a time when bankers are waiting to receive final resolution plans in the 12 large corporate accounts which were sent to the National Company Law Tribunal (NCLT) in June. In a majority of the cases, the expression of interest was sought by the resolution professionals in October, following which, the interested bidders had four to six weeks to submit a final resolution plan.

These 12 cases represent about a fourth of the banking sector’s gross NPAs.

A banker, who spoke to BloombergQuint on the condition of anonymity, believes that while the re-entry of promoters is more or less blocked for the 12 large cases, this may not be the case for the accounts which are part of the RBI’s second list. This list, which was sent to banks in August, consists of about 30 accounts where bankers have been given time till December 13 to resolve the stress outside the insolvency process. Even after the insolvency process begins, promoters will have until the resolution plans are submitted to regularize their account by paying the overdue amount. This may allow some of the promoters to hold on to their assets while allowing banks to upgrade their accounts.