IBBI Chairman Asks Banks to Initiate Proceedings soon after NPA Classification

Banks should initiate the process of taking a defaulter to the bankruptcy court as soon as the loan account is classified as a non-performing asset (NPA), Insolvency and Bankruptcy Board of India (IBBI) chairperson Ravi Mital says.

According to Reserve Bank of India (RBI) norms, if the interest or principal is overdue for 90 days or three months and above, banks have to classify a loan account as NPA.

Lenders are required to implement a resolution plan in respect of the entities in default within 180 days from the end of the review period of 30 days.

“It is perhaps in the interest of banks to file CIRP (corporate insolvency resolution process) applications as soon as the default occurs,” Mital wrote in IBBI’s latest newsletter for July-September, published on November 12.

“However, it is noticed that more than a year is being taken by FCs (financial creditors) in filing CIRP applications, post defaults. This delay leads to erosion in the value of assets,” he said.

In this context, creditors, or banks, need to change their behaviour and submit the insolvency application soon after the default, said Mital. Still creditors, invariably, have the option to withdraw the application before it is admitted, he added.

In December 2016, the provisions of the corporate insolvency resolution process under the Insolvency and Bankruptcy Code (IBC) came into effect. The code is aimed at expediting and simplifying the process of bankruptcy proceedings, and ensuring fair negotiations between the borrowers and creditors.

It is aimed at the timely resolution of stressed assets so that lenders can ensure maximum recovery from these assets.

Guiding nudge or caution?

The IBBI chair’s comments come at a time when issues of poor infrastructure and inordinate delays in the resolution of stressed assets continue to haunt lenders.

Strict timelines prescribed under the code, multiplicity of cases, and lesser number of tribunals have increased the backlog of cases.

A total of 5,893 CIRPs had commenced by the end of September, according to the IBBI newsletter. Of these, only 3,946 have been closed. Till June, over 500 CIRPs yielded resolution plans. Liquidations under the code have also been high. According to the IBBI newsletter, during July- September, 84 CIRPs ended in orders for liquidation, taking the total CIRPs ending in liquidation to 1,807.

“Typically, what we are seeing is that the economic value of most of the companies that get liquidated is almost completely eroded even before they get admitted to the insolvency process,” said a banker at a stressed asset vertical at a state-owned bank, on condition of anonymity.

“These comments seem to be cautioning banks to avoid such situations and get maximum recovery,” the banker added.

IBC experts, however, said it could be a guiding nudge on behalf of the board to initiate the insolvency process at the earliest.

“This is more of a guiding nudge by the IBBI Chair in view of the concerns around the erosion of value,” said Aastha, partner at Argus Partners. “The limitation period under IBC continues to be three years.

According to Aastha, it would be prudent to initiate IBC action at the earliest except where other effective avenues are being explored for resolution, she said.

Abhinay Sharma, managing partner of ASL Partners said timely submission of the insolvency application is just one aspect of a faster resolution. In addition to it, other stakeholders, too, need to abide by statutory timelines, he added.

Blanket classification unfair

Bankers said that a blanket classification of NPA accounts into bankruptcy would be unfair for those with genuine financial difficulty.

“The comments have to be taken in good faith, but a literal implementation looks far too stretched; it would end up dissuading demand for credit,” said another senior banker on condition of anonymity. “While dragging a defaulter to bankruptcy, there are multiple factors which we have to consider. Such a blanket classification may not always be fair.”

Nirav Shah, a partner at DSK Legal, agreed with the banker’s view.

“There may be certain instances where the company could be in genuine financial difficulty and with some assistance/leeway from the lenders, could turn around without initiating the corporate insolvency resolution process under IBC,” said Shah.

The IBBI chair’s proposal could deny genuine cases which may be on the cusp of insolvency but could be saved with some concessions from lenders, added Shah.

This could potentially deny the corporate debtor or promoters of the corporate debtor and lenders a chance to revive, restructure the loans when the insolvency is genuine and no fraud or siphoning off of assets/ funds is involved, he said.

‘Proposal may not be advisable’

While the proposal to file for insolvency within 90 days of default is feasible, this may not be advisable in every case, said Dhananjay Kumar, partner at Cyril Amarchand Mangaldas.

This may also be in conflict with the RBI’s June 7 circular that provides for 30 days of review period after default and then 180 additional days for the implementation of a resolution plan, added Kumar.

Moreover, even as the IBBI chair’s comments are lucrative at the very outset, they would also negate the other guidelines of RBI like the corporate debt restructuring (CDR) mechanism, which also helps resolve stressed assets, said experts.

CDR aims to ensure a timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems outside the purview of legal proceedings, for the benefit of all concerned.

“While I agree that the companies should be referred to IBC soon after a default has occurred, this should not mean that the companies are not provided an opportunity to explore the possibility of debt restructuring under the CDR mechanism,” said Sandeep Bajaj, managing partner at PSL Advocates & Solicitors.

Further, Bajaj elaborated that, in India, there are certain sector-specific factors—cyclic events like the monsoon—which may affect the ability of companies of a particular sector to adhere to their financial obligations during certain specific months in a year.

In such a scenario, these factors would have to be paid special consideration as it would be “unfair” to refer these companies to IBC immediately, he added.

On the other hand, it is not feasible for banks to begin insolvency proceedings within 90 days of default for every account due to the high costs and lengthy resolution process, said experts.

“Banks prefer to use IBC as a last resort due to the lengthy process, high cost, and low success rate,” said Sonam Chandwani, managing partner at KS Legal & Associates. “It is not practical to begin insolvency proceedings within 90 days of default.”