Some resolution cases like Future Retail could get derailed if operational creditors initiate insolvency proceedings. A section of bankers feels that the government can use the leeway under the amendment and extend the suspension up to June 2021.
As part of its Covid relief measures, the government had issued on June 25 a notification to suspend insolvency proceedings by six months. In December, the centre extended the suspension by another three months.
The original ordinance allows the government to extend the suspension for up to one year. The ordinance states that no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed for any default arising on or after March 25, 2020.
The reason behind the ordinance was that the lockdown was a force majeure situation beyond the control of debtors and, even if insolvency were to be initiated, there would not be many buyers.
According to bankers, since lenders cannot initiate insolvency proceedings against those who defaulted during the Covid lockdown, they have no choice but to offer them a one-time restructuring under the pandemic relief scheme. This window for the restructuring of small business loans is available until March 31 this year.
While many borrowers have sought restructuring, banks are yet to finalise the scheme for large borrowers. The challenge for banks is that the Supreme Court is yet to rule on a petition by borrowers against classifying loans as non-performing assets (NPA).
The government scheme rules out relief to borrowers who were stressed before the pandemic. This exclusion makes it difficult for any revival scheme. At the same time, insolvency is also not an option.
Bankers feel that if the suspension is lifted and operational creditors start proceedings against defaulting companies, some of the restructuring plans might get derailed. According to a report by ICICI Securities, the restructured portfolio of banks is likely to be less than 1%.
Rating agency Moody’s said in a report last month that, as of the end of December 2020, the five banks it rated had restructured 0.7-2.6% of their gross loans — lower than the agency’s expectation.
“Given that banks can restructure loans to micro, small and medium enterprises (MSMEs) until the end of March 2021, restructured loans could increase in the next few quarters,” said Moody’s.