A day after finance minister Arun Jaitley said a total of 81 default cases had been filed for resolution under the Insolvency and Bankruptcy Code (IBC), the central bank said its Internal Advisory Council (IAC) had recommended 12 accounts for immediate resolution under IBC. These 12 account for 25% of current gross NPAs of the banking system. Though the Reserve Bank of India (RBI) did not give names of individual accounts, they would probably include accounts like Bhushan Power and Steel, Bhushan Steel, Essar Steel, Electrosteel Steels, Uttam Galva and Visa Steels. The press release says accounts that were looked at were those which were “classified partly or wholly as non-performing from amongst the top 500 exposures in the banking system”.
Once these cases go to IBC, the lenders in each of these accounts will now have to set up a committee to come up with a plan for resolution. If that cannot be done in a period of 180 days — this can be extended to 270 days — the borrowing entity will go into liquidation. The banks can decide if the company should be immediately taken over by an insolvency professional or whether the existing management can continue to run the firm.
What restructuring the committee agrees to is unclear, but recent research by IdeasForIndia, an economics and policy portal, studied 114 cases where corporate debt restructuring (CDR) had taken place between 2008 and 2012 and found that, despite the CDR, the firms got even more stressed. In other words, the loan restructuring wasn’t serving any purpose and was either too small to be useful or the firm was too inefficient to survive.
The RBI press release said the IAC, at its first meeting on Monday, recommended that all loan accounts that have fund and non-fund based outstanding amount greater than `5,000 crore and where at least 60% of the exposure has been classified as non-performing by banks as of March 31, 2016, be referred for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC).
“The IAC, in the meeting, agreed to focus on large stressed accounts at this stage and accordingly took up for consideration the accounts which were classified partly or wholly as non-performing from amongst the top 500 exposures in the banking system,” the RBI release said.
As for other non-performing accounts that do not meet these criteria, the IAC recommended that banks should finalise a resolution plan within six months. In cases where a viable resolution plan is not agreed upon within six months, banks would have to file for insolvency proceedings under the IBC.
“The Reserve Bank, based on the recommendations of the IAC, will accordingly be issuing directions to banks to file for insolvency proceedings under the IBC in respect of the identified accounts. Such cases will be accorded priority by the National Company Law Tribunal (NCLT),” the release said.
Details of the resolution framework with regard to other NPAs will be released in the days ahead and a circular on revised provisioning norms for cases accepted for resolution under the IBC will be issued separately, the RBI said.
On May 22, the central bank had issued a release outlining the steps taken and those being planned in the wake of the promulgation of the Banking Regulation (Amendment) Ordinance, 2017. The release had mentioned that the RBI would be constituting a committee comprised largely of its independent board members to advise it in regard to the cases that may be considered for reference for resolution under the IBC.