RBI sees relief for NCLTs from pending cases with pre-pack resolution for MSMEs

Ease of Doing Business for MSMEs: In 537 cases referred to IBC involving Rs 1,35,139 crore, only Rs 27,311 crore was recovered during FY21, provisional data showed, in comparison to Rs 1,04,117 crore recovered in 1,986 cases involving Rs 2,24,935 crore referred in FY20.

Pre-pack resolution is essentially a blend of formal and informal mechanisms having a debtor-in-possession model as an option unlike the creditor-in-control model followed in the Corporate Insolvency Resolution Process (CIRP). (Image: Pexels)

Ease of Doing Business for MSMEs: The pre-packaged (pre-pack) insolvency resolution window, which was made available to micro, small and medium enterprises (MSMEs) through an amendment to the Insolvency and Bankruptcy Code Act earlier this year, may provide relief to National Company Law Tribunal (NCLT) from pending cases, the Reserve Bank of India (RBI) said. “Allowing pre-pack resolution window for MSMEs is expected to assuage the mounting pressure of pending cases before NCLTs, reduce haircuts and improve declining (loan) recovery rates,” the central bank said in its report Trend and Progress of Banking in India 2020-21 published on Tuesday.

Importantly, loan recovery had recorded a sizeable decline through all recovery channels, particularly Lok Adalats, in the cases referred for resolution, according to RBI. This gained more significance as the initiation of fresh insolvency proceedings under the IBC was suspended for a year till March 2021 and Covid-related debt was also excluded from the definition of default. Still, it constituted as one of the major modes of recoveries in terms of the amount recovered, RBI added.

In 537 cases referred to IBC involving Rs 1,35,139 crore, only Rs 27,311 crore was recovered during FY21, provisional data showed, in comparison to Rs 1,04,117 crore recovered in 1,986 cases involving Rs 2,24,935 crore referred in FY20. Similarly, the amount recovered in cases referred to Lok Adalats had declined from Rs 4,211 crore in FY20 to Rs 1,119 crore in FY21. Further, recoveries through Debt Recovery Tribunals (DRTs) dipped from Rs 9,986 crore in FY20 to Rs 8,113 crore in FY21. Through Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, recoveries declined from Rs 34,283 crore in FY20 to Rs 27,686 crore in FY21.

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As of December 2020, 21,259 cases were pending before NCLT, according to the data provided by the Finance Minister Nirmala Sitharaman in a written reply to a question in Lok Sabha in February this year, PTI reported. The minister had said that the government is taking steps such as additional space, benches, courts, members and manpower to address the issue of rising cases.

Pre-pack resolution is essentially a blend of formal and informal mechanisms having a debtor-in-possession model as an option unlike the creditor-in-control model followed in the Corporate Insolvency Resolution Process (CIRP). Even before the corporate debtor’s admission application is filed, both debtor and creditor can negotiate and arrive at a potential resolution plan. The default threshold under pre-pack is Rs 10 lakh to initiate the resolution process and hence seems more accessible to MSMEs which otherwise has been difficult under CIRP with the default threshold of Rs 1 crore.

RBI also noted in its report that the year-on-year growth rate in the number of MSME accounts, which were deployed credit, decelerated for all scheduled commercial banks (SCBs) during FY21 primarily driven by private banks (PVBs) and foreign banks (FBs). For PVBs, the growth rate declined from 31.42 per cent in FY20 to minus 1.41 per cent in FY21 as the number of MSME accounts supported by PVBs declined from 270.62 lakh in FY20 to 266.81 lakh in FY21. Likewise, the growth rate for FBs also declined from 14.17 per cent to minus 5.11 per cent as MSME accounts declined from 2.74 lakh to 2.60 lakh. However, the growth rate for PSBs had jumped from minus 1.89 per cent in FY20 to 36.05 per cent in FY21 with an increase in the number of MSME accounts from 110.82 lakh to 150.77 lakh during the said period.

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