Banks seek clarity on interim finance rules

Mumbai | Published: November 22, 2017 3:48:45 AM

The Insolvency and Bankruptcy Code, 2016 (IBC) describes interim finance as any financial debt raised by the resolution professional during the insolvency resolution process period.

Bankers have also asked the RBI to reconsider its guideline that states that banks must make 100% provisions for interim finance loans, a senior official of a state-run bank said. (Reuters)

Indian banks, which have largely stayed away from extending additional loans to companies admitted by the National Company Law Tribunal (NCLT) for insolvency proceedings, have sought relaxations to the existing interim financing rules from the Reserve Bank of India (RBI), sources with direct knowledge of the development said. Lenders have written to the RBI seeking clarification on payment of interest on interim finance loans in case a company goes for liquidation, a senior banker said. At present, no interest is paid on interim finance loans if a company goes into liquidation. The principal amount, however, is paid on priority. The Insolvency and Bankruptcy Code, 2016 (IBC) describes interim finance as any financial debt raised by the resolution professional during the insolvency resolution process period.

Bankers have also asked the RBI to reconsider its guideline that states that banks must make 100% provisions for interim finance loans, a senior official of a state-run bank said. “Both these issues are extremely disadvantageous for us. We want clarity on whether we will receive interest on interim finance loans if a company is liquidated. Because of lack of clarity on this, we are staying away from providing interim finance,” the banker quoted above said. Interim finance has been given priority status, and creditors who have financed these loans would be the first to get back their principal amount after a resolution is reached or a company is liquidated.

“Although the rate of interest is much higher on the interim finance loans, such credit should not attract 100% provisioning,” a banker said. Asset reconstruction companies such as Edelweiss ARC and even private equity firms such as KKR India have been providing interim finance to companies that have been admitted by the NCLT. The rate of interest varies between 18% to 20%, the head of a large asset reconstruction company said. In June, the RBI asked banks to refer 12 accounts totaling about 25% of the Rs 8 lakh crore of non-performing assets to the NCLT. Subsequently, Jyoti Structures, Essar Steel, Monnet Ispat and Energy, Alok Industries, Electrosteel Steels, Amtek Auto, Bhushan Steel, Bhushan Power and Steel, ABG Shipyard, Lanco Infratech and Jaypee Infratech have been admitted by the NCLT. In August, the central bank sent a second list of accounts, including those of companies such as Videocon Industries, Uttam Galva Steels and IVRCL, to the banks to be referred to the NCLT. The lenders have time till December 13 to resolve these accounts outside the NCLT, after which they will be admitted for insolvency proceedings.

Shamik Paul

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