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IBC deferral Plan & Absence of loan Restructuring put banks in a fix

IBC deferral Plan & Absence of loan Restructuring put banks in a fix

As per the reports, banks are indecisive over the resolution of stress among the corporate borrowers as they find themselves caught between the recommendation of the Central Government to suspend the Insolvency and Bankruptcy Code for a year and the reluctance of the Reserve Bank of India to allow for a one-time loan restricting in the absence of adequate and proper information and data.

Deferring the admission of cases under the IBC would not only prevent timely resolution in the banking system but could also be viewed as worsening the current situation of banking in India. Neither the government nor the Central Bank, i.e., RBI may approve a loan restructuring scheme without taking measures for enough checks and balances. The higher officials of banks along with RBI will make balance-sheet provisioning for unsustainable portion of debt without declaring the account as NPA. This would minimize accounts to become NPA. A loan restructuring would enable a bank to disburse fresh loans and changing the entire outstanding amounts to match the cash flow of the borrower’s after the pandemic of COVID-19 business environment.

Banks are proposing a partial provisioning of only the unsustainable debt which cannot be serviced due to reduced earning capacity of the borrower.  This would protect the books of accounts of banks while the borrower preserves its credit score and reputation by staying out of the NPA list. The Government should at least allow the corporate debtor of a company to file for bankruptcy before the NCLT while others feel that IBC route should be kept open for financial creditors, operating creditors as well as the borrowing company. A restructuring scheme for MSMEs is in place for this year which will benefit many MSME units.

The Government and Regulator (RBI) may take some time to decide before allowing banks to take a haircut for bigger corporate houses. However, unlike the 2008-2009 downfall of the Indian economy, COVID-19 has impacted a far larger number of industries.

 

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