Page 12 - Banking Finance May 2020

ROUNDUP

sector which were facing liquidity con- vency proceedings against fresh de- The suspension on fresh initiation of
straints even before the outbreak. faulters would remain suspended for insolvency proceedings for one year is
up to one year and Covid-19-related likely to increase provisioning for
Funding costs are higher for NBFCs than debt would be excluded from the defi- banks.
banks because they lack access to low- nition of default. This step however,
cost retail deposits and therefore need will potentially hit financial and opera- "The advantage we were getting to
to earn higher asset yields by focusing tional creditors hard and bleed their refer a case to the National Company
more on riskier borrowers. Moody's balance sheet, apart from temporarily Law Tribunal (NCLT) was reversal of
pointed out that in both home loans depriving them of a credible mode of additional provisioning, now that op-
and loans against property, NBFCs bad debt resolution. Lenders may be tion will not be there," an MD & CEO
have a higher share of loans to borrow- forced to seek regulatory forbearance of a bank who did not wish to be
ers working in the informal sector and on provisioning and capital require- named told.
self-employed employees than banks. ments.
According to the June 7, 2019, circu-
"To alleviate borrower stress, the Re- Initially, proceedings under the Insol- lar of the Reserve Bank of India (RBI),
serve Bank of India (RBI) is allowing vency and Bankruptcy Code (IBC) can't banks can reverse 20% provisioning for
financial institutions to provide three- be invoked for six months, which can unresolved cases, after referring a case
month moratoriums on loan repay- then be extended by another six to the NCLT.
ments. These measures represent a months, depending on the pandemic
significant drain on near-term liquidity situation. There will be a special insol- "NCLT was anyway the last option for
at NBFCs, as most primarily manage vency framework under section 240-A us, so now will try to resolve cases
liquidity by matching cash inflows from of the IBC. Already, in a bid to insulate outside court through inter-creditor
loan repayments with cash outflows to small businesses from being dragged to agreement (ICA) as much as possible,"
repay their own liabilities," the report the NCLT, the default threshold for another senior official told.
said. triggering insolvency has recently been
raised to Rs 1 crore from just Rs 1 lakh Casting the IBC as a landmark law, the
The extent of liquidity stress, Moody's
earlier. government asserted that just the
said, will depend on the number of
threat of the legislation has ensured
customers seeking moratoriums and Finance minister Nirmala Sitharaman recovery of as much as Rs 5 lakh crore
the degree of the economic shock. The
said an ordinance will be promulgated up to February 29 since its inception in
longer restrictions on economic activ-
soon to implement the proposed 2016.
ity remain, the longer it will take for changes. However, proceedings in the
loan repayments to return to normal
cases already admitted will remain The figure was arrived at by aggregat-
levels even after moratorium periods
unaffected by the latest move. Data ing the default involved in as many as
end, it said.
available with the IBBI show, proceed- 13,556 cases where insolvency applica-
ings in 1,961 cases were going on as tions were withdrawn from the NCLT
The rating agency added that while
of December 2019. before they were admitted, as default-
the government's measures to directly
subscribe to Rs. 30,000 crore of NBFC ing promoters rushed to settle dues for
Despite risks of a sharp deterioration fears of losing their companies once
debt, will provide some near-term re-
in credit quality of banks and cash flows the proceedings started.
lief, this will not sufficiently address
their structural funding issues. of operational creditors due to the sus-
pension of IBC initiation, many experts In the 221 cases resolved so far via IBC,
COVID-debt clause may believe that given the unprecedented about Rs 1.84 lakh crore was recov-
crisis, the existence of companies must ered, against the admitted claims of Rs
worsen NPA mess take precedence over the resolution of 4.13 lakh crore, marking a recovery
Central government has said that insol- stressed assets. rate of 44%, Sitharaman said.

12 | 2020 | MAY | BANKING FINANCE