HYDERABAD : The seven amendments to the bankruptcy law are credit-positive for banks as they restore the primacy of secured creditors, said global credit ratings agency Moody’s. The proposed changes, cleared by the Cabinet early this week, aim at improving the effectiveness of the bankruptcy law and three of the proposals have credit-positive implications for banks.
They seek to restore the supremacy of creditors by giving them the explicit authority over distribution of proceeds in a resolution process, Moody’s said citing the recent appellate tribunal’s judgement in the Essar Steel case, which put secured creditors on par with unsecured and operational creditors. The order forced lenders to move the Supreme Court.
According to Moody’s, the NCLAT ruling could have material implications for recoveries by banks, pointing out that Essar is the largest NPA being tackled in the resolution process to date. “The amendments will be applied with retrospective effect and will strengthen the case of secured creditors in the Essar Steel resolution,” it added.
The second positive is the insistence on resolving cases within 330 days, up from the original 270 days. “Cases in NCLTs have taken much longer to resolve than within the originally envisaged 270 days, largely because of the parties concerned have repeatedly appealed to the higher courts,” it pointed out. The Essar Steel case is yet to reach a finality even though resolution proceedings are under way for more than 650 days after the bankruptcy filing.
The third amendment that’s positive for banks is including home buyers in the list of creditors, as following this, the committee of creditors can approve a resolution plan if more than 50 per cent of the affected home buyers back it. This, the agency noted, will facilitate the resolution of real estate projects since the large number of home buyers in big projects has made resolutions difficult.
Tweaks restore supremacy of creditor
The proposed changes, cleared by the Cabinet early this week, aim at improving the effectiveness of the bankruptcy law. They seek to restore the supremacy of creditors by giving them the explicit authority over distribution of proceeds in a resolution process, Moody’s said.