NEW DELHI: The government has recently exempted companies from Insolvancy and Bankruptcy Code for one year but experts point out that lack of clarity on many issues has left lenders and companies both confused.
According to Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co the suspension of IBC, is likely to further hurt the banking and financial sector. “While provisioning and asset classification benefits would be extended, banks will continue to face challenges with their assets,especially with the moratorium being further extended,” Sivaramakrishnan added.
Experts also observe that while bankers cannot drag a company to bankruptcy court now, there is no clarity on how banks will report bad loans. “There is no clarity on how banks will address queries of their auditors in terms of reporting NPAs and action taken for recovery,” said Sumit Batra, a Corporate Lawyer said.
Furthermore, the blanket ban on new IBC entries will require restructuring of loans and for that RBI norms will have to be amended. Currently as per RBI’s restructuring norms, banks have 180 days to restructure loans. “However, in case restructuring is not worked out within 180 days and a case has not been filed under the IBC, a steep 20 per cent provision is required to be taken. So far there is no clarity on it,” said a senior banker.
While corporates may cite Covid-19 and its aftermath as reasons for default, to prove this would be very heavy and a mere financial difficulty is unlikely to liberate them from their financial obligations. “This would also mean for the companies to reveal more information,” admitted a senior member of ICAI.
Experts also ask what will happen after one year if there is a spike in bankruptcy cases. “Currentlt, there are several practical difficulties and we will have to see how those are being addressed,” Batra adds.
The paradox of COVID-19 debt
The proposed amendment to exclude COVID-19 related defaults for initiation of insolvency processes seems redundant in the wake of IBC suspension for a year. It is not yet clear if the government intends to continue the benefit of exclusion of defaults further.