The plan will protect firms from bank action now, but any delay in revival will lead to a surge in cases later.
Though the resolution through the IBC process was delayed, it had given bankers a solid tool to ensure defaulters do not game the system. With the taking away of this tool bankers say borrowers may no longer fear the law.
“Though the intention of the government may be good, the signal it is sending is not good. For all its delays, IBC was still a system to deal with defaults, a blanket ban is not a good sign,” said Vishwavir Ahuja, CEO at RBL Bank.
To be sure, the IBC process has been marred by delays. As on December 31, 2019, 1,961 companies were undergoing resolution, of which 32% had already taken more than 270 days. Of the roughly 200 cases where a resolution plan has been successfully implemented, the average time taken for the CIRP was high at 393 days.
Analysts said while a one-year suspension will protect companies from bank action now, any delay in economic revival will lead to a surge in cases later.
“If the severity of the pandemic were to increase thereby increasing the longevity of the lockdown or lead to fresh lockdowns later on, thus delaying economic revival, then we could see a sudden surge in cases being referred under the IBC after the one-year period. This would be detrimental to the resolution process, which is already facing challenges from over-burdened tribunals,” said Abhishek Dafria, vice president, ICRA.
Bank stocks fell sharply due to fears that the blanket ban on fresh cases could lead to a surge in bank NPAs. The BSE Bankex fell 6.69% led by a 10% fall in IndusInd Bank followed by a 9.5% fall in RBL Bank shares.
Some bankers are hoping that a suspension of fresh cases will give bankruptcy courts enough time to clear the backlog.
“Most of the large cases are already in court but are delayed very badly. There are many which have been referred but not admitted, some that are still pending resolution while some others that are just pending final order. These cases will continue. Some courts are taking up cases electronically, which is good. So, this suspension should not have that much of an impact,” said a senior public sector bank executive.
Bankers are hoping that a ban on fresh cases would push promoters to consider one-time settlement with banks, which is a quicker way to a recovery.
“The IBC process was impacting recovery because of the delays. But it had forced promoters to come and settle with banks. We can only hope that this window will be used by them to get into one-time settlements. Anyway, due to the recession, we would not have seen much value in assets so in that sense, this will not hurt us much,” said another executive from a public sector bank.
Besides a one-year suspension, the finance minister also announced that loans taken by companies to deal with the Covid-related stress will be exempt from bankruptcy proceedings. Though details of this move are not yet out, bankers are wondering as to how to deal with defaults from these new loans when they happen.