RBI not in favour of fresh insolvency freeze
The Reserve Bank of India (RBI) has shot down suggestions of a fresh suspension of the Insolvency & Bankruptcy Code (IBC) due to the second wave of Covid-19, while making it clear that banks can still restructure distressed but viable loans, ensuring that their balance sheets remain transparent.
- During initial discussions with the government, RBI has indicated a freeze will not help anyone in the long run as it will only show a lower level of non-performing assets (NPAs).
- The government has not completely shut the door on the issue but the regulator’s reluctance will certainly weigh on the decision.
- Last year, RBI went along with the government decision to suspend IBC provisions for six months, which was subsequently extended to a year, but it had reservations.
- Due to the last round of freeze, several businesses managed to avoid reference to NCLT, enabling management to stay in the saddle. The moment a case against a company is admitted, the promoters lose control as an insolvency professional runs the show along with a committee of creditors until the resolution process is completed.
- The corporate sector has pitched for a fresh suspension, arguing that there will be additional stress in the wake of the lockdown announced across most states to check the surge in cases.
- The steps announced by RBI, allowing restructuring for small retail and business loans, will ease the pressure on the most vulnerable segments.
- Besides, RBI had allowed a one-time restructuring window for small businesses and banks have the option to use that facility until June.
- For the larger players, the June 2019 circular allows banks to restructure loans provided they set aside funds and the NPA classification remains unchanged.
What is a Non-Performing Asset (NPA)?
- A non-performing asset (NPA) refers to a classification for loans or advances that are in default or in arrears.
- A loan is in arrears when principal or interest payments are late or missed.
- A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations.