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.

What

  1. 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).
  2. The government has not completely shut the door on the issue but the regulator’s reluctance will certainly weigh on the decision.
  3. 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.
  4. 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.
  5. 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.
  6. The steps announced by RBI, allowing restructuring for small retail and business loans, will ease the pressure on the most vulnerable segments.
  7. Besides, RBI had allowed a one-time restructuring window for small businesses and banks have the option to use that facility until June.
  8. 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)?

  1. A non-performing asset (NPA) refers to a classification for loans or advances that are in default or in arrears.
  2. A loan is in arrears when principal or interest payments are late or missed.
  3. A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations.