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During the month of August 21, the August Standing Committee on Finance submitted its report on the implementation of the <keyword id="128499" type="General" weightage="100" keywordseo="insolvency" source="Orion">Insolvency</keyword> and Bankruptcy Code, the only comprehensive resolution mechanism for all forms of debt resolution which transformed India’s ease of doing business and propelled credit resolutions in India unprecedented in its history. However, as with all new regulations, the law takes its time to settle. Having said that there are certainly some learnings which need to be factored based on experience which may require attitudinal or regulatory change. Key issues are broadly around regulation changes and capacity building. I would focus the piece on capacity building, which I believe is the elephant in the room. The efficiency of courts is first on my list. Our courts today have 13,170 <keyword id="192838" type="General" weightage="20" keywordseo="ibc" source="Orion">IBC</keyword> ( Insolvency and Bankruptcy Code) cases pending for approximately INR 9 lakh crores with 71% of the cases being more than 180 days. Apart from the vacancies at the <keyword id="6355809" type="General" weightage="20" keywordseo="nclt" source="Orion">NCLT</keyword> (National Company Law Tribunal) and NCLAT (National Company Law Appellate Tribunal) and the high level of litigation, the key issue on hand is the approach of the judges. Liberal stays at the slightest instance, encouraging plans from the defaulters whom the Committee of Creditors (CoC) have refused to entertain under the 12A provisions, allowing individual creditors to litigate at every step and adjudicating <keyword id="6155516" type="General" weightage="20" keywordseo="financial-creditor" source="Orion">Financial Creditor</keyword> admissions to IBC are tools used by vested interests to delay resolutions. The Rules need to differentiate between what is essentially a court filing from a compliance perspective from that of an adjudicating perspective. Our rules and hence our courts adjudicate matters which are essentially just procedures. Examples are Admissions to NCLT, approval of Final plan, process extensions, court filing requirements under IBC. A detailed study of differentiation between adjudication and compliance needs to be thought through. Also, Technical and Judicial members need to adhere to the same timelines as the rest of the ecosystem. This would require a detailed understanding and appreciation of the insolvency process and the law which at present seems lacking. Insolvency professionals are the second on my list. In our quest to build capacity to address the high levels of NPAs in 2016, we introduced over 3000 insolvency professionals with an entrance exam based on levels of seniority and qualifications. Whilst the professionals, mainly accountants started behaving like consultants rather than business managers who are required to preserve enterprise value during the <keyword id="1061688" type="General" weightage="20" keywordseo="CIRP" source="Orion">CIRP</keyword> (corporate insolvency resolution process) period. The focus too moved more toward regulatory compliance rather than business revival. To add to it the regulator focussed on process rather than value creation. Most of the 150-odd show-cause notices issued pertained to compliance with regulation as against business conduct. The supervisory aspect needs to include business conduct reviews within the spirit of regulation rather than bind the Insolvency professional to compliance as the latter only deters maintaining of Enterprise value. The Insolvency professional on his part needs to show utmost integrity and needs to be compensated for the same so as to remain honest. There is a lot of debate around the adequacy of insolvency professional’s fees which I think is a complete waste of time. The insolvency professional should be encouraged to appoint advisors where his skills are enhanced and not seek legal advice at every stage. The culture would come once the system trusts these professionals and the professionals demonstrate credibility. To build an enhanced Insolvency professionals, a continuing education program is required and members who are either found to not do them or have been found for any business-related irregularity should be barred from the profession for life. The Committee of Creditors is the final one on my list. They are the custodians of all classes of creditors and need to operate as a board of directors to protect the best interest of the company during CIRP. The CoC needs to mandate attendance of at least a Chief General Manager level person for all critical discussions and matters that require voting of 66%, for finalising the process for sale, negotiation with <keyword id="6078018" type="General" weightage="20" keywordseo="resolution-applicants" source="Orion">Resolution Applicants</keyword> and for discussion of all Avoidance applications. Further, the CoC should ensure that bankers provide interim finance to keep the operations going within established parameters. The CoC also needs to recognise that the Insolvency Professional is appointed by them to serve the creditors better and there may not be a need to appoint CoC advisors as different from RP advisors. If the need is felt, CoC advisors cannot be paid out of company funds. The CoC needs to question the action of the Insolvency Professional and make him accountable for actions. This would enable better governance, enterprise value creation and hence better recoveries at reduced overall costs In conclusion, I would reiterate the spirit of maintaining or even enhancing enterprise value during the CIRP period through capacity build, trust and commitment. The regulatory changes that would also be required should more be in the nature of facilitation like allowing piecemeal sale of businesses, creditor discretion on avoidance applications, reduced court processes by cutting down adjudication only to disputes and not processes and a policy around interim finance to grow businesses. The key to success of Insolvency is to trust all its four pillars where breaches should be punished appropriately. <keyword id="152629" type="General" weightage="20" keywordseo="abizer-diwanji" source="Orion">Abizer Diwanji</keyword> is Head – Financial Services, EY India

OPINION: How to make India’s bankruptcy resolution process faster and more efficient

<ul><li> <keyword id="191977" type="General" weightage="20" keywordseo="pratip-chaudhuri" source="Orion">Pratip Chaudhuri</keyword> was arrested by Rajasthan Police on Sunday (October 31) from his residence in Delhi.</li><li>The arrest was made in connection with an alleged sale of a non-performing asset, Hotel Gaudavan, to <keyword id="994351" type="General" weightage="20" keywordseo="alchemist-arc" source="Orion">Alchemist ARC</keyword> at a low value.</li><li>SBI, as well as his predecessor Rajnish Kumar, who took over as SBI chairperson in 2017, have come out in support of Chaudhuri calling his arrest wrong.</li></ul>The arrest of former State Bank of India (SBI) chairperson Pratip Chaudhuri will make banks risk-averse, World Bank’s former executive director CM Vasudev told Business Insider. Vasudev is a retired Indian Administrative Service (IAS) officer, who has served as the finance secretary of the Indian government and as non- of <a href="https://economictimes.indiatimes.com/c-m-vasudev-re-appointed-as-hdfc-bank-non-executive-chairman/articleshow/21151133.cms" data-type="tilCustomLink">executive chairperson</a> HDFC bank. “Public sector banks as it is are very risk-averse and this type of decision will make them even more risk-averse,” Vasudev said, adding that this will deter bankers to not make such crucial decisions and play safe. He explained that banks are the real intermediaries who write finances to the “real sector” of the economy and if the banks become risk-averse, then there is no financing for new ventures. “If such decisions are made criminally liable for individual decision makers, it is going to have a very adverse impact on the economy,” he added. Chaudhuri was arrested by Rajasthan Police on Sunday (October 31) from his residence in Delhi in connection with an alleged sale of a non-performing asset (NPA) — Hotel Gaudavan — to Alchemist ARC at a low value in 2014. The arrest was made on the basis of a protest petition filed by former directors of Hotel Gaudavan and he has been sent to judicial custody for 14 days. State Bank of India (SBI), as well as Chaudhuri’s predecessor Rajnish Kumar, who took over as SBI chairperson in 2017, have come out in support of Chaudhuri calling his arrest wrong. “This seems to be a case of highly motivated, high-handed action. This seems to be an error of judgment. There is a due process and set of rules laid out by the RBI for the sale of assets to ARCs [asset reconstruction companies]. Where is the corruption here?” Kumar <a href="https://www.moneycontrol.com/news/business/pratip-chaudhuri-arrest-former-sbi-chairman-rajnish-kumar-calls-the-move-a-motivated-high-handed-action-7662941.html">said</a> in an interaction with Moneycontrol. SBI has shared a detailed statement, highlighting the facts of the matter. Interestingly, SBI wasn’t even made party to this case even though the alleged “scam” happened while Chaudhuri was serving as the chairperson of this bank. “SBI would like to reiterate that all due processes were followed while making the said sale to ARC. The bank has already offered its cooperation to the law enforcement and judicial authorities and will provide further information, if any, that may be called for from their side," the bank said, adding that the sale to Alchemist ARC was done through a laid-down process. <div type="image" title="The arrest of former SBI chief Pratip Chaudhuri may prevent bankers from making any risky decisions, say experts" msid="87482644" hostid="261"></div> Abizer Diwanji, partner and national lead of financial services at EY, told Business Insider that the arrest of Chaudhuri was wrong, but the banking community needs to be “cautious that when they sell any asset they should not only aim to recover their loan amount, but get a fair value out of it.” The loan to Gaudavan Group was ₹24 crore, but the value of the properties were ₹200 crore. SBI, however, sold the assets to Alchemist ARC for ₹ 24 crore to recover their loans. <div type="image" title="The arrest of former SBI chief Pratip Chaudhuri may prevent banks from making any risky decisions, say experts" msid="87482320" hostid="261"></div> SEE ALSO <a href="https://www.businessinsider.in/business/startups/news/logistics-startup-delhivery-files-for-a-nearly-1-billion-ipo/articleshow/87481889.cms" data-type="tilCustomLink">Logistics startup Delhivery files for a nearly $1 billion IPO</a> <a href="https://www.businessinsider.in/business/telecom/news/elon-musk-owned-starlink-forms-subsidiary-in-india-will-soon-apply-for-licenses/articleshow/87480590.cms">Elon Musk-owned Starlink forms subsidiary in India, will soon apply for licenses</a> <a href="https://www.businessinsider.in/stock-market/news/shares-of-tata-motors-gains-on-strong-demand-for-jlr-despite-14-fold-widening-of-loss/articleshow/87480018.cms">What Tata Motors investors are excited about — obviously not the huge loss</a>

The arrest of former SBI chief Pratip Chaudhuri may prevent bankers from making any risky decisions, say experts

<ul><li>Finance Ministry and the <keyword id="30067" type="ORGANIZATION" weightage="20" keywordseo="RBI">RBI</keyword> are mulling the option of a one-time restructuring of loans across all sectors </li><li>RBI in the past has been uncomfortable with the practice calling it ‘deceptive banking’ and is afraid that a one-time restructuring would open up the floodgates. </li><li>The Confederation of Indian Industry (CII) is pushing for the reform with some guidelines that may address the RBI’s concerns. </li></ul>All eyes will be on the upcoming monetary policy to find out whether the <keyword id="6354335" type="ORGANIZATION" weightage="20" keywordseo="reserve-bank-of-india">Reserve Bank of India</keyword> (RBI) will allow a one-time loan restructuring and how. This topic has been widely debated and is being ‘<a href="https://economictimes.indiatimes.com/news/economy/policy/finmin-working-with-rbi-on-need-for-loan-restructuring-fm-nirmala-sitharaman/articleshow/77285208.cms">actively</a>’ discussed as an option by the Finance Ministry. Even as the RBI remains moot on the topic, juggernauts like Uday Kotak and Deepak Parekh continue to ask for industry-wide relief. RBI’s dilemma is choosing between what former governor Raghu Rajan once called “deceptive banking” or the second option, which is the banking system putting its provisions to use once the moratorium ends on August 31. <div type="image" title="Copy of ICICI GNPA NNPA" msid="77328312" hostid="261" caption="&amp;lt;p&amp;gt;GNPA and NNPA across the top 5 banks in India&amp;lt;/p&amp;gt;"></div> The apex bank’s own stress tests show that the level of bad loans or non-performing assets (NPAs) could be anywhere from 12% to 15% by the end of the year. Abizer Diwanji, EY India’s financial services leader told Business Insider that this may leave the RBI with little choice. <div type="image" title="Copy of hdfc provisions" msid="77328335" hostid="261" caption="&amp;lt;p&amp;gt;Bank&amp;#39;s are building up a cushion in case loans turn bad starting August 31&amp;lt;/p&amp;gt;"></div> “Given that, every industry across the country has been impacted, even those industries which had defaulted before COVID happened — there the chances of revival are near zero even in the post-COVID situation,” he said. To NPA or not to NPA As of right now, there is nothing stopping banks from restructuring accounts. The catch is that they need to declare the account as a non-performing asset first. However, declaring an account NPA would also require a bank to set aside 15% of the loan value to cover the default risk. Higher levels of NPA mean more provisioning and that means more demand for capital. “When there is capital inadequacy in the market, banks lose trust. When banks lose trust, deposits drain out. When deposits drain out there is a liquidity problem. That is the traditional cycle that banking follows,” explained Diwanji. <div type="image" title="GNPA RBI" msid="77328358" hostid="261" caption="&amp;lt;p&amp;gt;RBI&amp;#39;s stress tests to estimate the ratio of GNPA across different types of banks by the end of the year&amp;lt;/p&amp;gt;"></div> For a large-scale one-time restructuring, industry bodies are asking that accounts not be declared NPA. If an account isn’t declared an NPA, it’s good for the bank’s balance sheet and the borrower is likely to see more incremental funding. “The reclassification of the NPA is not to hide something, it is more to enable the cycle to start again,” said Diwanji. However, RBI has issues with this approach being used to show higher profits to fetch better valuation in the stock market. Everyone will want a piece of the pie The one-time restructuring would also open the floodgates to every account wanting a way out of their existing payment plan. If a borrower is likely to get only one chance at restructuring their loan, they’re likely to be more conservative about their recovery estimate — ie. one year to recover in a pre-COVID world versus five years to recover post-COVID, according to Diwanji. Here’s what the Confederation of Indian Industry (CII) proposes: <ul><li>Funding only for ‘holding on operation’ basis. Banks will only give enough money for the entity to survive, not grow. </li><li>If at least 15% of the restructured loan is not paid — either through operations or refinancing — within 18 months, the account will get classified as NPA. </li><li>Any new money given by the banks as part of the restructuring should be a priority — it has precedence over all other obligations of the company. </li><li>Get rid of all the bureaucratic processes that are there for restructuring — agency ratings, forensic audits, and valuations — because everything is uncertain in the post-COVID scenario. </li></ul>“There is a growing view across the membership for a one-time restructuring,” said Uday Kotak during RBI Governor Shaktikanta Das’ address to CII National Council members. The clamour for loan restructuring is growing louder because the bankers are not in favour of extending the moratorium period. It remains to be seen whether the Reserve Bank of India will provide this reprieve in its upcoming policy this week. SEE ALSO: <a href="https://www.businessinsider.in/finance/banks/news/sbi-share-price-after-q1-profit-provision-rise-and-bad-loans-npa-drop/articleshow/77280221.cms">SBI piles on profit and provision with cash from selling stake in insurance business⁠— bad loans drop</a> <a href="https://www.businessinsider.in/stock-market/news/hdfc-bank-share-price-rises-on-bond-issue-and-increase-in-provision/articleshow/77061426.cms">HDFC Bank is beefing up capital and provision to cushion a spike in bad loans post moratorium — and that’s helping its share price</a>

One-time loan restructuring dilemma - RBI won’t commit, and India Inc won’t stop asking for it

<ul><li>The Reserve Bank of India (RBI) is bringing in <keyword id="396965" type="ORGANIZATION" weightage="20" keywordseo="KV-Kamath">KV Kamath</keyword> to head up a new committee that will look into the one-time restructuring of loans. </li><li>The committee will look into the financial parameters that need to be factored into resolution plans. </li><li><keyword id="4124197" type="PERSON" weightage="20" keywordseo="loan-resolution">Loan resolution</keyword> beyond a certain amount will also be validated by the committee before implementation.</li></ul>The Reserve Bank of India (RBI) has taken heed to the call of industry leaders and is open to the idea of the one-time restructuring of loans — with its own terms and conditions, of course. It will set up a new mechanism for stressed assets that need rescuing and the existing scheme for restructuring MSMEs has been extended. <div type="Article" hostid="261" msid="77387591" title="‘Watchful’ RBI leaves repo rate unchanged to keep inflation in check" mstype="2" mssubtype="0"></div> Governor <keyword id="6359111" type="UNKNOWN" weightage="20" keywordseo="Shaktikanta-Das">Shaktikanta Das</keyword> said that the Reserve Bank of India will set up a committee under KV Kamath ⁠— the former chairman of BRICS Bank and ICICI Bank ⁠— to set the parameters and benchmarks for this programme aimed at the resolution of stressed loans. The existing scheme for restructuring MSMEs is being extended to cover loans that were classified as standard as of March 1. Das said that for any new borrowers coming into the fold that the restructuring has to be implemented before 31 March 2021. <div type="Article" hostid="261" msid="77328145" title="One-time loan restructuring dilemma - RBI won’t commit, and India Inc won’t stop asking for it" mstype="2" mssubtype="0"></div> “The underlying theme of this resolution window is the preservation of the soundness of the Indian banking sector,” said Das highlighting that safeguards will be put in place like prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring. The one-time restructuring of loans or resolution window will be implemented under the Prudential Framework dated 7 June 2019. Prudent entry norms Banks and other lending institutions can only extend this facility to borrowers that are facing stress on account of COVID 19. But when it comes to types of loans, everyone is fair game — from big corporate loans to personal loans. Banks will also need to make sure that any resolution plan adheres to the eligibility criteria put forward by the RBI. For instance, MSME borrowers with aggregate exposure of ₹25,000 crore or less as of March 1 will not be eligible. Financial service providers, credit societies, and government loans will not be eligible either. The Expert Committee headed by Kamath will also bring in sector specific benchmark ranges for the financial parameters that need to be taken into account. Clearly defined boundary norms In addition to the financial parameters that will cover aspects of leverage, liquidity, and debt serviceability among other things, the Expert Committee will also be called on to vet resolution plans for loans where the amount is ₹1,500 crore or more. The Confederation of Indian Industry (CII) has suggested that business should only be given enough money to survive, not grow and the money should be given on priority — it will have precedence over all other obligations of the company. The CII had also recommended that loans not be classified as non-performing assets (NPAs) as a part of the restructuring. RBI seems to agree provided the resturcturing of loans is carried out within the stipulated timlines. This means that banks will still have to set aside 15% of the loan value to cover the default risk. Which means the levels of provisioning will continue to remain high and the demand for capital is unlikely to subside if bad loans grow. Constant monitoring Considering the uncertainty brought on by the coronavirus pandemic, borrowers are likely to be more conservative in their estimates for recovery. The difference could be as much as a borrower needing one year to recover in a pre-COVID world versus five years to recover post-COVID, according to EY analyst Abizer Diwanji. The RBI is only allowing banks to give up to two years for borrowers to pay back the pending amount of their loans. SEE ALSO: <a href="https://www.businessinsider.in/finance/news/rbi-governor-shaktikanta-das-leaves-repo-rate-unchanged-to-check-inflation/articleshow/77387591.cms">‘Watchful’ RBI leaves repo rate unchanged to keep inflation in check</a> <a href="https://www.businessinsider.in/finance/news/rbi-has-opened-a-pipeline-of-funds-for-startups-home-buyers-and-green-power-producers-too/articleshow/77388903.cms">RBI has opened a pipeline of funds for startups, home buyers and green power producers too</a> <a href="https://www.businessinsider.in/stock-market/markets/news/manappuram-finance-and-muthoot-finance-share-price-chart-after-after-rbi-increased-the-loan-to-value-ratio-on-gold/articleshow/77388739.cms">Manappuram and Muthoot Finance shares jump nearly 5% after RBI increased the loan to value ratio on gold to 90%</a>

RBI brings in KV Kamath to set the boundaries for a one-time restructuring of loans

Mumbai, May 22 () Beyond its timing, there was no surprise in the rate cut move by the RBI on Friday, and there exists a scope for more cuts of up to 1 percentage point because of the troubles on the growth front, analysts said. However, the decision to extend the moratorium and not go for a restructuring package came for some criticism. Earlier in the day, RBI's rate setting panel cut key rates by 0.40 per cent for the second consecutive time during the pandemic after pre-poning its scheduled meeting. Governor Shaktikanta Das said GDP will contract in the fiscal, and the rate cut was directed largely to push up the growth process. "We expect the terminal repo rate to be cut by 100 basis points in the current cycle even after today's rate cut," house economists at largest lender SBI said, adding an aggressive cut in repo rate is the effective policy response to adjust the real interest rate as inflation is set to "collapse" in FY21. Such a move will, however, have a "significant sobering impact" on asset quality of banks as RBI research shows, they added. Bank of Baroda's chief economist Sameer Narang said he expects the GDP to contract by 4.7 per cent in FY21, and headline inflation at 3.5 per cent, which leaves the room for the RBI to deliver another 25 bps reduction in policy rate. Yes Bank's economists said the RBI will further support the economy with a 0.50 per cent cut in the key rates amidst a widening of negative output gap and assertion of disinflationary pressures. "All this (the rate cut) was expected and will provide support especially so as the lockdown has been quite severe for the last two months or so impacting activity," analysts at Care Ratings said, hinting that the markets reacted negatively to the move because of the negative growth statement from Das. Singaporean lender DBS said the reverse repo is likely to become the operative rate from here on as the system is in net surplus liquidity. However, it was on the regulatory policies front, and the moratorium in particular, that the analysts had some reservations. SBI note said the market was expecting a clarity on the moratorium, consultancy firm EY made it more explicit. "It (the announcements) fell short of a one-time restructuring proposition. Instead the moratorium on all term-loans has been extended by three months along with an Funded Interest Term Loan (FITL) plan for loan recoveries from 1 September 2020 to 31 March 2021." "Given that the economy would take considerable time to recover, a higher EMI (current EMI plus FITL installment) will be difficult to honour. I think a one time restructuring would have enabled a more certain recovery," its partner Abizer Diwanji said. Domestic rating agency Crisil said Extension of moratorium by another three months will be beneficial from a borrower's perspective, particularly for those whose cashflows have been impacted on account of the extended lockdown and expectation of only a phased resumption of economic activity. "From a lender's perspective, what needs to be monitored is borrower behaviour pertaining to payment discipline once the moratorium is lifted as 6 months of continuous non-payment of debt obligations can result in some element of credit indiscipline creeping in for certain borrowers," its senior director Krishnan Sitaraman said. He also said that there will be an increase in non-performing asset levels despite the move to extend the recognition because of the gloomy times that the economy is passing through. AA MKJ MKJ

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OPINION: How to make India’s bankruptcy resolution process faster and more efficient

Abizer Diwanji

The arrest of former SBI chief Pratip Chaudhuri may prevent bankers from making any risky decisions, say experts

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One-time loan restructuring dilemma - RBI won’t commit, and India Inc won’t stop asking for it

Prabhjote Gill

RBI brings in KV Kamath to set the boundaries for a one-time restructuring of loans

Prabhjote Gill

No surprise in RBI policy decision, still exists scope for further cuts: Analysts

PTI

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