Finance Ministry issues advisory to Banks to avoid bankruptcy trials for defaults which are less than Rs. 200 crores

The Finance Ministry has apparently issued an advisory to the Indian Banks’ Association (IBA) asking it to avoid referring companies with loans defaults of less than Rs. 200 crores to the bankruptcy tribunal. The ministry has also proposed that the banks in alliance with promoters work to ensure that under no condition would the companies be forced into closure which leads to job losses.

A two-page advisory sent to IBA on and later circulated by the association to its members emphasizes the need to create an atmosphere where government servants work to protect against the closure of companies and loss of jobs.

According to the advisory, around 19,000 cases have been referred to the National Company Law Tribunal (NCLT) and 10,000 have been admitted. Although some of the large companies and a few smaller ones have been declared insolvent, majority of the companies below the Rs. 200 crore mark are in a very vulnerable position. According to the Finance Ministry, the collapse of so many companies will cause an exponential job loss and thereby further economic slowdown.

The latest Insolvency and Bankruptcy Board of India (IBBI) data showed 58% of all closed cases under bankruptcy till date were via liquidation while only 14% cases were resolved with an average haircut of nearly 57% on admitted claims. Roughly 50% of the number of cases admitted to NCLT in the December quarter was referred by financial creditors. This clearly indicates that despite the new RBI rule on stressed asset resolution, bankers continue to use IBC as a framework of resolution. The note also expressed concern over indiscriminate use of the NCLT route which was only meant as a deterrent.

The advisory also stated that the banks on being faced with NPA, end up referring the matter to the NCLT instead of arriving at a balanced resolution. The reason is that the concerned bank officers find that a safer option rather than the option of taking the onus upon themselves and thereby making themselves vulnerable to a CBI or other inquiry at a later stage. This results in most banks using NCLT as escape route rather than a tool to empower and keep companies running.

The Ministry also raised concern over the NCLT infrastructure which was proving to be woefully inadequate for the quantum of cases flooding the system and suggested that lenders take bold decisions without the fear of investigative authorities which will help de-clogging bankruptcy courts. Data shows that out of 1,961 ongoing admitted cases, 635 cases have passed 270 days since admission, while another 247 cases have crossed 180 days.