Cabinet approves six-month IBC holiday for defaulters/NPAs

The Union Cabinet has approved the suspension of proceedings under the Insolvency and Bankruptcy Code (IBC) for bank defaulters for six months with a provision to extend the period for up to one year.

The nationwide lockdown was announced on March 25 to contain the spread of Coronavirus and the IBC holiday was announced in view of the impact of the pandemic on the economy. The prolonged lockdown has impacted businesses severely restricting their ability to pay back loans to banks resulting in the IBC holiday being announced.

This shall be applicable for NPAs (non-performing assets) after March 25 and is one of the proposals announced by Finance Minister Nirmala Sitharaman as a part of the Rs. 20 lakh crore economic package. The move will come as a relief to many companies impacted by the COVID-19 pandemic since these firms will not be dragged into the IBC proceedings as of now. This decision may not however be good for the banking sector that will have to sit on bad assets for a long period. They won't be allowed to drag such accounts to IBC for quick resolution. This could lead to potential future stress and lower realisation through resolution process.

According to rating agency ICRA, suspension of fresh insolvency proceedings for a period of one year would ensure relief for the companies that are severely impacted by the Covid-19 pandemic and are unable to meet payments to their creditors. According to ICRA, the COVID-19 outbreak and the suspension of new proceedings under IBC is expected to result in significantly lower realisations of upto 30-40% for the financial creditors in FY20-21. After the introduction of IBC – one of the major reforms to the Indian economy, Indian banks have managed to achieve resolution in some large cases. The IBC has to a large extent aided banks to progress on bad asset resolution in a quick and efficient manner as compared to the erstwhile Debt Resolution Tribunal (DBT) system which took years to resolve a case.