Two ARCs seek RBI nod for priority funding for cases under bankruptcy law

A priority funding structure could prove to be a boon for companies that are not able to close a bad loan sale due to pricing issues


Under the insolvency and bankruptcy code procedures, there is a higher chance of a bad loan case turning around, says an ARC official. Photo: Mint
Under the insolvency and bankruptcy code procedures, there is a higher chance of a bad loan case turning around, says an ARC official. Photo: Mint

Mumbai: At least two asset reconstruction companies (ARCs) have written to the Reserve Bank of India (RBI), seeking permission to allow priority funding for cases under the insolvency and bankruptcy procedures.

“Under current guidelines, ARCs are not allowed to fund any case which is not in their portfolio. If RBI approves this demand, we can look at more innovative ways to deploy our capital in turnround efforts,” said the chief executive of a leading ARC, the first of the two mentioned above, speaking on condition of anonymity.

Priority funding involves extending credit to a company on the promise that the lender will be given higher priority during the payout phase, once the turnround is effected or the company is liquidated.

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A priority funding structure could prove to be a boon for companies that are not able to close a bad loan sale due to pricing issues, said an official from the second ARC mentioned above, also on condition of anonymity.

An email sent to the RBI spokesperson on Monday remained unanswered till the time of going to press.

Banks have put up for sale between Rs10,000-15,000 crore worth of non-performing assets (NPAs) as part of their recovery and bad loan reduction attempts ahead of RBI’s 31 March deadline for lenders to clean up their balance sheets.

The Indian banking system had bad loans worth nearly Rs7 trillion as on 31 December, 2016. In addition to this, it has a large amount of assets classified as stressed but not non-performing.

Since 1 January, 14 insolvency cases have been heard in 12 National Company Law Tribunals across cities in India, the most in Mumbai. Of these, only six have been admitted under the insolvency process.

“Under the insolvency procedures, there is a higher chance of the case turning around. If nothing, there is at least a legal route through which companies can be liquidated in a timely manner, if turnround is not possible,” the second ARC official said.

As per the proceedings prescribed in the Insolvency and Bankruptcy Code, once a case has been admitted into the process, an insolvency professional is appointed who creates a turnround plan relevant to the company. On implementation, the company is given a moratorium of 180 days for the turnround process. This can be increased to 270 days in special cases. In the absence of adequate success during this time, liquidation is triggered and a payout is initiated on the basis of a waterfall system suggested in the code.

Experts say that the Indian stressed asset market already has a vacuum as banks do not want to fund cases which are already liquidity strapped. As the need for funding increases, private sector investors could look at this as a viable investment opportunity.

“Priority debt financing in stressed cases could be attractive for special situation and other credit funds as returns are typically higher. As the insolvency resolution process establishes itself, we expect to see a lot more interest in this space for interim finance,” said Nikhil Shah, managing director, Alvarez and Marsal India Pvt. Ltd.

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