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Reviving Indian economy: Can loan restructuring be the answer?

Reviving Indian economy: Can loan restructuring be the answer?

Reviving Indian economy: Can loan restructuring be the answer?
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By CNBCTV18.com Contributor Dec 23, 2020 5:58:19 PM IST (Updated)

Post-COVID, the RBI has permitted borrowers to opt for a one-time restructuring under the COVID Restructuring Circular, without the risk of their account being downgraded by the banks and financial institutions.

Authored by Veena Sivaramakrishnan

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With stress continuing to increase at alarming rates across sectors in the Indian economy and the Insolvency and Bankruptcy Code (IBC) as an effective tool of resolution continuing to remain suspended, “one-time restructuring” under the aegis of circulars issued by the Reserve Bank of India (RBI) continues to gain traction.
For banks and financial institutions regulated by RBI, the RBI Circular of June 2019 on restructuring (June 2019 Circular), coupled with the RBI’s recent restructuring circular for COVID impacted borrowers (COVID Restructuring Circular), continue to be the basis for restructuring outside the formal insolvency process.
Post-COVID, the RBI has permitted borrowers to opt for a one-time restructuring under the COVID Restructuring Circular, without the risk of their account being downgraded by the banks and financial institutions. This is a shift from the June 2019 Circular, as the rescheduling of payment on account of financial difficulty is no longer treated as restructuring.
Another significant change is that the borrower can opt for one-time restructuring while remaining in control of its enterprise. This shift is critical, as, under the June 2019 Circular, it was a prerequisite for a change in shareholding to be implemented to get the benefit of asset classification.
The COVID Restructuring Circular while contemplating one-time restructuring as an option, raises certain key issues that could be a hindrance in implementation. The intention of the regulator seems simple - there are no free lunches, and if a borrower is impacted by COVID, such a borrower is expected to get its house in order and present a resolution plan, which can be considered by the lenders for implementation. As the promoter can remain in control, the implicit expectation is that they carry out impact analysis on their business.
The key feature of the COVID Restructuring Circular is that the lenders sign an inter-creditor agreement (ICA). This continues to be a hurdle for a borrower, as the lending community in India is not aligned in the principles of executing an ICA. Also, there is no compulsion on lenders who are out of the purview of RBI to execute such an ICA. Entities with diverse borrowing profile of loans and debentures, with mutual funds, family houses, Indian banks, NBFCs, foreign institutional investors and foreign banks as lenders, will find it difficult to get the lenders to execute an ICA. In the absence of an ICA, consensual restructuring is the only option and given the varied objectives of the lenders, this is going to be the biggest challenge.
Assuming that the borrower manages to get the lenders on board, the step of arriving at a resolution plan could be easier. The plan can provide for an extension to the loan tenor, conversion of debt into equity / marketable securities, alteration in payment terms, etc. In such a scenario, it can be reasonably expected that the lenders will seek additional comfort and collateral from the borrower and for the borrower, in addition to arriving at a plan, it would be critical to treat the financing as fresh funding as the terms are bound to be heavily negotiated.
Having said that, banks want the benefit of provisioning and the borrowers who are facing liquidity issues solely on account of COVID, want a restructuring. This could probably be the time for innovative measures of restructuring to take place. The other reforms in the system which need to be fixed for the one time restructuring to be successful include measures such as timely detection of risk by rating agencies, opening up of cross border financing with limited end-use restrictions, access to the Indian distressed market by foreign distressed debt players, widening the ambit of asset reconstruction companies in the role they can play in reviving such borrowers, etc.
A mere one-time restructuring as presently contemplated could be beneficial in the short run, but would not lead to the revival of the economy as a whole. Additional measures that provide for a fresh infusion of capital and not just resolution of debt already existing, would be the first step towards the Indian economy seeing some positive changes.
Veena Sivaramakrishnan is Partner at Shardul Amarchand Mangaldas & Co.
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