Development Banks – 06
Restructuring is the changing the Loan interest percentage or tenure ownership. For Infrastructure loans: RBI allowed banks to extend infra-loan tenure upto 25 years, and even reduce loan interest rate. But such Interest rate will be reviewed each 5 years.
CDR: Corporate Debt Restructuring: loan can be restructured if 75% of the lenders approve.
Strategic Debt Restructuring
Bank’s Debt (Loan) is converted to Equity (Shares with Voting Rights) & bank sells it to highest bidder. It may alter the company’s ownership.
Scheme for Sustainable Structuring of Stressed Assets: Only unsustainable portion of Debt (Loan) converted to equity (Preferential Shares without voting rights) & sold off to investors, in such manner that company’s ownership is not change.
5/25 Refinance rule: the window for revival of stressed assets in infrastructure sector and 8 core industries. The lenders are allowed to extend the tenure of loans to 25 years with interest rate adjusted every 5 years so the tenure of the loan matches the gestation period.
Bank liquidates loan-defaulter’s assets under either of the following acts:
SARFAESI Act 2002 or Insolvency and Bankruptcy Code 2016: If 75% of the lenders don’t agree for restructuring / resolution plan, then assets will be liquidated.
4.2 SARFAESI ACT 2002:
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a legislation that helps financial institutions to ensure asset quality. This means that the Act was framed to address the problem of NPAs (Non-Performing Assets) or bad assets through different processes and mechanisms.
Following are the main objectives of the SARFAESI Act.
- The Act provides the legal framework for securitization activities in India
- It gives the procedures for the transfer of NPAs to asset reconstruction companies for the reconstruction of the assets.
- The Act enforces the security interest without Court’s intervention.
- The Act gives powers to banks and financial institutions to take over the immovable property that is hypothecated or charged to enforce the recovery of debt.
Insolvency and Bankruptcy (I&B) Code 2016
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
Individual, Partnership firm or Company defaults on a business loan of ₹ 1 lakh or more, then, lenders approach National Company Law Tribunal (NCLT) to initiate proceedings under the I&B Code.
The code applies to companies and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.
The Code creates various institutions to facilitate resolution of insolvency:
A specialized cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
Insolvency and Bankruptcy Board Of India
The Insolvency and Bankruptcy Board of India was established on 1st October, 2016 under the Insolvency and Bankruptcy Code, 2016 (Code). It is a key pillar of the ecosystem responsible for implementation of the Code that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.
It is a unique regulator: regulates a profession as well as processes. It has regulatory oversight over the Insolvency Professionals, Insolvency Professional Agencies, Insolvency Professional Entities and Information Utilities.
IBBI composition consists of one chairman, 1 nominated member from RBI, other members from Government’s side. Total 1 chairman + 9 member = 10 people. IBBI’s administrative control rests with the Ministry of corporate affairs (MCA). Chairman has 5 years / 65 age tenure, whichever earlier. He is also eligible for a reappointment.