Proposed insolvency law amendments credit positive for banks: Moody's

Moody's Investors Service on Thursday said the proposed amendments to the Insolvency and Bankruptcy Code will improve its effectiveness and are credit-positive for Indian banks.

The government last week cleared seven amendments to the Insolvency and Bankruptcy Code (IBC) seeking to put in place a 330-day deadline for corporate resolution process, including litigation and other judicial processes, as well as make resolution plan binding on all stakeholders.

"The amendment proposes that cases referred to the IBC should be resolved within 330 days, including appeals, a credit positive for Indian banks because it will reduce resolution timelines," Moody's said.

The rating agency said cases in the IBC have taken much longer to resolve than the originally envisaged 270 days, in large part because concerned parties have repeatedly appealed to higher courts.

The proposed amendments aim to improve the code's effectiveness, and three of the proposals have credit-positive implications for Indian banks, Moody's said.

The amendments also give the committee of creditors explicit authority over the distribution of proceeds in the resolution process, thereby maintaining the accepted hierarchy of creditors.

Moody's said in a recent judgment in the case of Essar Steel, the insolvency court overruled the decision of the committee of creditors and stated that the resolution's proceeds should be equally distributed among all claimants, putting secured creditors on the same level as unsecured and operational creditors.

Essar Steel is the largest non-performing asset account currently in the IBC process, and the ruling could have had material implications for the recoveries of the banks involved, it added.

"The case could also have set a precedent for upending the accepted creditor hierarchy because Indian banks predominantly engage in secured lending. The amendment will be applied with retroactive effect and will strengthen the case of secured creditors in the Essar Steel resolution," Moody's said.

It further said the third amendment states that in cases where the creditors include homebuyers, the committee of creditors can approve the resolution process as long as more than 50 per cent of the homebuyers on the committee give their approval.

"This amendment is credit positive for Indian banks because it will facilitate the resolution of real estate projects. Under the IBC, homebuyers in a real estate project are treated on a par with secured creditors, which means that their approval is required before the committee can approve the resolution plan," Moody's said.

Because homebuyers in a large project are likely to be relatively numerous, obtaining the approval of all the affected homebuyers has proved a logistical challenge.

"With the proposed change, only the approval of a majority of those present will be required for the resolution to be approved," Moody's added.