COVID-19 Impact RBI and IBBIecpl.live/icai/18042020/ICAI -IBC PPT for Webcast... · profound impact...
Transcript of COVID-19 Impact RBI and IBBIecpl.live/icai/18042020/ICAI -IBC PPT for Webcast... · profound impact...
COVID-19 Impact – RBI and IBBI
Webinar
April, 2020
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Ind
ex 1. Impact of COVID-19 on the economy
2. RBI’s circular /IBBI response
3. New IBC Amendments
4. Prepacks
5. Questions
Impact of COVID-19
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COVID-19 – ‘A Global Pandemic’Current situation
► Impact of COVID-19 has been profound and deleterious on the global economy
► It has forced policymakers to look for novel ways to respond to the growing humanitarian & economic crisis
► Innovative policies implemented at the right time have the potential to limit the economic damage
Global Impact to date
> 75 Countries with
> 100 cases
> 2 millionConfirmed cases
> 200%Increase in cases
in Europe/America
> 200 Countries with
local transmission
>120,000Deaths
194 Countries
35New countries
with cases
>10,000total cases
₹ 1.7 trillionGoI stimulus
plan
Stage 2 of the
pandemic
>400deaths
Lockdown extended to 3 May 2020
27Infected states
Story in India so far…..
Situation can worsen quickly if tough measures are not taken
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COVID-19 – ‘A Global Pandemic’Globalised Impact
100+ countries under lockdown globally
>30%
Financial stress in emerging markets
Chinese growth
expectation
Likely recession
in the US & the Eurozone
Growth outlook down
significantly
4.8%
2.9%
Big decline in global stock markets
The economic impact of COVID-19 is still unfolding and longer the global lockdown continues, greater the economic loss and time to recovery
Firms cut costs,default
on loans
Bank’s unwilling to
lend
Consumers not
spending
Short-run trade-off between flattening the epidemic curve and the depth of the recession
World’s recovery period to pre-crisis levels>4 Qtr
$2Tn Global income loss (estimated), Recovery to start post Q2 FY20
Addition to unemployed individuals from Mar7 to Mar21 just in the US
3 Mn
China’s Industrial output fell ~14% in Jan-Feb’20Exports fell ~20%Auto sector fell ~90%
Economic stimulus announced by all major world economies
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COVID-19 – ‘A Global Pandemic’Destruction of income and wealth
Moody’s investor service cut India’s growth forecast for Calendar year 2020
40 days of countrywide lockdown, aimed at reducing the spread of the disease… Led to
5.3%
2.5%
Disruption in mfg. supply chain
Poor cash recoveryto farmer despite bumper harvest
Significant loss to
unorganized sector
Daily loss @ ₹ 35-40K Cr
Loss for 21 days
>₹7Lac Cr
GDP Loss
Q4 FY20 1.5%-2% growthdown from 4.7%amplified impact expected in Q1 FY21
Widespread job losses leading to labor migration
Loss of Govt. revenues
From 52wk High
Top 100 stock by Mkt Cap₹ 46.5
Lac Cr
Credit rating downgrade fearsFitch has downgraded UK [AA to AA-]Any such action against India could have profound impact on investment flows
Declining market capitalization
Significant decline in Rupee value
FIIs - >₹ 100K Cr Net outflow during Feb-Mar’20
Gold loosing its safe haven title
Increasing external debt₹ 28 Lac Cr (Sep’19)
Revised fiscal deficit targetFY 20, could be higher (>6.0%) for FY21 along with recalibration of budget
3.8%
3.3%
Large Caps – Nifty 50P/E : Declined from historic high of 22x to 17x29% correction since Jan 14th, 39% at lowest
► Tata Motors 70%► Vedanta 67%
► ONGC 64%► Gail 62%
Some of the biggest losers
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Covid-19: Impact on various industry sectorsPotential survivors and thrivers in the short term
Potential Survivors
Potential Thrivers
Construction & Real Estate
ICT
E-Commerce
Agriculture
Education
Financial ServiceManufacturing
(non essential)
Automotive
Aviation & Maritime
Tourism & leisure
Oil & Gas
Medical supply & Services
Food Processing
Healthcare
Expenditure being limited to non-luxury goods
• Deferred Capex• Preference for
renting• Essential
commodities• Preference to
generic brands
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RBI and IBBI response
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Developmental and regulatory packageRBI’s comprehensive package to mitigate negative effects of COVID-19, revive growth and preserve financial stability
Expanding liquidity in the system to restore normalcy
► CRR
► Policy rate
► LTLRO
► MSF
01
Improving the functioning of financial markets
► Long term Repo operation
► Offshore Rupee NDF
03Liquidity to Banking Sector for investment Borrower
Easing financial stress caused by COVID-19
► Moratorium on debt repayment
► Asset Classification norms
04
Reinforcing monetary transmission for smooth credit flow
► Reverse repo rate
► Extension in Basel III framework
02
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COVID-19 Regulatory packageAttempts in mitigating the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure the continuity of viable businesses
Lending institutions (LIs)• Commercial banks (including
regional rural, small finance & local area banks)
• Co-operative banks, • All-India Financial Institutions, • NBFCs (including housing
finance companies)
Supervisory review
• Accounts provided relief subject to supervisory review with regard to their justifiability on account of the economic fallout from COVID-19
Other conditions
• Reliefs provided not to constitute as default
• MIS on reliefs provided to borrowers with o/s in excess of ₹ 5 Cr
Term loans
► 3 month moratorium in payment of installments
► Includes Agricultural, retail and crop loans
► Residual tenor to be shifted across the board
Interest on CC/OD
► Recovery of interest on CC/OD facilities to be deferred by 3 months
► Interest shall continue to accrue and to be recovered immediately after May 31, 2020
Drawing Power
► Recalculation of DP allowed on case to case basis
► LI may reduce margins or reassess WC cycle
► Relief to be available up to May31, 2020
Moratorium
Deferment
Recalculation
Relevant period for COVID-19 regulatory package being 3 month starting March 1, 2020 to May 31, 2020
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Industry ImpactFinancial services & NBFC industry section
► LTLRO of ₹ 1 lakh crores unlikely to be used for NBFCs (of investment grade securities of ₹ 53.2 lac crores, NBFC debentures contribute ₹ 9.6 lakh crores, while total non bank borrowings of NBFCs stand at ₹ 15.6 lakh crores. All other liquidity measures mainly SLR or CRR based, no direct liquidity support to NBFCs
► If ₹ 15.6 lakh crores of non-bank liabilities do not offer moratorium (assuming banks do) this sector would have high liquidity mismatches as it has no option but to offer moratorium to its borrowers
► High level of NPAs expected given a ₹ 3.0 lakh crore of the outstanding's are to the commercial real estate sector, a substantial portion of its non-housing loan portfolio
► Accounting anomalies may result in covenant breaches. Issues around Staging under IFRS not addressed by RBI, DPD calculation related interpretations
► Issues around securitisation and Debentures held by banks remain unresolved creating uncertainties.
Debentures30%
Borrowing from Banks19%
Borrowing from FIs
1%
CPs4%
Other Borrowing14%
Current Liabilities & Provisions
8%
Shareholder Funds24%
NBFCs- Liabilities breakup
Loans and Advances72%
Investment in G-Sec2%
Other Investments17%
Cash and Deposits3%
Other assets6%
NBFCs- Assets breakup
Balance sheet - ₹ 32,57,641 Crores (as of Sept. 2019) NBFCs comprise 21% of total lending by financial institutions at ₹ 23.4 lakh crores
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Impact of current situation on IBC cases
Regulatory/legal pronouncements IBC cases in pipeline
► Finance Minister announced the raising of minimum limit for IBC cases from ₹ 1 lac to ₹ 1 crore
► IBBI vide a notification regarding has declared a blackout period for all accounts in IBC for the lockdown period
► Courts are closed during the Lockdown
► Finance minister has announced a possible temporary suspension of section 7,9 and 10 of the IBC
► Suo moto order from the NCLAT for extension of CIRP by the moratorium period.
► Considered view that the 1 crore limit applies only for prospective filings and all filings done prior to the announcement would be at the old limits
► Seeing many situations where factories are either locked down or operating at minimal staff and going through a business continuing planning. Value preservation
► There has been a lack of interest in bidders mainly as they are involved in business continuity planning of their own.
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Emergency Credit LineAn initiative taken by banks to meet temporary liquidity mismatch arising out of impact of COVID-19 pandemic
Various banks have rolled out COVID Emergency Credit Line (CECL) to provide emergency credit to existing MSME and Corporate borrowers affected by the impact of COVID-19.
Particulars Bank 1 Bank 2 Bank 3
Eligible BorrowersAll standard accounts, not
classified as SMA-1 or SMA-2Not available in public domain
All standard accounts, not classified as SMA-1 or SMA-2
Nature of Facility Demand Loan Demand Loan / Overdraft Short Term Loan / Demand Loan
Validity of Scheme June 30, 2020 June 30, 2020 Not available in public domain
Quantum of FinanceMax. 10% of the existing FBWC
Limits, up to ₹ 200 CrMax. 10% of the existing FBWC
Limits, up to ₹ 100 CrMax. 10% of the existing FBWC Limits, up
to ₹ 200 Cr
Repayment Tenor12 Months (including 6 months
moratorium)24 Months (including 6 months
moratorium)15% in first 6 months,
Balance 85% in next 12 months
Rate of Interest 7.25% p.a.1 Year MCLR / RLLR
(1-yr MCLR as on Apr 1, 2020 is 7.75%)
Corporate Borrowers : 8.15% (1-yr MCLR)
MSMEs : 8% (RLLR)
Margin / SecurityNIL
Extension of charges on securityNot available in public domain
Nil80% of proposed limits should be backed
by value of stocks & receivables.
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New IBC Amendments
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Admission of the insolvency application by class of creditors
► Specific criteria set for class and real estate allottees.
► Initiation of CIRP on another corporate debtor (CD) by a CD now allowed
Commencement date
► Removed the provision for initiating a CIRP from the appointment of IRP.
► IRP to be appointed on the date of order instead of within 14 days from the order date.
► RP to manage affairs of CD till a liquidator gets appointed.
Commencement MoratoriumRing-fencing or whitewashing
of corporate debtor
Enhanced scope of moratorium► A grant or right given by the
central government, state government, local authority, etc. shall not be suspended or terminated on the grounds of insolvency*
Enhanced scope of essential goods and services
► Shall not be terminated, suspended or interrupted if considered to be critical for survival by IRP/RP*.
*provided payments are made during moratorium
For prior offences,► Liability of CD to cease► CD shall not be prosecuted
after approval of a resolution plan
► No action (attachment, seizure, etc.) after approval of a resolution plan
► Actions against promoters and designated partners still allowed
► Assistance and cooperation shall be provided to authorities
Others
► The definition of interim finance is changed and may be used to include rescue finance
The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, effective 28 December 2019, aims to further amend the code and accord clarity on some contentious and litigious issues of the Code while expanding the scope of some provisions. The amendments address concerns expressed by major resolution applicants and creditors. The legislative changes, coupled with Supreme Court orders in 2019, may lead to higher investor interest in resolving distress in insolvent companies.
The amendments seek to address the practical issues in the insolvency framework and respond to the emerging trends in an adequate manner
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Insolvency for Financial Service Providers (FSP) – a prelude to FRDI?
Rules of the game..
MCA has notified rules providing a ‘framework‘ for insovlency resolution of systemically important FSPs, excluding banks. This comes on the back of a liquidity crisis in the NBFC sector and recent cases of default by Financial Institutions (Fis)
Sec. 227 of the Code
Insolvency and Liquidation
Proceedings for FSPs Rules 2019
MCA notification S.O. 4139(E) dated 18th
November 19
Gives power to Central Govt., in consultation with financial regulators, to
notify FSPs to whom provisions of Insolvency & Bankruptcy Code would
apply
Provides a framework for initiation of insolvency process against a FSP on an
application by a notified Regulator
Notifies the rules will be applicable to NBFCs (including Housing Finance
Companies) with asset size of INR 500 crs. or more as per last audited balance sheet and RBI will be the FSP regulator
allowed to file an application
Backdrop..
infrastructure Leasing & Financial Services (IL&FS) Group, one of India’s biggest non-bank finance company’s (NBFC) defaulted on its debt obligation and Govt. stepped-in and took control of the Group by reconstituting its board.Further, large FSPs (DHFL, Altico) missed debt payments sparking a default fear in the financial sector. The problem seemed to be more systemic than transactional and necessitated a need for a framework to deal with such situations
2017
2018
2019 RBI initiated regulatory actions and investigations over alleged irregularities in certain loan accounts by Punjab & Maharashtra Co-operative Bank.In absence of insolvency framework for FSPs, in a unique case NCLT admitted an application by an Operational Creditor against Aviva Life Insurance for a default of an operational debt.
Financial Resolution and Deposit Insurance (FRDI) Bill was introduced to provide a framework for resolution of distress/failures of FIs. The ‘bail-in’ provisions grabbed media attention and raised concerns amongst the general public, making it politically unwelcome and was subsequently shelved
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The process...how it differs from a vanilla CIRP?
Particulars Sec. 7, 8, 9 Sec. 227 Further comments
Who will it apply to?
Companies other than FSPs
Notified FSPs (with asset size > INR 500 crs) have been notified
Central Government's power to notify any other FSP (bank/insurance/AMC) for purpose of their insolvency (in consultation with regulator) continues as it were earlier
Who can apply?Any creditor with default above amount specified
Only notified regulators can apply – only RBI has been notified so far
The power given only to regulators and not any other creditor to file an application for insolvency seems to be in line with leading global practices including the UK
When does the moratorium start?
Starts from the date of the admission order
Interim-moratorium from the date of filing application
Interim moratorium is to provide breathing space to the FSP from independent creditor actions on the news of filing of application
Who runs the process?
An Insolvency Professional registered under the IBBI regulations
An ‘Administrator’ proposed by the appropriate Regulator and appointed by NCLT
In addition to the Administrator, the Regulator may, where deemed necessary constitute an Advisory Committee (AC) within 45 days of admission with three of more members
Approval on resolution plan
CoC + NCLTCoC + NCLT + No objection from the appropriate regulator
Upon CoC approval the Administrator shall seek ‘no objection’ from the appropriate regulator on the ‘buyer’ who would be in control or management of the FSP after plan approval
Except for the key differences highlighted below, the Corporate Insolvency Resolution Process for FSPs would be like any other Company with claims in 14 days from admission, first CoC in 30 days and process to be completed in 180 [+90] days
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Prepacks
The Government of India’s outlook for resolving Stressed Assets beyond the IBC: Pre-packaged Bankruptcy
This information contained in summary is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.
Understanding Pre-packaged Bankruptcy
Defined by Association of Business Recovery Professionalsin the UK
“an arrangement under which the sale of all or part of acompany’s business or assets is negotiated with apurchaser prior to the appointment of an Administrator,and the Administrator effects the sale immediately on, orshortly after, his Appointment”
The Pro’s and Con’s of Pre-packaged Bankruptcy
Advantages of Pre-pack
process
Criticism of Pre-pack process
The Graham Report (2014) in the UK proposed the creation of a ‘pool of independent experts’ which would address problems raised by marketing
of the business and provide extra checks and balances to the process
Speed of Resolution
Continuity of Business
Low Cost of Trading
Brand
▪ Company undergoes Administration with resolution imminent
▪ Minimal disruption to brand, customers, supplied and other stakeholder confidence
▪ Cost of trading avoided resulting in maximization of value
Unsecured Creditors
Operational Creditors
▪ Conclusion probable without creditor or court approval
▪ OC can take aggressive stance in collection of dues
Negotiate terms
before filing
Shorten & simplify the
process
Proactive approach
Minimal Brand
Erosion
The proposed mechanism for a pre-packaged insolvency in India
This information contained in summary is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.
Proposed Pre-Insolvency planning and execution
Consortium of lending banks
with the BoD of the CD
appoint an IP/Advisor
1IP/Advisor to review financial
and business position and
collate financial and operational
claims
2
IP/Advisor to lead process of
attracting, evaluating and
negotiating a resolution plan
3
BoD to providing data required
by potential resolution
applicants for due diligence
4IP/Advisor to facilitate selection of
appropriate resolution plan
completeness of legal compliance
5
Valuation and feasibility of the plan is independently determined IP, BoD
and lenders to have the plan & process reviewed by the Oversight
Committee especially if the resolution plan is proposed by related party
6
Various options still exist to implement a Pre-packaged Bankruptcy
Option A (Based on UK Pre-pack model) Filing with NCLT and Approval
Option B (Based on US Pre-pack model) Filing with NCLT and Approval
▪ IP files Resolution Plan in NCLT with application for CIRP,
with statutory disclosures required under Law
▪ Submission of claims collated and details of process
followed
1
▪ NCLT, if satisfied with the process followed should approve
the plan within 30 days.
2
▪ If approval is not feasible in view of the NCLT, the corporate
debtor should be admitted into IBC on Day 30 with the IP as
the IRP.
3
▪ IP files Resolution Plan in NCLT with application for CIRP,
with statutory disclosures required under Law
▪ Submission of claims collated and details of process
followed until filing date
1
▪ NCLT, if satisfied with the process followed should approve
the plan within 14 days.
▪ Appoint IP as RP; RP to invite claims and form the CoC as
prescribed under IBC
2
▪ Pre-pack plan to be put to vote in first CoC and
subsequently be filed with the NCLT if approved – NCLT to
approve plan within 14 days of filing
▪ If not approved by CoC, CIRP to continue
3
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Questions
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Way Forward
Successful implementation of RBI directions through quick decision making
Pass on the liquidity created through RBI directions to the lendees
Close monitoring of accounts with a cash flow focused approach using predictive analysis & other monitoring tools
Developing new products to assist the business and the economy to revive
Further support and robust reforms covering both fiscal & monitory policies
Long dated rescue package and reforms with a longer horizon / timeline (>12 months)
Extending the moratorium on downgrade of accounts for 12 months
Special purpose financing required to address the need of restart financing
Reforms focused towards middle class to preserve income and revive overall demand
Economic revival will be staggered, bankers have to reassess the road map for the next 3 years
Measures taken by the GoI, RBI and banks are in the right direction but a holistic revival plan with a longer timeline must be devised