COVID-19 Impact – RBI and IBBI

Webinar

April, 2020

Page 2

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

1 2 3 4

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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