Impact of the Code on banks and financial institutions 113 Impact of the Code on banks and financial institutions

114 Impact of the Code 1/2 ▫ BIFR and SICA go off completely; however, corporate resolutions come under NCLT ▫ Tight timelines under the new law – entire process of resolution to be over in 6-9 months May lead to greater financial discipline ▫ Creditors have an upper hand in resolution plans ▫ Moratorium is not indefinite – limited moratorium; if revival does not work out, entity to mandatorily go into liquidation ▫ Companies and guarantors can be both brought under a common forum – NCLT ▫ While borrowers may file resolution applications seeking moratorium, but borrower will have to face the threat of liquidation ▫ Can debtors under banker-driven restructuring also go for NCLT resolution – yes. In view of mandatory timelines, the case may reach bankruptcy stage faster Accelerating provisioning – faster transition into a case of loss assets

115 Impact of the Code 2/2 ▫ Parity between secured and unsecured creditors In voting on resolution plans, unsecured financial creditors, working capital lenders, term lenders – all get parity ▫ Can a bank stay out of resolution? Yes, Clearly provided for in case of non-corporate persons; seems logical in case of corporate entities too ▫ Major change in priority of distribution on liquidation State claims moved from first position to fifth position; utmost priority for secured creditors ▫ Floating charges completely ignored by the law ▫ Major chances of delaying tactics in case of non- corporate borrowers ▫ Cult of bankruptcy may usher a new era of consumer defaults

Structuring of loans Focus has to be on assets and cashflows 116 Structuring of loans Focus has to be on assets and cashflows ▫ Guarantees help only if they are backed by assets and cashflows ▫ Letter of comfort not a guarantee, and hence, not sufficient to rope in the comfort-provider into insolvency Lending against core assets vs peripheral assets ▫ As far as possible, recovery of loans against core assets should proceeded against under the Code rather than SARFAESI Act As far as possible, ascertainable security interests are better than unascertainable securities Lending to operating entities versus lending to upstream entities ▫ Separation of legal entity may disentitle the bank from claiming assets of the downstream entities Loans against pledge of unlisted shares ▫ Shares are unlikely to have any value in bankruptcy Financial leases may become interesting: ▫ Permitted by RBI long time back; however, not used by banks at all ▫ Has complete protection under the Code, as the leased assets do not form part of the estate Secured bonds versus loans: ▫ Secured bonds have the benefit of SARFAESI as well Companies Act

Restructuring under RBI guidelines vs resolution under the Code 117 Restructuring under RBI guidelines vs resolution under the Code That an entity is undergoing restructuring under RBI guidelines is no bar on other creditors petitioning resolution under the Code ▫ The Code treats secured and unsecured creditors at par ▫ Non-banking creditors have no say in bank-driven restructuring; all financial creditors at par in resolution under the Code