Proposed Insolvency Law Amendments Credit Positive For Banks: Moody's

The central government's proposed bankruptcy code amendments are credit positive for banks, Moody's Investors Service said on Thursday.

The Union cabinet had, on July 18, approved proposed amendments to the Insolvency and Bankruptcy Code (IBC). 

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

"It gives the committee of creditors explicit authority over the distribution of proceeds in the resolution process, thereby maintaining the accepted hierarchy of creditors", it said. 

In a recent judgement in the case of Essar Steel, the insolvency court had overruled the decision of the committee of creditors stating that the resolution proceeds should be equally distributed among all claimants, thereby putting secured creditors on the same level as unsecured and operational creditors.

"The amendment will be applied with retroactive effect and will strengthen the case of secured creditors in the Essar Steel resolution," the statement said.

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

"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 the higher courts," the statement said.

"However, the poor track record of resolving cases on time means that actual implementation will be required before the process can be said to have been definitively speeded up," it added. 

Additionally, under the third amendment, which 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," said the US ratings multinational.

Under the IBC, homebuyers in a real estate project are treated on par with secured creditors, which means that their approval is required before the committee can approve the resolution plan. 

"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," the statement added.