MUMBAI: The Reserve Bank of India has assured banks that they can classify priority loans extended to defaulting companies in the bankruptcy process as standard debt in a move aimed at ensuring that entities which can be revived are able to raise resources, said people with knowledge of the matter. This will come as a relief to those companies that are struggling to recast loans within the strict deadline imposed by the Insolvency and Bankruptcy Code.
The central bank has however said this classification will be allowed only if repayments are made every month rather than later in the form of bullet payments or after a few months. RBI did not respond to ET’s queries. The banks had sought a clarification on the difference in treatment of such loans by banks and finance companies. Priority loans take precedence over other forms of debt and are repaid before other loans in the event of liquidation.
Finance companies without any existing exposure to defaulting entities are allowed to classify new loans to such entities as standard debt besides being able to charge much higher rates of interest than banks.
Once the bankruptcy process against a company is initiated by admission into the National Company Law Tribunal (NCLT), banks have to set aside 50% of unpaid dues as provisions. This rises to 100% if the company has to be liquidated.