Financial Creditors during covid-19 pandemic

By Gaurav Singh | 6 min read

What's in the page

Shared Services Centre

Pandemic and Global Economy

The inexorable virus spread at an alarming rate, infecting millions in its way of bringing the global economy to its knees. World economies visualizing their greatest fall ever named this pandemic “A crisis like no other” projecting a global growth at –4.9 percent in 2020. Even the financial crisis of 2009 led to a contraction of only -1.9% in the world GDP. The impact on the low-income groups was significantly worse than others, negating the significant efforts by many countries in bringing them out of poverty since the 1990s.

The Indian economy has been losing growth momentum before pandemic for three consecutive years. GDP growth was 8.3% in 2016-17. It fell to 7% in 2017-18, 6.1% in 2018-19 and 4.2% in 2019-20. The economy had never lost growth momentum for three consecutive years since 1991-92. And that too happened only twice before. First, during the Bangladesh War of 1971 and Second, during the First Gulf War of 1991.

Global GDP was affected by Covid

Since the Indian economy was witnessing the pre-pandemic slowdown, the pandemic only magnified the pre-existing horrors of the Indian market.

Almost 80% of Indian companies witnessed cash flow difficulty and over 50% of companies faced operations issues. According to the  Federation of Indian Chambers of Commerce and Industry (FICCI) report, 53% of companies in India are impacted by pandemics. The slow economic activity resulted in cash flow problems eventually impacting repayments, interest, taxes, etc.

The lockdown, which in India is continuing to date (June 2021) crippled the nation’s economy, financial markets, and businesses by affecting the cash flows in the market. This increased the numbers of Non-Performing Assets (NPAs) and the corporate began defaulting on payments to creditors/banks/financial institutions leading to initiation of CIRPs and ultimately Bankruptcy.

Public Sector Banks have taken a major chunk of NPA in India

Indian public sector banks collectively owe 6.8 trillion Rupees in nonperforming assets in fiscal year 2020. This value has decreased from previous fiscals.

The net NPAs as of March 31, 2020 for public sector banks were reported to be 2,30,917 Crores. Out of which 51,871 Crores, approximately 22 % belonged to the largest public sector bank in India i.e. State Bank of India.

Net NPA from different bank categories

Amendments by Government of India

The government of India in an attempt to safeguard the financial interest of corporate debtors and individuals who may default to meet their debt obligations because of pandemic brought two amendments in the existing Insolvency & Bankruptcy Code, 2016 in March 2020.

  1. The government of India raised the threshold for initiation of CIRP. Previously the minimum amount or initiation of CIRP was Rs. 1 Lakhs, but now it has been raised to Rs. 1 crore under Section 4 of the IBC Code
  2. The government also suspended the initiation of CIRP for Sections 7, 9, and 10 of the IBC Code. The default arising on or after the 25th of March 2020 was suspended for a period of 6 months (but not exceeding 1 year)


What FY 2022 may have for Financial Creditors ?

The pandemic may have increased the operational challenges for the various parties involved in a CIRP, which resulted in limited cases yielding a resolution plan. The amendments by GoI along with the catalyzing pandemic, which also brought a slowdown in the resolution process, led to a decline in the realization for Financial Creditors from the resolution of the Corporate Insolvency Resolution Process (CIRP) under the IBC, 2016. The total resolution amount for 2021 was around Rs. 26000 crores, which is almost a quarter of realizations in FY2020.

Of the 4,376 cases admitted in CIRP till the end of March 2021, about 30% have ended up in liquidation. The ratio is better than accepted but the assets were not of good quality. However, it is estimated that the realization amount for the Financial Year 2022 would increase due to the successful resolution of 8-9 big companies.

NCLT has already approved Jalan Kalrock’s Resolution Plan for Jet Airways and Vedanta Group’s Resolution Plan for Videocon. National Company Law Tribunal (NCLT) has directed the lenders of Dewan Housing Finance Corporation Ltd to consider any offer made by the Chairman of Board, Kapil Wadhawan. Taking a cue from Mr. Wadhwan’s bid, Manoj Gaur, Chairman of Jaiprakash Associates, has made a similar offer to the creditors of Jaypee Infratech. Gaur offered to repay banks and financial institutions in full, Rs. 9,783 crore by way of upfront payment, land swap, and long-term debentures with a total value of about Rs. 12,500 crore.

Want to share this post?

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

Follow Us

Connect With Us

Thank you for your interest in SPC Group. Please click on the link below and fill in your details. Our Executive will call you in 2-3 Business Days.

Contact Us?

Doing Business in India

Something isn’t Clear?
Feel free to contact us on 01204516921.

We will be more than happy to answer all your queries.

Contact Us?

establishing Business in India

Something isn’t Clear?
Feel free to contact us on 01204516921.

We will be more than happy to answer all your queries.

Contact Us?

apply for jobs

Something isn’t Clear?
Feel free to contact us on 01204516921.

We will be more than happy to answer all your queries.

Contact Us?

alumni connect

Something isn’t Clear?
Feel free to contact us on 01204516921.

We will be more than happy to answer all of your questions.

Thankyou for contacting us!

Your form has been submitted successfully. We will contact you in 2-3 business days.