The government plans to suspend laws which classify corporates as non-performing assets (NPA) for six months amid coronavirus outbreak.
The companies that default their loans after March 1 and the companies which are currently enjoying a grace period of 90-days to settle dues will not be counted as NPAs, according to government sources.
"The government plans to amend the Insolvency and Bankruptcy Act (IBC) through an ordinance for protecting the loan defaulters, who suffered heavily because of the spread of the virus and lockdown. The officials in finance, corporate affairs and law ministries are consulting the industrialists regarding this," said a senior company executive.
The government believes that the impact of the pandemic will last for at least two quarters of this financial year, said another senior executive, who previously worked with the RBI.
"So it is ideal to suspend initiation of new IBC cases during this period," he added. However, the ongoing IBC cases will continue.
The new cases will not be pushed by the banks, which have already offered a three-month moratorium on interest on term and working capital loans of corporates as per RBI's instructions. But the RBI moratorium doesn't give exemption to loans defaulted prior to the three-months.
The lockdown has badly hit the financial performance of companies. There's a high likelihood financial and operational creditors will declare insolvency proceedings against many such firms.
To avoid this from happening, Finance Minister Nirmala Sitharaman earlier announced that the government may consider suspending Sections 7, 9 and 10 of the IBC for a period of six months if the current situation continues beyond April 30.
The move will disable the creditors and promoters from initiating insolvency proceedings against companies.
According to the RBI rules, if payment is not made and the accounts are not regularised within 90 days of the date of default, the borrower's account is classified as NPA.
There is a demand for exclusion of lockdown period while computing the 90 days for NPA.
The Bombay High Court has said the lockdown is to be excluded while computing 90 days for the declaration of NPAs.
The court's decision came on a petition by Transcon Iconica, which recently defaulted its loan from ICICI Bank.