IBBI Chairman Ravi Mittal said in a quarterly update issued earlier this week that it is in the interest of existing lenders to provide interim finance as they will benefit in getting better resolution amount, which is more than the watershed priority.
A senior bank official said that at present the existing lenders refrain from providing interim finance due to inordinate delay in closing the resolution plan. The same banker said there has been a delay in getting approval from the adjudicating authority to implement the scheme due to litigation and lack of members in the tribunal.
The Chairman of IBBI expects that “as the Insolvency and Bankruptcy Code matures, it is expected that there will be an increase in awareness among lenders about the benefits of raising interim finance during the Corporate Insolvency and Resolution Process (CIRP). debt and protecting it from going into liquidation.”
Interim finance is part of the CIRP cost, which is prioritized in the payment of other debts of the corporate debtor—in the resolution plan and during the settlement of debts in liquidation.
Making a strong pitch for interim finance, the Chairman said that in order to protect the interest of the lenders, the code prohibits creating any security interest on any asset of the debtor without the consent of the creditors. The Reserve Bank of India allows banks to classify interim finance as a standard asset during the CIRP period.
Despite these exemptions, Mittal said that in some cases, the Committee of Creditors (CoC) has opposed providing finance to the distressed entity; In other cases, interim finance is given only to meet process costs, which may not be sufficient to drive the company through its restructuring.
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A recent study shows that in 85% of the cases, less than Rs 5 crore was raised as interim finance, which indicates that the money raised was used only to cover the process cost.
Mittal pointed out that given the level of uncertainty and risk, lenders are apprehensive of lending money to a company already under stress.