It has been estimated that the in the Public Sector Banks, the NPAs percentage can go as high as 17.6% and the same statistics for Private Sector Banks show that the NPAs may rise up to a level of 8.8 % by the end of September 2021.

With the second wave of the pandemic in hitting India, it's inexorable to expect the problem of NPAs/Bad loans to aggravate. After the first lockdown was imposed, we saw a 'K shaped' recovery pattern which draws a picture that the outbreak of Covid-19 pandemic in 2020 lead to moratorium being extended to borrowers by the RBI. The banks were largely uninterested in lending money to troubled companies.1

At the current economic phase, it is imperative to boost the credit growth to see a healthy recovery on the economy. On this note, providing troubled companies with interim financing could help bolster the struggling economy and presents itself as a very lucrative option for the creditors.

The concept of interim financing has spread like wildfire with ARCs Companies such as Edelweiss Asset Reconstruction Company, NBFCs such as Eight Capital LLC, etc. entering the picture. With arms of Private Equity firm likes KKR India also coming forward with Interim financing policies, private players seem to have the grasp on the interim financing, whereas banks such as Punjab National Bank and State Bank of India are also slowly coming into the market with interim financing schemes.2

Research Questions

• What is interim financing and how does it help in increasing the credit flow?
• What makes interim financing a viable option in saving troubled companies and what effect has the pandemic had on the outlook of interim financing? And what is its range as an upcoming market for banks and financial institutions?
• How is the interim financing framework in India and how does it compare with other framework of other jurisdictions?
• What steps has the RBI taken in order to address the effect of rising NPAs and falling economy on the banking sector and what's the way forward?

Scope
The scope of this projects extends to analyzing the developments in India whilst drawing a contrast with foreign jurisdictions.

Limitation
Due to paucity of time and resources the gamut of this project has been restricted to discussing interim financing under IBC only. An exhaustive analysis of the effectiveness of interim financing and other viable options could not be done owing to the concept being fairly new and untested in the Indian landscape. Also, the issue being present-day, an analysis of the case laws and commentaries could not be made.

The Impact Of The Pandemic On Banking Sector

The pandemic has rendered economic growth to come to a halt and has led the economy into an unparalleled recession throughout the globe. The most affected companies are the ones who already has outstanding debt near the saturation point. The pandemic has forced India to deploy revised strategies to deal with the problem of growing bankruptcy of companies which would otherwise triggered IBC in cataclysmic proportions.

Companies that were already under liquidity crunch before corona have struggled most due prolonged liquidity crunch also affecting the value of their assets. Around 1900 companies have been reported to be undergoing CIRP process.

Due to liquidity crunch and downfall in demand, banks' balance sheets have taken a massive blow. Hike in NPAs have been rising at alarming rates. With the lockdown imposed, shutting down of operations of bankrupt companies and dip in demand by prospective bidders alongside depreciating value of assets, banks have been affected the heavily.3

Even before Covid, the problem of NPAs still existed and in order to mitigate the issue, the government had already brought into use Corporate Debt Restructuring Mechanism, Strategic Debt Restructuring Scheme, etc. but to no avail.

• Bad Banks
  Union Budget 2021-22 saw a proposition of setting up of Bad Banks, which is basically an asset reconstruction company aimed at consolidating stressed assets. Bad banks basically do the work of segregating good assets from bad assets and try to resolve these bad assets over some period of time. This would enable the banks to focus their operating profits on credit growth and fresh business rather than only limit themselves to making provisions for bad loans. This lessens the burden of NPAs on the banks. An estimate figure of around 2.25 Lakh Crore is being made to be transferred to and managed by the bad banks.
  
  Bank taking over the bad loans helps the banks improve their asset quality at a time when the real lending rates have taken a hit. At the current economic recovery phase, addressing and boosting the credit growth is the best idea for the banking industry.
  
  But prior to the bad banks coming into picture, another tool of solving the boosting credit growth that still exists is interim financing.

What Is Interim Financing?

"Interim Financing is like oxygen to ailing companies and is indispensable"

Interim financing, also known as rescue financing, is a tool which helps troubled companies undergoing resolution proceedings to fund themselves when there's need for funds. It basically is the raising of any financial debt by the RP (resolution professional) during the process of insolvency resolution up until approval of a resolution plan by committee of creditors and the NCLT. Interim Finance is mentioned under section 5(15) of the Insolvency and Bankruptcy Code 20164. This is super beneficial for the troubled companies and at the same time an interesting lending opportunity for the creditors.

For a corporate company undergoing the process insolvency, Interim financing has presented itself as a lucrative option for the company to maintain the status of going concern or have minimum liquidity to operate. Earlier, there was no provision for accrual of interest once the liquidation process had started. But now, amendments have been made and super priority extends to the liquidation process as well.5

While the Corporate Insolvency Resolution Process in underway, there are certain expenses that the Resolution professional has to make The corporate debtor may or may not have the funds to cater to the expenses such as payment to staff, security, fees of valuers and other professionals. Even for such petty expenses, the RP has to raise funds through interim financing. This raising of funds if subject to approval by the committee of creditors.

1. Features of Interim Financing
   Some of the features of interim financing are:
   1. Interest Rate:
      Since interim finance caters to urgent corporate requirements within the CIRP, it is beyond doubt that the creditors will charge higher interest rates. Also, there is a high risk of timely debt recovery. Creditors charge around 16-24% interest rates to give out such credit or at an interest which is around 500-600 base points higher than normal credits.
       
   2. Priority status- Section 53 6alongside section 5(3) of the Insolvency and Bankruptcy Code 7lays down that interim finance takes priority vide section 53 (1) (a), which implies that they would be the first in line to be repaid among all the loans in the books of the debtor company. This applies to both, repayment of principal and repayment of interest on the principal.
   3. Long term interest- Post the amendment, to the delight of the creditors, they are now entitled to interest and priority status even post the commencement of liquidation
   4. Tenure of Interim finance- Credit extension via Interim financing can more or less be considered as short term as the loans are extended till the resolution process is underway or till liquidation. This short-term aspect of loan extension makes them more secure than long term credits.
   
    
2. Interim Finance as A Solution for NPA Problem
   On a grass root level, the real reason behind piling up of the NPAs is the incaution and indiscretion by the creditor. RBI as well as the banks, although, mete out credit to the companies adhering to the prudential norms, it out of their hands to inspect the corporate/technical decisions taken by the company. A failure of such debtor company (going bankrupt) go on to the books of the creditors as bad loans/NPAs. This is where interim finance finds its strength. It derives its reliability from the security provided by the wisdom of CoC as finance can only be meted out on discretion of the CoC. In a scenario where the company couldn't survive and is at a liquidation state, priority is given to the interim finance. Another aspect is that a letter of comfort can be extended to the lendors by the CoC to undertake responsibility of security onto themselves. This aspect bolsters the threat of non-repayment because of the fate of the debtor as CoC also share the burden.
   
   Post the 2020 amendment, provisions were made to raise finance for troubled companies keeping in mind the current situation of economy during the ongoing pandemic. Section 5(15) of the Insolvency and Bankruptcy Code has been amended to include "and such other debt as may be notified" and "during the insolvency resolution process period" giving freehand to raise
   interim finance to the Interim resolution professional and the resolution professional as and when the requirement surfaces.
   
   It is the duty of the resolution professional to maintain the troubled corporate debtor as going concern under section 25 (2) (c) of the Insolvency and Bankruptcy Code8. The resolution professional also has the power to raise interim finance under the section 5(15) of the Insolvency and Bankruptcy Code.
   
   The apex court of the country, the Supreme Court has stated in the landmark case of Swiss Ribbons Vs UOI that "a good realization can generally be obtained if the firm is sold as a going concern". To this cause, the authority to avail interim finance helps further the idea of ensuring going concern status of the corporate debtor even during the CIRP process. In these trying times, interim financing helps the resolution profession/ Interim resolution professional to maintain the necessary cash flow and liquidity to ensure going concern and mitigate increasing debts9
   
   The setting in India with regards to interim financing was such that the banks avoided the extending loans to the companies undergoing the process of insolvency. After a few relaxations extended to the interim finance providers, the interim finance market had become a lucrative offering for the banks to tap into.10

Comparing The Insolvency And Super Priority Framework With Other Legislations

In times to come, many companies will file for bankruptcy and the requirement for credit to ensure minimum liquidity and continuance of operations will increase. This will trigger banks to take action in providing credit to such companies for varied reasons. Some may use it as an opportunity to gain profit from super priority financing and some may lend to safeguards the position of existing loans.

1. Super Priority Financing
   Last mile or rescue funding is new concept in India however it's possible to turn to established jurisdictions such as for example the United States and Singapore which offer robust financing mechanisms. Analysis of other developed jurisdictions dictates that super priority status through express legislative provisions / judicial interpretations should be granted to the lenders.
    
2. Framework in Foreign Jurisdiction: USA And Singapore
   Chapter 11 of the United States Bankruptcy Code 11provides for a super priority status alongside a lot of other perks to the lendors who give out credit to troubled companies undergoing reorganization. Such finance is termed as Debtor in Possession Financing. 12Following the footsteps of USA, Singapore also made amendments to its insolvency mechanism. Similar to the US, the Singapore insolvency regime also includes the concept of Debtor in Possession Financing.
   
   Also, Singapore, in May 2017, amended its company act to introduce section 211E 13which provides for the super priority status of the lendors. One major hurdle that arises in giving out credit to a troubled corporation is the concern how the fresh funds would be utilized, would it be used to siphon off the existing debts or to generate fresh income from it.
   
   To safeguard the creditors in this aspect, the United States Bankruptcy Code provides for a super priority status which implies that they would be the first in line to be repaid among all the loans in the books of the debtor company. This takes care of the debt overhang issue as any cash flow that is generated goes to repay the Debtor in Possession financer.

The judiciary of Singapore in the landmark case of Re Attilan Group ltd laid down the prerequisite conditions that must be satisfied before the status of priority is granted to the finance. The finance must satisfy the definition of rescue financing under 211E(9), 14the finance must have been provided as the last resort in the given circumstances [section 211E (1)] and the court has discretionary powers to grant the status of priority.15

"It is only where there is some evidence that the company cannot otherwise get financing that it would be fair and reasonable to reorder the priorities on winding up, giving the rescue financier the ability to get ahead in the queue for assets." The onus lies on the applicant to prove that reasonable attempt at trying to secure financing has been made while asking for priority status. In a scenario where the applicant fails to prove this, priority status will not be granted to the creditor. Singapore has now introduced a Singapore Bankruptcy Act in 2020.16

The Indian Expirience

The Indian Insolvency and Bankruptcy Code, in order to resolve the issue of troubled companies undergoing resolution proceedings (CIRP) to raise finance, introduced super priority status under section 5(13)17 in similar lines to the USA and Singapore. In addition to that, post the 2018 amendment, priority status now extends to the creditors during the liquidation process also. In contrast to Singapore where priority status is later accorded by the adjudicating authority, the discretion in India lies with the committee of creditors.

1. Legislative Framework

   Section 5(15) of the Insolvency and Bankruptcy Code has been amended to include "and such other debt as may be notified" and "during the insolvency resolution process period" giving freehand to raise interim finance to the Interim resolution professional and the resolution professional as and when the requirement surfaces.18
   
   It is the duty of the resolution professional to maintain the troubled corporate debtor as going concern under section 25 (2) (c) of the Insolvency and Bankruptcy Code19. The resolution professional also has the power to raise interim finance under the section 5(15) of the Insolvency and Bankruptcy Code.
    

2. Judicial Developments

   Certainly, one of 1st cases that addressed the dilemma of Interim Finance jurisprudence in India is that of Edelweiss ARC v. Sai Regency Power Corporation Pvt. Ltd and Another20. NCLAT in this case laid down that," Value of a going concern is much more than a non-functional plant or concern. ‟ implying that interim finance could be availed for supply of essential goods and direct costs also.
   
   One caveat that arose from this judgement was that it failed to ease off the regulations 31 and 32. Regulation 32 puts forth strict categories of essential goods precluding direct input costs. One of the intricacies of the judgement was that now a disharmony exists between regulation 31, 32 and Section 14(2A) as it bestows the determining discretion onto the Resolution Professional and Committee of Creditors.

Legislative Endeavours And The Road Ahead

It is evident that super priority financing in foreign jurisdiction is well established that works within a well laid and thought-out legal framework which is specifically cutout to cater to such provisions. Although India in this aspect is behind the foreign jurisdictions, India too has taken steps towards bridging the gap through amendments.

A provision was made for the lenders to not lose out on their ad interim benefits by extending the date till which the interest could be accrued which was set to 12 months from commencement of liquidation or loan repayment, whichever comes first. In another amendment, it was declared that the asset classification norms would treat interim finance as standard asset while the power to raise interim finance was extended to the resolution professional.

With India's commitment to promote native indigenous industries to act as fuel for the economy, interim financing becomes an important tool in achieving it. With times like these being uncertain, it is important to have exhaustive guidelines that synchronize with the judicial and legislative framework of the country. Had it been done earlier, India could have dealt with the issue of falling economy during the pandemic in a more efficient manner. Even now, India should endeavor to evolve into a debt restructuring hub. With the second wave of the pandemic in hitting India, it's inexorable to expect the problem of companies slipping down the road of insolvency. 21Prioritizing interim finance during such times could be a life savior for the troubled companies.

Steps Taken By RBI

RBI has, in order to bolster the wrath of the pandemic announced various regulatory, supervisory and monetary measures which include cutting down on interest rates, moratorium on debt, resolution window within Prudential framework of stressed asset classification standstill, etc.

To aid the economic revival, the troika of slashing policy rate alongside liquidity infusion, time bound resolution and regulatory forbearance was employed by the government.22
WMA (ways and means advances) are basically temporary loan extensions given out to the central government and state government which aid them bridge the gap between revenue and expenditure. The WMA limit for central government has been set at 2 lakh crores. The limit set by the RBI to the state under WMA for such credit to 60% enabling the states to be able to borrow an amount which is estimated to be 51600 crores.

WMA would be able to help in providing enhanced short term liquidity but will not be the final solution for the nosedive shortfall that was witness in revenue generation23
The Reserve Bank of India is additionally conducted a $2 billion six-month sell/buy
The government previously had ordered the banks to not charge interest on interest on the loans during moratorium period which is estimated to be around 14000 crores.24

An estimate by the ICRA put forth a figure that the bad loans would've amounted to 8.7 trillion rupees if the government hadn't intervened. The policy rates were reduced by 115 base points by the RBI25 Liquidity of around 4lakh crore has already been infused into the banking system and RBI endeavors to continue doing that.

RBI has now started the process of unwinding by increasing the cash reserve requirement to 4% which was earlier at 3% (since the announcement of march 2020). Although it will be a tough task to strike a balance between the unwinding and infusion of liquidity during the recovery process.26

RBI, last year, had announced forbearance to now declare NPAs from March to August which proved to be a boon for companies and retailers. This invariably also resulted in resurfacing of the banking asset quality issue;
The RBI's actions were geared towards providing a boost to the economy whilst also ensuring financial stability.27

An ordinance was passed on June 5th to forbids the initiation of CIRP which was extended to 31st March 2021. It suspended section 7,9 and 10 of IBC due to the rising uncertainty and stress in the economy. Now the companies could not initiate insolvency proceedings.28

Conclusion:
A framework which is well thought-out and in which consultations and viewpoints of all stakeholders is taken into consideration to effectively protect the interest of every stakeholder (depositor, lender, debtor, etc.) in the process.

In an attempt to tackle the situation in hand, the government has taken various measures in the form of reforms to which IBC is no exception. Whilst the economy had taken a nosedive, the government was quick to realize the need to save the troubled companies and to take steps to solve the issue of rising NPAs.

The government increased the triggering threshold for insolvency, suspended section 7,9,10 of IBC, conducted a $2 billion six-month sell/buy, infused liquidity, etc. in order to bolster the wrath of the pandemic. In short, the government has tried to give extra time and space to companies whilst also ensuring the best return to lendors after the crisis passes.

One long term viable solution to solve the ever existing crisis of banks, rather than aiming to reduce short term burden on sheets of the banks, could be to incorporate "an early warning system" and "forward looking stress testing framework" in risk management framework of the banks.

This would enable the banks to pick up incipient signals of the debtor's stress and would also enable them to take remedial actions early and effectively whilst also ensuring the value of the assets don't go down. In the same landscape, Interim Financing can be a way which can help save the eroding asset value.

Just like how boosting the immunity and following proper stringent guidelines is the best way to tackle the pandemic, to strengthen the banking, financing and debt framework would ensure long term financial stability.

A framework which is well thought-out and in which consultations and viewpoints of all stakeholders is taken into consideration to effectively protect the interest of every stakeholder (depositor, lender, debtor, etc.) in the process.29

Debt restructuring framework should be closely aligned with IBC. Since finance is an evolving field in the contemporary world and steps have to be constantly taken towards achieving a synchronous framework. Factors like deregulation, competition, technological advancements, globalization, etc. have affected the diversification of operations providing an impetus to financial institutions extending various service Interim financing in India, being an underdeveloped field, isn't well regulated and supervised as of now due to the existence of interim finance under IBC and outside of purview of IBC which is to say that extension of interim finance is not just limited to banks or financial institutions30. In this backdrop, the presence of a super regulator might come in handy in dealing with two or more independent regulatory jurisdictions giving rise to supervisory arbitrage.

End-Notes:

1. *
2. *
3. Megha Mittal, Interim Finance Becomes Effective Attractive' (Vinodkothari.com, 2021) odkothari.com/wp-content/uploads/2019/06/Interim-Finance-Becomes-Effective-Attractive.pdf accessed 7 April 2021
4. Insolvency and Bankruptcy Code, §5(15)
5. Bhavya Gupta and Arush Agrawal, 'Analysis Of The Insolvency & Bankruptcy (Second Amendment) Bill, 2020' (The Daily Guardian, 2021) the-insolvency-bankruptcy-second-amendment-bill-2020/> accessed 7 April 2021.
6. Insolvency and Bankruptcy Code 2015, §53
7. Insolvency and Bankruptcy Code 2015, §5(3)
8. Insolvency and Bankruptcy Code 2015, §25(2)(c)
9. Coronavirus impact on banks' (The Economic Times 2020) offering-credit-line-with-softer-terms -to-retail-borrowers /articleshow/74826322.cms?utm
   _source=contentonterest&utm _medium=text&utm_campaign=cppst> as accessed 5 April 2021
10. A. Gupta, V. Rehan, 'The Going Concern Experiment: Experience With IBC and Way Forward' 2020 Taxmann.com
    /www.taxmann.com/research/search?searchData=2020%5D%C2%A0122%C2%A0taxm ann.com%C2%A0269%C2%A0(Article)> accessed 1 April 2021
11. US Bankruptcy Code 2015, Chapter 11
12. United Nations World Economic Development Report
    ://www.un.org/development/desa/dpad/document_gem/global-economic-monitoring-unit/world- economic- situation-and-prospects-wesp-report/> accessed on 01 April 2021
13. Companies Act Singapore, §211E
14. Companies Act Singapore, §211E(9)
15. Vantage Editor, 'Rescue Financing: Helping Hand For Entities In Distress | India Business Law Journal' (Law.asia, 2021) distress/accessed 1 April 2021.
16. Singapore Bankruptcy Act 2020
17. Insolvency and Bankruptcy Code 2015, §5(13)
18. Insolvency and Bankruptcy Code 2015, §5(15)
19. Insolvency and Bankruptcy Code 2015, §25(2)(c)
20. Edelweiss Asset Reconstruction Company v. Sai Regency Power Corporation Pvt. Ltd and Anr, [2019] Comp. App. (AT) (Ins) No. 887 of 2019.
21. RBI Says Banks Need To Prepare For Challenges After Unwinding Of Covid-Related Measures (BloombergQuint, 2021) www.bloombergquint.com/economy-finance/banks-need-to-gear-up-to-meet-new-challenges-following-unwinding-of-measures-to-combat-covid-rbi> accessed 7 April 2021.
22. Anup Roy, 'Covid-19: In Fight Against Economic Slowdown, RBI Introduces New Measures' (Business- standard.com, 2021) ://www.business-standard.com/article/economy-policy/rbi-introduces-measures-to-fight-covid-19-slowdown-cuts-repo-rate-to-3-75-120041700485_1.html> accessed 7 April 2021.
23. Ibid.
24. Japnam Bindra, 'RBI States Waiver Of Interest Would Risk Financial Stability Of The Banks' (mint, 2021) www.livemint.com/industry/banking/moratorium-case-rbi-states-waiver-of-interest-would-risk-financial- stability-of-the-banks-11591217084160.html> accessed 7 April 2021.
25. Shaktikanta Das, 'It is Time for Banks to Look Deeply Within: Reorienting Banking Post-Covid' (Speech at Unlock BFSI 2.0, 27 August 2020)
26. Supra note 1
27. Sushant Hede, 'One Year Later, What Changes Should We Expect In The RBI'S Pandemic Playbook?' (The Wire, 2021) accessed 7 April 2021.
28. Vivek Kaul, 'What Today'S Supreme Court Order On Loan Moratorium Means For Banks' (mint, 2021) www.livemint.com/industry/banking/what-today-s-supreme-court-order-on-loan-moratorium-means-for- banks-11616504216224.html> accessed 7 April 2021.
29. RBI Says Banks Need To Prepare For Challenges After Unwinding Of Covid-Related Measures' (BloombergQuint, 2021)/www.bloombergquint.com/economy-finance/banks-need-to-gear-up-to-meet-new-challenges-following-unwinding-of-measures-to-combat-covid-rbi> accessed 7 April 2021.