The Reserve Bank of India’s latest provisioning diktat may force banks to opt for deeper haircuts or sell loans to asset reconstruction companies at a discount instead of opting for the insolvency route.
The regulator last week demanded a steep increase in provisioning requirements for loans being referred to bankruptcy courts. If an insolvency case gets admitted to the National Company Law Tribunal, banks have to set aside 50% of the loan upfront.
“NCLT is no longer a recovery mechanism for us if we are asked to provide for 50 per cent of the loans upfront,” said a banker miffed with the RBI directive and did not wish to be identified. “While earlier it was felt that the bankruptcy route was ammunition for banks to reduce the NPA (non-performing asset) burden, it’s now turning out to be a course that is filled with thorns.”
RBI has asked banks to set aside at east 50 per cent of the loan amount as likely losses for all cases referred to the insolvency process. The regulator said there should be 100 per cent provisioning in cases that don’t get resolved and are forced into liquidation.
“The biggest deterrent now is that even if a corporate debtor or any operational creditor files an application, banks will have to set aside 50 per cent of loans as provisioning, once admitted,” said Babu Sivaprakasam, partner at Economic Laws Practice. “Banks may defer to go to NCLT, but this may not stop the corporate debtors or operational creditor to exercise insolvency and in turn, involuntarily bring the banks within the IBC (Insolvency and Bankruptcy Code) ambit. “Rating agency Crisil NSE 0.12 % estimated that banks would need an additional Rs 40,000 crore as bad loan provisioning for 12 large cases being referred to the NCLT.
“With this step, the RBI has addressed the reluctance of banks to further mark down the asset values of these NPAs by having an oversight committee to provide guidance,” Crisil said in a report.”Additionally, it sends a strong signal to borrowers to adhere to credit discipline, and also encourages banks to break resolution deadlocks with definite timelines.”
Crisil estimated that banks had provisioned 40 per cent, or Rs 80,000 crore, for these 12 accounts with total debt of Rs 2 lakh crore. Lawyers said the RBI’s latest move will force banks to settle for more realistic valuations for bad assets.
“Till now, these banks were not taking meaningful hair cuts including on sale of NPAs to ARCs,” said Jayesh H, founding partner at Juris Corp.”Now it doesn’t matter who goes to NCLT, banks will have to bear 50 per cent and then 100 per cent provisioning cost.
This will force PSU banks to become far more realistic and settle for greater haircuts upfront in restructuring schemes. Hopefully, most banks will now behave in an economically rational manner.”
The RBI reviewed the top 500 exposures of banks that are partly or wholly classified as NPAs and has given its recommendations, which include referral of the top 12 NPAs for resolution under the IBC.
The regulator recommended that for other large NPAs, banks should figure out a resolution within six months and if a viable resolution is not reached within six months, the banks must begin liquidation proceedings.
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