Bankers will soon act on the 28 defaulters identified in Reserve Bank of India's second list and haul them to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC).
This is likely to hit their profitability further as additional provisioning, even if relatively lower, towards these accounts will add to the credit costs of banks, especially mid-sized and smaller public sector banks (PSBs).
As many as 23 companies will be referred to the NCLT. Promoters of most of these companies in the second list have not brought much on the table, said a senior public sector banker.
Bankers we spoke to said, of the second list, about 23 companies will be filed at the NCLT courts, as they are in the process of finding a resolution for about five companies.
Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA, said, "A large part of the cases will go to the NCLT and so at a portfolio level, about 42-43 percent of provisions have already been taken by banks. To that extent (RBI's provision requirement being 50 percent for secured assets), banks will have to make incremental provisions of Rs 10,000 crore over two quarters and hence, relatively the shock is lesser. But till such time that their profitabillity does not pick up, any additional credit costs will only burden them more."
As per an ICRA report released last month, with a total exposure of Rs 3 lakh crore of accounts likely to be resolved under IBC, as per our estimates, the overall credit provisions are likely to be at Rs 2.4-2.6 lakh crore (including impact of ageing on existing NPAs and provisioning on IBC accounts) for FY18 as against Rs 2 lakh crore during FY17. "This can result in losses before taxes of Rs 30,000-40,000 crore for PSBs during FY18, even as the return on equity is expected to moderate for private banks to 9.4-10.2 percent during FY18 as against 12 percent in FY17.”
State Bank of India (SBI), country's largest bank, has said it has made 75 percent of the required provisions if all the accounts in the second list are referred to the NCLT.
B. Sriram, Managing Director (Corporate banking), SBI, post results said, "The intention is to use the strength of the balance sheet to provide aggressively and upfront to have a healthy balance sheet and consistency."
Nine of the 21 PSBs, including IDBI Bank and Indian Overseas Bank, had reported losses during 2016-17, as per the information given to the Parliament in July. As many as 13 state-owned banks had reported losses during 2015-16 financial year.
The overall credit provisions are likely to be at Rs 240,000-260,000 crore (including impact of ageing on existing NPAs and provisioning on IBC accounts) for FY18 as against Rs 200,000 crore during FY17, the report said.
After the first list comprising 12 large NPA cases identified by the RBI in June. In August, another set of about 28 stressed accounts were given to banks to be resolved by December 13 or to be referred to the NCLT.
While there was a plea from the banks to extend the deadline, the RBI has not yet accepted and is unlikely to accept that demand for extension.
Banks had already taken up 11 companies — out of its first list of 12 companies — for insolvency proceedings at various NCLTs.
Jayaswal Neco Industries, Jayaprakash Associates and Videocon Industries are not being considered for reference to the NCLT as lenders are looking at other options including restructuring of loans. However, even this will depend on the RBI’s approval given that the deadline for December 13 is over.
The RBI has told banks to provide for the loans of defaulters in the second list according to the provisioning requirement laid down for the 12 large cases in the first list referred for insolvency.
This means banks will need to provide 50 percent against the secured exposure and 100 percent against the unsecured exposures in these cases. Banks have a huge exposure in some of the accounts not being considered for reference to NCLT. Hence, banks will have to make huge provisions, leading to heavy losses in the next quarter.
Banks have a total exposure of about Rs 4 lakh crore, or 45 percent of the total systemic gross non-performing assets in the companies mentioned in the two RBI lists.
While the resolution success through NCLT is yet to be estimated with the 6 months (extendable to 9 months) resolution deadline under NCLT ending in January, the impending decision on several steel assets – with many of them receiving active interest from bidders — will make life better for large infrastructure lenders.
Less bidders for insolvency accounts?
Moreover, with the government's recent ordinance banning wilful defaulters and promoters who have defaulted for more than a year from bidding for companies which are going insolvent, bankers are worried may lead to lesser bids for smaller and mid-corporate stressed firms.
Rajnish Kumar, Chairman of SBI, had recently said, “We will be careful about a couple of things. The first thing is that resolution has to be very credible because the idea is that if we can save the asset from liquidation and we should save it. Second, when we are talking about resolution, the credibility of those who are bidding would also be examined."
He added, "I will be happy when the resolution happens. I don’t mind some haircut but I don’t want to go bald.”
Corporates such as JSW, Vedanta, Tata Groups and other private equity players have evinced good interest for the stressed assets on the block.
Corporate Lawyer Shardul Shroff at a panel discussion earlier this month said the amendments will not lead to few or no bidders in the large NPAs as the good assets will find interest among large corporate players.
Dimilarly, SBI's Kumar had said, “This presumption that there would be a few bidders for large corporates, is itself not correct. If there is value in any asset then we believe bidders will be very much interested. If you look at the expression of interest for many of the companies that are under NCLT, there is a good interest."
As per a Motilal Oswal report, "A total of 376 cases have been referred to the NCLT over the first nine months of calendar year 2017. A majority of these cases (i.e. 187) have been filed by the operational creditors, 122 cases by the financial creditors and the remaining cases by the corporate debtors."Resolution of these accounts is expected to be a major trigger for corporate lenders. However, the beginning appears to be modest, with only two accounts taken up for resolution (at hefty haircuts), 7 accounts directed to undergo liquidation, and another 14 witnessing further appeals," the report added.