The RBI’s Internal Advisory Committee (IAC) has advised banks to take 12 companies with exposure greater than `50 billion and contributing to 25% of NPLs to the NCLT to frame a resolution under the Insolvency and Bankruptcy Code (IBC). Other instances of NPLs should be resolved in the next six months and it has recommended a liquidation process. The key uncertainty in this whole approach is that the code is still in early stages of evolution.
RBI looking at faster resolution of the underlying NPLs
The IAC, in an objective and non-discretionary approach, has recommended 12 accounts which are 25% of the industry gross NPLs for immediate reference under the IBC. These accounts were 1) classified partly (60% or more) or wholly as NPLs among the top 500 exposures, 2) were accounts with exposure (fund and non-fund) greater than `50 billion, 3) had a cut-off reference date of March 2016. With respect to other NPLs which do not qualify under the above criteria, the IAC recommended that banks finalise a resolution plan within six months. In cases where a viable resolution plan is not agreed upon, banks need to file for insolvency proceedings under the IBC. The RBI will issue a separate circular on revised provisioning norms for cases accepted for resolution under the IBC.
Would assets have to be sold at discounts steeper than warranted as the timer begins?
We are not too sure of the accounts referred to, but the key concern remains if all accounts beyond the cut-off are accepted irrespective of the problems plaguing individual sectors. For example, steel companies have balance sheet related issues, power companies issues with power purchase agreements or fuel linkages, conglomerates have issues with holding company debt/cross guarantees provided etc. Banks now need to find a resolution in 180 days or liquidate the asset as these cases would mostly get accepted at the NCLT given there is evidence of default. Lack of consensus for an amicable resolution implies forced liquidation of the asset immediately. If there is a large number of assets put up immediately for liquidation, mostly in the next one year, only a few may get closer to a realisable value while the rest may have to be liquidated at very high discounts. Would banks, to prevent this, look to temporarily take over the company by converting debt to equity or sell at steep discounts? This would imply high levels of equity ownership in some of these assets or higher provisions than initially anticipated.
The law is still in early stages of implementation and its interpretation can delay recovery
One of the key challenges with this approach is the code itself. A quick analysis suggests that there are probably no cases where a stage of resolution/liquidation has been reached under the code while there were quite a few cases which were referred to upper benches for interpretation of the law. This code is still in the early stage of evolution and the infrastructure is still being built. Experts we spoke to suggest a two-year window for the law to be fully functional. Referring large cases at such an early stage is a risky approach though, if resolved, can be regarded as a game changer approach to manage NPLs henceforth.
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Some challenges or risks that we are worried about: (1) Discussion with some serious insolvency professionals suggests that they are still not fully comfortable with the code and protection it offers to them/firms in case issues crop up post liquidation/during a resolution process. These professionals have requisite understanding and manage large NPL cases given that they have established this as a separate line of activity in other countries. (2) Finding professionals, who need to take decisions on behalf of the board/companies immediately on being assigned without having any perspective of running that specific asset/industry is a challenge.