Lenders have sought clarification from the Reserve Bank of India (RBI) on provisions to be made for accounts being sent to the National Company Law Tribunal (NCLT), sources told FE, adding that the issue was discussed at the recent meeting with the RBI. According to a senior public sector banker, lenders are wary of auditors who in the past sought 100% provisioning to be made in case of companies that are being sent for insolvency and bankruptcy (IBC) proceedings. Banks have sough clarification from the RBI citing existing income recognition and asset classification (IRAC) norms which are already being followed. “We are of the opinion that we will keep increasing the provisions for such accounts as they are and not immediately after moving NCLT,” the banker said, adding that it would put an unnecessary burden on the bank. The banks are expecting easier provisioning norms for these accounts which are supposed to be sent to the NCLT, he said. According to the RBI regulations, banks are required to set aside a specific sum of money as buffer against a loan that could turn into a non-performing asset.
For every loan disbursed, banks need to provide 0.4% of that loan and 15% towards any loan that turns NPA. The provisions increase to 25% if the account remains an NPA for more than 12 months and is called a doubtful 1 loan. Banks need to provide 40% for doubtful 2 and 100% for accounts that have remained in the NPA category for more than four years. The central bank recently identified 12 large accounts (with exposure of more than Rs5,000 crore and more than 60% of which is recognised as NPAs) which banks have to refer to the IBC. The RBI also said the circular on revised provisioning norms for cases accepted for resolution under the IBC is being issued separately. Once these cases go to IBC, lenders in each of these accounts will have to set up a committee to formulate a plan for resolution. If that cannot be done in a period of 180 days — this can be extended to 270 days — the borrowing entity will go into liquidation.
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Analysts at Credit Suisse wrote in a note that the resolutions would need additional provisions. “We estimate 40-60% provision would be needed on the steel accounts and even larger provisions for the others,” they opined. These amounts add up to a little over Rs2 lakh crore, or about 30% of the Rs7 lakh crore worth of gross non-performing assets (NPAs) in the banking system. The central bank has said the 12 accounts on the list constitute about 25% of the current gross NPAs of the banking system. In early May, the President of India had approved an ordinance amending the Banking Regulation Act 1949, giving more powers to the RBI to deal with non-performing assets. Earlier, the Union cabinet had approved a proposal to amend Section 35 of the BR Act. The extent of the NPA problem can be gauged from the fact that around Rs10 lakh crore of loans are either non-performing or stressed; this is roughly 12% of total loans.