The Reserve Bank of India (RBI) said on Tuesday it has identified 12 of the largest loan defaulters, who owe over Rs 5,000 crore each and 60 percent or more of the loan had been already classified as non-performing by banks as of 31 March 2016, and has asked banks to start bankruptcy proceedings against them. Experts have hailed this action by RBI as it is expected to bring about financial discipline and pave way for better asset quality in PSU banks.
The RBI said the 12 accounts make up around 25 percent of the gross non-performing assets (NPAs) of the banking system. Bad loans in the banking system are estimated at over Rs 8 lakh crore, meaning the NPAs in the 12 accounts are worth at over Rs 2 lakh crore.
Here’s what the experts said about this move:
Bank of America Merrill Lynch (BofAML)
The global financial advisory and research firm termed the bankruptcy code invoked by the central bank as a long-term positive. It believes that most private players have already initiated insolvency resolution process under the said Code.
BofAML assumes banks have made provisions of 40/10 percent on reported NPLs and restructured book and that going ahead, the government may have to recapitalise PSU banks after write-down due to possible haircuts.
CLSA said that the focus will be on sectors like steel, which lead NPLs as well as power sector and large-stressed corporates. The resolution package will give a clearer path to stressed loan reduction despite upfront haircuts. Assuming the 25 percent NPL resolution with 60 percent haircuts, there is 8 percent upside to FY19 adjusted net worth.
The global investment bank said that as far as the PSU banks are concerned, the government is likely to link capital infusions with performance in respect to NPA resolution. Going forward, a better asset quality will be a positive for PSU banks and private banks where stressed loan ratios are high.
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JPMorgan said that RBI’s latest move is a positive one as most resolution processes had reached dead ends. The global financial major believes that the announcement could trigger a short-term rally in the banks with high NPLs. The preferred way to play this theme would be through ICICI Bank, Axis Bank and SBI, it said.
The brokerage estimates that two large steel companies account for over 50 percent of these 12 accounts. Further, it estimates 40-60 percent provisions would be needed on steel accounts and even larger provision for others. It believes that only ICICI Bank will not need further dilution to provide for haircuts.
Ashvin Parekh Advisory Services
The financial advisory firm believes that this move will bring about a certain degree of financial discipline and the pace of resolving NPAs will pick up.
“Now onwards, two things happen at the financial lenders’ level. There will be a high order of discipline. They themselves will be a little more amenable to taking decisions because they will not be investigated later on,” Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services LLP, said to ET Now.
“A proper, sound resolution approach has to be taken by the financial lenders. The onus is now on the financial lenders. Within the six months, they have to get back to the system and have to really evaluate the resolution,” Parekh added.