Given how banks have been unable to come up with solutions for the stressed assets on their books, it is just as well RBI has asked them to refer a dozen cases to National Company Law Tribunal (NCLT). The move might seem drastic, but the fact is bankers have not succeeded in attracting investors for these assets; although the Strategic Debt Restructuring (SDR) scheme was initiated for two dozen companies, most attempts failed as prospective buyers were looking for big haircuts and were also unwilling to bring in fresh equity which was needed to restore the debt-equity ratios to reasonable levels. RBI now wants lenders to try and recover their dues via the Insolvency and Bankruptcy Code (IBC) even as they continue to pursue other solutions.
However, anticipating that a meaningful resolution might be elusive, it wants banks to make hefty provisions for these exposures—50% to begin with, and if no solution is found in 180 days and the business is to be liquidated, the provisions are to be upped to 100%. Even if banks have already provided for about 40% of the loans, they would need to set aside fairly large amounts of capital to comply with these directives. While the level of provisioning may seem harsh, the regulator’s concerns are understandable. Resolving cases via the insolvency route can be time-consuming—the average time taken is more than four years. Moreover, the rate of recovery, going by past experience, is low at just 26%. While the IBC has a strict timeline for resolution—the initial verdict is to be delivered within 180 days—this can be extended by another 90 days.
RBI’s concerns, and conservative stance, probably stem from the fact that the government hasn’t talked of infusing capital into state-owned banks, apart from the Rs 70,000 crore promised in the Indradhanush programme. Based on an assessment of the embedded value in the top 50 NPA cases, Crisil estimates a 60% haircut would be needed on these loan assets. In which case, banks would need to increase their provisioning by another 25% this fiscal, compared with 9% in the last. That would seriously impede their ability to lend. Over the last six months, loan growth has averaged 5.5% y-o-y, partly because demand for credit has been poor. However, a sharp jump in provisioning would seriously slow down lending.
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The government is believed to have asked some of the bigger and relatively strong lenders to tap the capital markets for equity. The response from investors is likely to be better if there is no dilution in the equity bases of these lenders; as such, the government should offload shares rather than banks issuing fresh shares. At a time when banks are unlikely to command exciting valuations, a stake sale by the government would help.