NPA clean-up round 2 begins: Rs 3.8 lakh crore at stake; how RBI is fixing India’s biggest banking crisis

By: | Updated: August 28, 2018 12:06 PM

The push has come to shove for bankers around the country as the 180-day deadline for stressed asset resolution has ended -- the only option now is to initiate insolvency proceedings within 15 days.

NPA clean-up round 2: Whopping Rs 3.8 lakh crore at stake; how India’s biggest banking crisis is getting fixedThe push has come to shove for bankers around the country as the 180-day deadline for stressed asset resolution has ended.

The push has come to shove for bankers around the country as the 180-day deadline for stressed asset resolution has ended — the only option now is to initiate insolvency proceedings within 15 days against companies that failed to make payments under the Insolvency and Bankruptcy Code (IBC); unless the Supreme Court steps in.

On February 12, the Reserve Bank of India (RBIstruck down over a dozen ‘confusing’ resolution mechanisms and replaced it with the one with a stricter timeline, putting a red alert on 70 accounts. These accounts were expected to turn non-performing assets (NPAs) on March 1, with estimated exposure of Rs 3.8 lakh crore to banks, ICRA noted in a report recently.

Power sector woes:

The 70 accounts, as per ICRA estimates, include mostly companies from Power, Engineering, Procurement and Construction (EPC), and Telecom sector. However, the biggest culprit is the power sector, comprising 34 stressed accounts and exposure of at least Rs 1.8 lakh crore, which even led to legal battle.

After initial injunction, the Allahabad High Court refused to grant any interim relief on the RBI-set deadline to power companies on the plea by Independent Power Producers Association of India (IPPAI), which alluded high stress in the sector to structural problems. The Supreme Court is now scheduled to hear the plea on Tuesday on whether or not power sector will be given special treatment via relaxed rules.

Status update:

Meanwhile, racing against time, the bankers are on the cusp of resolving eight stressed accounts of the 34 worth Rs 70,000 crore, while four have been tagged non-viable, the State Bank of India, lead lender in most cases, told reporters on Monday. Of the remaining, 18 assets are already undergoing insolvency procedure under the IBC law, while the status of four other accounts is not clear yet.

Although the IPPAI and the power ministry have been negotiating with the RBI for months now for the relaxation of the rules, the central bank stood its ground and refused to go soft on the power companies. Experts laud RBI’s decision, saying that a tough measure was needed to deal with the banks’ NPA crisis before it spiralled out of control.

Genie out of the bag:

“The RBI has finally taken the bull by the horns. The move was aimed at tightening up the reporting regime within the banking system, flagging potential stress, triggering anticipatory remedial action before things spiralled out of control, or otherwise, requiring mandatory action where things have spiralled out of control,” Ran Chakrabarti, Partner at law firm IndusLaw told FE Online.

“The Insolvency & Bankruptcy Code is about to let the genie out of the bag,” he said. On Monday evening, addressing top bankers, Finance Minister Arun Jaitley called NPA problem in the banking system one of the key challenges and pointed finger at its subsequent cover-up, known as ‘evergreening’ in banking parlance.

The big bang bad loan crisis:

The RBI data shows that the bad loans in the banking system surged dramatically in mid-2015 when the central bank brought in stricter norms for recognising and reporting NPAs. These were loans sanctioned mostly between 2006-2011.

As banks indulged in evergreening, which means sanctioning more loans to companies so that they can repay previous ones, the RBI made it necessary to make weekly disclosures to its credit registry about loan defaults made by companies.

IBC so far…

This mammoth task of resolving stresses asset with the iron rule did not come before the test-drive of 12 big stressed accounts, which constituted 25% of total bad loans in the system. However, despite praise for the IBC law from all quarters, the results have been mixed. Of the 12 accounts, two have been officially overtaken by reputed companies, while two more have got the official nod, and eight are under process.

Even as in the case of Bhushan Steel, the first one to see successful resolution and find Tata Steel as its new owner, the haircut to banks was less than 30%, other accounts were not that lucky. In the case of Alok Industries, lenders are expected to take 90% haircut. Moreover, except for Bhushan Steel, none of the other accounts made it within the 270-day deadline set by the RBI.

“Now that the maximum period including the extended one is complete, it is difficult to say that the final outcome is what was expected, especially when the Committee of Creditors (CoC) are approving huge haircuts up to 90% in some cases. However, in comparison to previous schemes, the IBC law is still a lucrative solution,” Daizy Chawla, Senior Partner, Singh & Associates told FE Online.

On the positive side, ICRA estimates that this clean-up would lead to a reduction in bad loans to 10% by March 2019, which could otherwise have been 12%. India’s bad loans surged to Rs 9.61 lakh crore as on March 31, 2018.

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