The Reserve Bank of India (RBI) had allowed banks a dispensation from maintaining 100% provisions against their exposures to Essar Steel in the July-September quarter, two senior bankers said. The regulatory relief had been granted on a joint request from banks, who were expecting a full resolution in the account during the October-December quarter.
A similar request may be made again for the December quarter if the account does not get resolved in Q3 or, at least, in early January.
“This was a dispensation given specifically for Essar Steel because ArcelorMittal’s bid had been approved by the CoC (committee of creditors),” an executive with a large public-sector bank (PSB) said. “We will wait to see what happens in December and then take a call on making another request.”
State Bank of India (SBI) had referred Essar Steel to the National Company Law Tribunal (NCLT) under Section 7 of the Insolvency and Bankruptcy Code (IBC) in 2017. Thereafter, the company, which owed banks `44,397 crore at the end of March 2017, has seen furious bidding activity as well as a high level of litigation.
As per the RBI’s July 2014 prudential norms on income recognition, asset classification and provisioning pertaining to advances, assets which remain in the ‘doubtful’ category for more than three years attract provisioning to the extent of 100%, or the entire exposure of a bank to the account. In Essar Steel’s case, this milestone was crossed in Q2 of FY19.
In order to avoid taking a large provisioning hit on account of their exposure, some banks, such as Bank of Baroda (BoB), have already sold their share of loans in Q2. Another large lender, Bank of India (BoI), ran an auction process for its exposure, but eventually chose to hold on to it while setting aside 100% in provisions, as prescribed by RBI norms. “So when the resolution happens, we will get a writeback,” a senior executive at BoI said.
SBI had also considered palming off its chunky exposure to Essar Steel, but changed track in September, following a sooner-than-expected National Company Law Appellate Tribunal order. On October 19, the CoC for Essar Steel declared ArcelorMittal as the highest bidder for the company, preferring them over Anil Agarwal’s Vedanta Group.