Provisioning requirement for cases under bankruptcy reasonable: Viral Acharya
Viral Acharya says it is ‘very reasonable’ to ask banks to make provision for 50% of the amount of defaulted loans submitted under the country’s insolvency and bankruptcy code
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Mumbai: Provisions, or the money that banks will be required to set aside to cover stressed loans, as prescribed by the Reserve Bank of India for cases referred for insolvency proceedings, are reasonable based on historical experience, Viral Acharya, deputy governor of the central bank said on Friday.
“I think 50% is a very reasonable level of provisioning given as I said the historical record. It is also in line with the kind of haircuts that you hear about in industry analyst reports,” he said, on the sidelines of an event.
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On 13 June, RBI advised banks to initiate the insolvency resolution process in select accounts under the provisions of the Insolvency and Bankruptcy Code (IBC). RBI had said that accounts with outstanding amounts of more than Rs5,000 crore, of which at least 60% was classified as non-performing by banks as of 31 March 2016, could be referred for bankruptcy.
Subsequently, RBI advised banks to set aside 50% provisioning against secured exposure and 100% against unsecured exposure in all cases referred for bankruptcy.
The new provisioning rules will be applicable in the case of the top 12 defaulters identified by RBI, including Essar Steel, Bhushan Steel and Alok Industries. Economic Times was the first to report the news on increased provisions.
Bankers were expecting RBI to give forbearance on the provisioning requirement for eight quarters, Mint reported on 15 June. While their request has been turned down, the regulator has allowed banks to reverse the provisioning once the resolution plan is implemented and if the company starts repayments, the ET report said.
Acharya added that banks have been given the flexibility to spread the provisions until the fiscal fourth quarter.
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According to Acharya, in the past, banks have used schemes such as corporate debt restructuring or strategic debt restructuring to skip provisioning requirements rather than resolve stressed loans.
“In my opinion, going about the same way again the third time will not be appropriate. I think it is better to mark the books ahead of time,” he said.
Indian banks are sitting on a stressed asset pile of close to Rs10 trillion; of this, gross bad loans account for Rs7.7 trillion and the rest are restructured loans.