Brokerages welcome RBI bankruptcy proceedings against defaulters, flag challenges
Mumbai: Brokerages welcomed the central bank’s Tuesday decision on lining up 12 bad loan accounts for the bankruptcy court, even as they flagged the challenges associated with the unprecedented move. Indian banks have nearly Rs10 trillion of stressed assets, of which gross bad loans make up Rs7.7 trillion and restructured loans the rest. On Tuesday, the Reserve Bank of India (RBI) said 12 accounts representing a quarter of all gross bad loans can be immediately referred for bankruptcy proceedings.
In a report, Credit Suisse said a couple of large steel companies could account for around half of the Rs2 trillion identified by RBI, and resolving them would need 40-60% provisioning.
The other large accounts are from the textiles and construction sectors, where provisioning needs could be larger. Based on FY17 performance, larger stressed companies need a 30-80% reduction in interest burden to get to interest cover of 1X, Credit Suisse analysts Ashish Gupta and Kush Shah pointed out. Interest coverage ratio shows a company’s ability to service its loans and a figure below one, like in the case of many troubled companies, indicates their inability to do so.
According to CLSA, the focus will be on sectors like steel which lead non-performing loans and account for around 30% of total loans, and power, which dominates the watch list along with large stressed corporates.
The other question is on how long the resolution will take.
“Quality/speed of resolution packages and adequate benches at National Company Law Tribunal (NCLT) will be key,” CLSA analysts said in a note. “This is key as some of the recent tools designed to resolve stressed loans have seen limited success thus far.”
The higher provisioning requirement may call for more capital, pointed out analysts.
“...as resolutions/liquidation take place over the next 6-9 months, provisioning needs will rise, precipitating the need for additional capital at corporate lenders, among which we believe only ICICI Bank may not need further dilution to provide for these haircuts,” Credit Suisse said in the note. These concerns seem to be widespread.
According to Kotak Institutional Equities, one of the key challenges is the Insolvency and Bankruptcy Code (IBC) itself. The brokerage firm said as IBC is still in the early stage of evolution and infrastructure is still being built, referring large cases at this stage is a risky approach. However, if resolved, this can be regarded as a game-changer approach to managing non-performing loans (NPLs) hereon, Kotak said in a report.
Kotak added that the key concern remains if all accounts beyond the cut-off are accepted irrespective of the problems plaguing individual sectors.
“If there is a large number of assets put up immediately for liquidation, mostly in the next one year, only a few may get closer to a realizable value while the rest may have to be liquidated at very high discounts,” Kotak Institutional Equities said.
“This would imply high levels of equity ownership in some of these assets or higher provisions than initially anticipated,” Kotak analysts added.
CLSA said if all the 12 accounts are resolved with an average of 60% haircuts, there may be an 8% upside to FY19 adjusted net worth of banks but earnings may face risk from credit cost towards haircuts. The Hong Kong-based brokerage firm said it likes ICICI Bank since its valuation discount to peers and potential fall in stressed loans could abate concerns. Among public sector banks it prefers State Bank of India and Bank of Baroda due to their stronger franchise and manageable stressed loans.
ICICI Bank is the only bank which may not need further dilution to provide for the haircuts, Credit Suisse agreed.
According to Bank of America Merrill Lynch, larger lenders such as State Bank of India are relatively better placed to benefit.
“Private banks with better provisioning and/or retail focus lenders such as HDFC Bank Ltd, Yes Bank Ltd remain our top picks at the sector level,” Bank of America Merrill Lynch said in a report.
Among the high-NPL banks, JP Morgan prefers Axis Bank Ltd, ICICI Bank Ltd and SBI as they have access to capital to be able to clean up their loan books and have the deposit franchise to drive future growth.