RBI move to resolve 12 NPA accounts credit positive for banks: Moody’s
Mumbai: Moody’s Investors Service on Monday said that the Reserve Bank of India’s (RBI) plans to resolve 12 large stressed accounts, which account for 25% of stressed assets, will be credit positive for the banks as any meaningful resolution will improve their overall asset quality. It will also set a precedent for resolving non-performing loans (NPLs) from smaller borrowers.
Moody’s believes that given the strict timeline under the Insolvency and Bankruptcy Code (IBC) of 180 days, which is further extendable to 270 days, after which a company will be liquidated, resolution process will get accelerate and help in loan recoveries. However, the strict timelines may force some companies into liquidation and may have a negative effect on banks, particularly in cases where little collateral is available.
The Indian banking sector is sitting on pile of Rs10 trillion worth of stressed assets of which gross bad loans account for Rs7.7 trillion and the rest are restructured loans.
Mint reported last week that the central bank has sent the list of defaulters to commercial banks against whom it wants creditors to invoke immediate bankruptcy proceedings. The defaulters’ list comprises Bhushan Steel Ltd, Bhushan Power & Steel Ltd, Essar Steel Ltd, Jaypee Infratech Ltd, Lanco Infratech Ltd, Monnet Ispat & Energy Ltd, Jyoti Structures Ltd, Electrosteel Steels Ltd, Amtek Auto Ltd, Era Infra Engineering Ltd, Alok Industries Ltd and ABG Shipyard Ltd.
“We expect that the directive will negatively affect banks’ profitability over the next year if they need to take large write-downs relative to their existing loan-loss reserves for those assets. This also will accentuate the capital needs of weaker public sector banks, which may require a large capital infusion from the Indian government,” the report noted.
S.S. Mundra, deputy governor of RBI, last week said that the public sector banks may require more than the budgeted Rs10,000 crore capital infusion from the government in the current fiscal on account of higher provisioning for bad loans and haircut on stressed assets.
Under the Indradhanush programme, the government has promised to infuse Rs70,000 crore in state banks over four years. Public banks will get Rs25,000 crore in 2015-16 and 2016-17, while Rs10,000 crore each would be infused in 2017-18 and 2018-19.
According to Moody’s, the effectiveness of resolution under IBC will be limited. Since control of management will change hands to insolvency professionals once IBC is initiated, they will continue to play a role in preserving day-to-day operations in some cases.