Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint

Banks may offload more bad loans in bid to meet RBI norms

Under the latest RBI rules, within 180 days of a borrower defaulting on a loan, banks must implement a resolution plan for the same

Mumbai: Banks are likely to sell a greater amount of bad loans to asset reconstruction companies this year as they struggle to meet tough central bank norms on loan defaults amid the slow pace of bankruptcy resolution.

Under the latest Reserve Bank of India (RBI) rules, within 180 days of a borrower defaulting on a loan, banks must implement a resolution plan for the same. Otherwise, the account must be referred for insolvency proceedings. Cases in bankruptcy courts must be resolved in a maximum of 270 days or the asset goes into liquidation.

Whenever a bad loan account is referred to bankruptcy proceedings, banks must set aside a provisioning of 50% of the loan amount. To avoid this, lenders are keeping a close watch on such accounts, according to four bankers.

According to Siby Antony, managing director & chief executive officer of Edelweiss ARC Ltd, lenders will prefer to sell the loans to ARCs as chances of liquidation are more.

Bankers said even after admission, the prospects of recovery are either uncertain or time-consuming.

In case the asset under Insolvency and Bankruptcy Code (IBC) proceedings is not resolved within 270 days of admission, it will have to be liquidated.

“The current rate of admission at National Company Law Tribunal (NCLT) is slow given the rising number of cases. This will lower chances of recovery because of the eroding enterprise value of the asset. In case of liquidation, the recovery is expected to be very low. In many cases, we don’t see implementing resolution plan with 180 days," said a senior banker at a large state-owned bank.

Currently, the 12 large accounts referred for insolvency proceedings following an RBI directive in June 2017, are nearing the 270-day deadline. So far, resolution plans have been approved for only one out of the 12 accounts, where banks have claimed dues of over Rs3 trillion. Additionally, insolvency petitions are filed against most of the 29 accounts identified by RBI in its second such direction.

According to bankers, progress in the second list of accounts has been slow.

Indian banks are sitting on stressed assets of over Rs10 trillion, of which gross bad loans account for Rs8.82 trillion.

ARCs claim banks will now insist on full cash deals as they have to maintain higher provisioning if the investment in security receipts (SRs), created against the sale of stressed assets, exceed 90% of total sale value. This threshold was 50% in the previous fiscal, according to the RBI’s rules.

“Banks are now insisting that ARCs offer full cash for bad loans as they have to keep higher provisioning against investments in SRs beyond 90%. For ARCs which are strapped for equity, full cash deals will be the new normal this year," said Eshwar Karra, managing director and chief executive officer, Phoenix ARC.