Investors in bank stocks may have celebrated too early, sending the shares up nearly 2% on Monday after the country’s largest lender State Bank of India (SBI) signalled that all will be well on the bad loan front soon. SBI chairman Rajnish Kumar said most stressed assets have been provided for, including those from the worst hit power sector, and that provisions are unlikely to balloon beyond what is anticipated.

Kumar’s comments provided comfort amid a tense run-up to the Allahabad high court decision that was hearing a petition to exempt the power sector from the Reserve Bank of India’s (RBI’s) 12 February circular. The circular did away with all the forbearance on stressed loans and said that for exposures above 2,000 crore, banks will have to put in place a resolution plan within 180 days of the first default, failing which the loan would be referred to the insolvency courts.

The 180-day period for all loans defaulted as on 1 March ended on Monday. The Allahabad high court refused to exempt power companies from the circular.

The power sector accounts for the largest chunk of the banks’ bad loans and the resolution of these assets is looking more and more arduous by the day. Most lenders were hoping for an exemption to avoid another quarter of losses due to heavy provisioning. Media reports suggest that nearly 80% of the defaulted loans do not have a resolution plan in place.

This means lenders will have to refer another huge set of loans to the insolvency courts and consequently provide 50% against these assets. The central bank’s circular states that if there was no resolution plan, lenders will have to refer the asset to the insolvency courts within 15 days.

These are the known stresses of the system for which many big lenders have provided for and some are in various stages of provisioning. Some pragmatic lenders such as the SBI have provided, assuming a worst-case scenario of haircuts or liquidation.

But what about those borrowers labelled as special mention accounts? The central bank’s circular states that even a one-day default by a borrower should prompt lenders to put in place a plan to fix the problem. If banks do not have a resolution plan for all colours of defaulters, they risk sending every bad loan to court proceedings. And the courts are already burdened with more than they can handle. RBI has said it would prescribe resolution timelines for smaller accounts as well over the next two years.

The fact that even the urgency to resolve recognized large bad loans has not been able to bring all banks and their boards to agree to one plan speaks volumes on the inability of lenders to quickly fix things.

SBI chairman Kumar’s rhetoric on provisions may have convinced investors of pain-free quarters ahead. But the slow progress in the insolvency courts on existing cases, the fast ageing of past defaulted loans, lack of consensus among banks to have resolution plans for stressed assets and, lastly, the spectre of new accounting norms next year, are all indications of volatile times ahead for investors in the banking sector.

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