RBI’s bad loan resolution move throws bankers into a tizzy
RBI’s decision to subject large NPA accounts to the insolvency and bankruptcy code has banks confused on how to start the bad loan resolution process
Mumbai: The Reserve Bank of India’s (RBI’s) decision to refer large cases of stressed loans for bankruptcy proceedings has thrown bankers into a tizzy on how to start the process, signalling that the bad loan resolution process could be long-drawn.
Bankers are awaiting the list of accounts from RBI despite having access to the Central Repository of Information on Large Credits, a centralized database of large exposures.
“We have to move to NCLT (National Company Law Tribunal) and get going with the plan. Apart from the list, we are expecting some directions from the RBI, on things like whether a joint lenders’ forum will be called and so on,” said the head of a mid-sized state-owned bank on condition of anonymity.
NCLT is the arbitration authority for cases filed under the Insolvency and Bankruptcy Code (IBC).
RBI on Tuesday said 12 accounts representing about 25% of the gross bad loans in the banking system would be eligible for immediate reference for bankruptcy proceedings.
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.
An internal panel of the central bank has suggested that accounts with outstanding loans of more than Rs5,000 crore, of which at least 60% was classified as non-performing by banks as of 31 March 2016, can be referred for bankruptcy proceedings.
Bankers said that before moving the cases for bankruptcy proceedings, all details of these accounts will have to be checked and addressed to ensure that possible loopholes are plugged.
The so-called special dispensation provided to borrowers under the terms of restructuring is seen as one loophole. Bankers and lawyers say borrowers could use this to delay proceedings.
“Before the application (to NCLT) is moved, we will have to ensure that there is no specific leeway the borrower had availed, either on bilateral basis or from the consortium (of lenders), which would be a hurdle during the proceedings,” said a senior official at another bank.
Under the IBC, once a case is admitted by the NCLT, a resolution plan must be in place within 180 days of admission. This is extendable up to 90 days. In case there is no plan or the committee does not agree on one, the company will go into liquidation.
Another problem for banks is the sacrifice they have to make to resolve the bad asset and the subsequent provisioning that will be required once bankruptcy proceedings start.
To be sure, RBI has said that it will detail revised provisioning norms for cases accepted under the bankruptcy code. However, state-owned banks, especially smaller ones, are lobbying for some relief in the provisioning, either in the amount or on spreading the amount over a few quarters, according to two bankers. This is to ensure that balance sheets are not further stressed at a time when bad loans have risen and capital is scarce.
Since the 12 cases are relatively old and probably well-provisioned for, it may not be an immediate problem, Seshadri K. Sen and Rahul Jain of JP Morgan India wrote in a note Wednesday. However, for a lasting resolution, state-owned banks will have to be recapitalized as the haircuts needed are likely to exceed the current provisioning norms, the note added.
“Referral to the NCLT is a double-edged sword: should the banks fail to get a resolution proposal approved in the predefined time-frame, the borrower automatically goes into liquidation and the lenders may have to take large losses in that event,” the note said.
In order to prioritize the resolution, RBI has said that IBC proceedings in respect of identified accounts will be accorded priority by NCLT. However, lawyers argue that this will be at the discretion of the arbitration authority, with principles of natural justice as the guiding factor.
As such, going by the 5 May ordinance, the central bank can ask banks to invoke proceedings against defaulters but has no say over NCLT proceedings, lawyers said.
In an interview to Mint, M.S. Sahoo, chairman of the Insolvency and Bankruptcy Board of India, said that it is understood that the government has plans to add more benches to the 11 NCLT currently has.
Bankers also question whether NCLT has enough infrastructure to deal with the expected rise in the number of bankruptcy cases.
“ NCLT does have bandwidth constraints, but NCLT judges have been generally trying to adhere to the timelines under the Bankruptcy Code. I think as we move ahead, there will be a more nuanced approach,” said Ashwin Bishnoi, partner at law firm Khaitan and Co.