Mumbai: Lenders are likely to refer majority of stressed cases identified by the Reserve Bank of India (RBI) in its second list for insolvency proceedings rather than resolve them outside the National Company Law Tribunal (NCLT), said three people familiar with the matter.

That’s because lenders are worried that even the portion of debt for these cases designated as sustainable (which a firm can service through its cash flows) would not qualify for an investment grade rating.

After sending its list of 29 cases to banks flagging them for early resolution, RBI had mandated that the debt resolved outside the ambit of the insolvency and bankruptcy code (IBC) be rated as investment grade by two external credit rating agencies.

“Two out of every three of the next set of NPA (non-performing asset) cases identified by the RBI are likely to be referred to NCLT. Banks will find it difficult to get an investment-grade rating for these distressed cases," said a senior bank official involved in the process, one of the people cited earlier.

In a meeting held at the Indian Banks Association last week, bank chiefs were also of the view that they would be more comfortable taking a decision within the ambit of NCLT because of the large sacrifices they would have to make, said the people cited earlier.

Lenders are expecting a haircut of at least 60% in these cases, said these people. Many accounts in RBI’s second list are already in the process of debt resolution and most lenders have set aside at least 40%. Some such as Videocon Ltd have received in-principle approval from lenders to restructure their domestic debt by the end of this month, Mint reported on 6 September.

That said, resolving the cases under the IBC is also an expensive process which involves higher provisions and interim funding at a higher rate. RBI has mandated that banks keep 50% provisioning against the cases identified for initiating insolvency proceedings.

A July report by Crisil estimates that banks have made around 40% provisioning against these top 50 accounts and will require an incremental provisioning of about 20%. Interim funding to meet the working capital requirement of these companies will also be available for an interest rate not less 15%.

“Few cases should be taken up under the IBC. Else it will clog up the NCLT leading to slow down in decision making," said Abizer Diwanji, partner, financial services, EY. “As long as creditors have taken a decision based on a credible business model, there is no need for rating the debt of these distressed cases. It makes the resolution process outside the NCLT a futile exercise," he added.

According to a EY report released in August, 1,000 cases have been filed with the NCLT under IBC so far, of which 220 are admitted.

The set of 29 firms sent by RBI follows an earlier list of 12 top defaulters who accounted for a quarter of the system’s stressed loans. Eleven of them have been admitted for insolvency proceedings and are under the control of interim resolution professionals.

My Reads Logout