Bad loan resolution: Haircuts and how to keep baldness at bay
Receding hairlines are not new in the banking world but everyone fears the fast road to baldness. So far, the toxic loan pile has driven bankers into losing their hair as well as hurtled bank balance sheets towards complete baldness.
The Reserve Bank of India’s (RBI) latest on a framework towards bad loan resolution seeks to put the brakes on this.
The central bank’s internal advisory committee has pulled up 12 accounts (out of a pile of 50 large borrowers) that in total form 25% of the current bad-loan stock to be referred under the Insolvency and Bankruptcy Code (IBC). This means that this bankers’ dozen will find their way to National Company Law Tribunal (NCLT), and into the hands of a professional to prescribe a turnaround plan.
To their credit, the fact that the central bank wasted no time in using its new powers conferred upon by the government only two months back shows that policymakers are not cooling their heels.
But there are several pitfalls, the first of which is an untested bankruptcy court. If a sizeable number of cases are resolved through IBC, it would be a game changer for future bad- loan resolution. But the court already has a formidable caseload due to older cases being transferred from other courts.
IBC is a time-bound mechanism instead of the other existing prosaic laws. But time has been the biggest foe of lenders and still remains so. From the day of entering the gates of NCLT to that of exiting, the entire process will take at least 230 days and at worst 320 days if the 90-day grace period is sought. This means lenders are unlikely to get a dime from these accounts that total to Rs2 trillion during the current fiscal year. Whether they will lose more money is in the hands of the courts and RBI.
The success will depend on how much of a hit bankers are willing to take and how much would the promoter cough up. This has been the reason for the stalemate between banks and borrowers that delayed the resolution process and led to stressed loans ballooning to Rs10 trillion. The government’s own calculations in the Economic Survey suggest that haircuts could be as high as 75% in many cases. Analysts at Credit Suisse note that banks have already provided at least 40% towards these 12 accounts but higher provisioning cannot be ruled out.
The real danger is the absence of an agreement on haircuts which would force liquidation. If a large swath of assets go up for sale, getting a realizable value would turn into a nightmare for many creditors.
In this pursuit of value, it is certain that bankers will lose more than promoters. The courts, RBI and the government will have to ensure that bankers don’t become bald.