The deadline for a resolution plan to be in place for 29 accounts, making up about Rs2 trillion worth of bad loans, will be up on Wednesday for banks. Lenders then will have to refer these accounts under the Insolvency and Bankruptcy Code (IBC), setting in motion court proceedings that could in some cases very well lead to an unfortunate liquidation.

These 29 accounts are part of a second list that the Reserve Bank of India (RBI) drew up and asked lenders to have resolution plans ready by 13 December. Beyond this deadline, these accounts would automatically have to be referred under IBC.

The second list followed a first one that had 12 big accounts making up Rs1 trillion worth of bad loans that the central bank explicitly asked banks to refer under IBC immediately.

Reference to the National Company Law Tribunal (NCLT) would mean lenders will have to make 50% provisioning against the accounts as precaution towards haircuts. Banks have already made the required provisions for the 12 accounts of the first list.

The provisioning for the first list resulted in 11 public sector banks reporting losses for the September quarter. The growing uncomfortable realization that haircuts would be higher made the government announce a Rs2.11 trillion recapitalization plan for public sector lenders to avoid some of them sinking below regulatory capital levels.

If the first list, making up about Rs1 trillion left banks teetering, does the second list have the potential to bring them to their knees? After all, if these 29 accounts find their way into NCLT, will it mean that lenders will have to set aside around Rs1 trillion as provisions?

But the situation is not dire as many of the accounts on the second list have been bad loans for more than a year now and provisions have already been made. For instance, the country’s largest lender State bank of India has made 50% provisioning against its exposure to the second list. Axis Bank, Punjab National Bank and Canara Bank have also made provisions to similar extent.

Others such as Union Bank of India, Bank of Baroda and ICICI Bank that haven’t made heavy provisions have indicated they would do so in the third quarter.

This explains why bank stocks have fared well, with the Bankex rising as much as 2.5% in the last three months. Of course, the rise was also due to the government’s recapitalization plan. But investors are convinced that the worst of provisioning is now behind the lenders.

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