Mumbai : Banks are scrambling to finalise resolution plans for large stressed accounts to meet the August 27 deadline set by the Reserve Bank of India (RBI) to avoid referring these accounts under the Insolvency and Bankruptcy Code. Though banks are still not sure about the number of accounts that will be resolved, they don’t expect a big impact on their bottom line even if some of these are referred to the National Company Law Tribunal, the adjudicating body for Insolvency and Bankruptcy Code.
The RBI’s circular on February 12 had given banks time till August 27 to resolve stressed assets with outstanding dues of over RS 2,000 crore, failing which the accounts would have to be referred for insolvency proceedings. Large state-owned banks such as State Bank of India, Punjab National Bank, Bank of Baroda, and Union Bank of India don’t expect a big impact on their provisioning, even if some of these accounts are referred for insolvency proceedings, senior officials have said.
This is largely because most of these accounts have already been recognised as non-performing and carry certain amount of provisioning, they said. “For most banks, the incremental provisioning was assumed in capital estimates because some of the large accounts are NPAs (non-performing assets) for over a year and would have entailed ageing-related provisioning,” executive director of a state-owned bank said.
“Most of these accounts are from the power sector and resolution plans may get finalised for some of these assets,” the executive director said. Having to refer these accounts to the company law tribunal is a burden on banks as the provisioning requirement for them then becomes higher.
The RBI had mandated banks make 50 per cent provisioning for accounts referred under insolvency code in the first two lists, constituting 41 large accounts.
According to ratings agency ICRA, banks need to resolve about 70 large accounts with total outstanding dues of Rs 3.8 lakh crore by end of this month. More than half of these accounts are from the troubled power sector. Last week, Punjab National Bank Managing Director Sunil Mehta said most stressed accounts with over Rs 2,000 crore outstanding dues mainly belonged to the power and steel sectors.
Some large accounts from the steel sector are already in the process of being resolved in the company law tribunal, and resolution for nine accounts from the power sector is likely to be in place within the stipulated deadline through the Samadhaan scheme.
Bankers are also hopeful that the incremental provisioning will be offset by expected recoveries from the companies already undergoing insolvency proceedings.
State Bank of India is expecting to recover about Rs 4,000 crore through resolution of one account from the RBI’s first list, which will potentially offset the costs related to resolving stressed loans from the power sector, Chairman Rajnish Kumar said earlier this month.
However, there could be a delay in accrual of the benefit considering the possible delay in resolution, he had said.
RBI has not explicitly clarified on the provisioning requirement for new cases that will be referred to the company law tribunal after the deadline.
“Unlike for the first two lists, there is no explicit mention as to how much banks need to provide if these accounts are referred to NCLT,” a senior official with a mid-sized state-owned bank said.
“We will make 50 per cent provisions because that is the benchmark that every stakeholder has assumed,” the official said. Banks are keen to resolve these cases outside the insolvency courts not just to avoid provisioning but because haircuts–the risk-cover for taking exposure–could be far higher in insolvency proceedings.