Bankers have set in motion the process of referring most of the 28 defaulters identified by the Reserve Bank of India in its second list to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC).
According to a banking source, as many as 25 companies will be referred to the NCLT. Another source said a list of only 23 companies will be forwarded now as lenders are in the process of finding a resolution for three to five companies. The RBI had, in August told banks to either resolve the 28 more large stressed accounts by December 13 or refer them to the NCLT by December 31. While there was a plea from the banks to extent the deadline, the RBI has not yet acceded to their demand for extension.
Banks had already taken up 11 companies — out of its first list of 12 companies — for insolvency proceedings at the NCLT.
Bankers said Jayaswal Neco, Jayaprakash Associates and Videocon Industries are not being considered for reference to the NCLT as lenders are looking at other options including restructuring of loans. However, even this will depend on the RBI’s approval as refusal by the regulator can land them in the NCLT.
The RBI has told banks to provide for the loans of defaulters in the second list according to the provisioning requirement laid down for the 12 large cases in the first list referred for insolvency. This means banks will need to provide 50 percent against the secured exposure and 100 percent against the unsecured exposures in these cases. Banks have huge exposure in some of the accounts not being considered for reference to NCLT. Banks will have to make huge provisions, leading to heavy losses in the next quarter.
The overall credit provisions are likely to be at Rs 240,000-260,000 crore (including impact of ageing on existing NPAs and provisioning on IBC accounts) for FY2018 as against Rs 200,000 crore during FY2017, ICRA said.
Banks have a total exposure of Rs 4 lakh crore, or 45 per cent of of the total systemic gross non-performing assets in the companies mentioned in the two RBI lists. While the resolution success through NCLT has been limited so far, the impending decision on several steel assets – with many of them receiving active interest from bidders — will make things interesting for corporate lenders.
The government had recently promulgated an ordinance banning wilful defaulters and promoters who have defaulted for more than a year from bidding for companies which are going insolvent.
“We will be careful about a couple of things. The first thing is that resolution has to be very credible because the idea is that if we can save the asset from liquidation and we should save it. Secondly, when we are talking about resolution, the credibility of those who are bidding would also be examined,” State Bank of India Chairman Rajnish Kumar had recently said. “I will be happy when the resolution happens. I don’t mind some haircut but I don’t want to go bald.”
Bad debt resolution became a hot issue with the promoters of insolvent steel companies bidding for assets.
Bankers said there’s good interest for assets on the block. “This presumption that there would be a few bidders is itself not correct. If there is value in any asset then we believe bidders will be very much interested. If you look at the expression of interest for many of the companies that are under NCLT, there is a good interest,” said an official.
Meanwhile, a total of 376 cases have been referred to the NCLT over the first nine months of calendar year 2017. A majority of these cases (i.e. 187) have been filed by the operational creditors, 122 cases by the financial creditors and the remaining cases by the corporate debtors. Resolution of these accounts is expected to be a major trigger for corporate lenders. However, the beginning appears to be modest, with only two accounts taken up for resolution (at hefty haircuts), 7 accounts directed to undergo liquidation, and another 14 witnessing further appeals, according to a Motilal Oswal report.
While lenders are sanguine about recovery in the case of metala and power companies, they are wary of a recovery trend in the EPC and services sector accounts, where the recovery rate is expected to be quite muted. This could thus act as a drag on overall recovery rate arrived via NCLT route.
Bhushan Steel, with a debt of Rs 44,500 crore, appeared on the RBI’s first list, is the biggest account in the two lists combined. Bhushan Steel was admitted by the NCLT in July 2017. Essar Steel, with a debt of Rs 37,300 crore, appeared on the first list provided by the RBI.