The pipeline of bad loans for resolution under the Insolvency and Bankruptcy Code is increasing. Corporate debt restructuring (CDR) packages of loan accounts involving Rs 61,691 crore have failed and withdrawn from the CDR cell of the banks in the 12-month period ended September 2017.
According to the CDR cell, corporate debt of 291 corporate loan accounts amounting to Rs 1,72,463 crore was withdrawn from the cell as of September 2017, compared with Rs 110,772 crore in September 2016 as banks and corporates were unable to come out with credible turnaround plans. These loans are likely to end up in the bankruptcy court.
Banks have started taking some of these accounts to the National Company Law Tribunal (NCLT) under the IBC. “Many of these cases are wilful defaults and involved in fund diversion. Some of the cases were not even considered for admission to the CDR cell as there were blatant fund mismanagement and diversion as per forensic audits,” said a banking source.
Total loans approved for CDR were Rs 4,03,004 crore involving 530 borrowal accounts as on September 31, 2017. Originally, 655 borrowers sought CDR packages, but banks rejected the applications of 125 borrowers involving Rs 70,998 crore. Banks have stopped taking up new CDR packages with many corporate using the CDR route to evergreen — or keep out of non-performing account (NPA) books — the loan accounts. There were reports that some banks and corporate used and misused recast schemes such as CDR, 5/25 and the Scheme for Sustainable Structuring of Stressed Assets (S4A) to keep big loans out of the NPA books. While there are live CDR cases of 130 borrowers involving Rs 1,45,528 crore, many of them are bound to fail as promoters have either failed to bring in their contributions and personal guarantees or the companies have failed to generate enough earnings to service the debt.
Bankers have set in motion the process of referring 28 defaulters identified by the Reserve Bank of India (RBI) in its second list to the NCLT for resolution under the IBC. While there was a plea from the banks to extend the deadline, the RBI has not agreed 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. The RBI has asked banks to provide for the loans of defaulters in the second list as per 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, rating agency ICRA has said. This means more losses for banks in the December and March quarters of 2017-18.
The RBI discontinued fresh CDR with a provision of five per cent with effect from April 1, 2015. However, from April, banks were told to classify restructured accounts as NPAs and provide at least 15 per cent for fresh recasts. On the other hand, banks were taking tough recovery measures against small borrowers. “Why were only big loans considered for restructuring under the 5/25 scheme or S4A scheme? “Now no one is restructuring small MSME loans. This is because the moment it’s restructured, it will have to be classified as NPAs. They have stopped restructuring. The issue is that we have to improve our governance standards. Everyone is trying to do that but they don’t have any idea how to do it. We should make banks’ boards accountable,” he said.
Experts say resolution plans for bad assets are “too late and too little”. “It’s too late and too little. There’s nothing wrong with the process but where’s the resolution? You tell me a single case that has been resolved. All resolutions are by writing off by bank loans. Technical write-off is the biggest scam of this century. Now almost Rs 6 lakh crore loans have been written off. Why don’t they say whose money has been written off. After some years, you will say losses of the bank have been written off. They won’t say bank loans have been written off,” said former RBI deputy governor K C Chakrabarty.
The gross NPA ratio of banks increased from 9.6 per cent to 10.2 per cent between March and September 2017. NPAs grew by 18.5 per cent on a year-on-year basis in September 2017. Private sector banks registered a higher increase in NPAs of 40.8 per cent as compared to their public sector counterparts (17.0 per cent), says the RBI’s Financial Stability Report released late last month. The macro stress test for credit risk indicates that under the baseline macro scenario, the NPA ratio may increase to 10.8 per cent by March 2018 and further to 11.1 per cent by September 2018.
The total stressed advances of large borrowers increased by 2.4 per cent between March and September 2017. Advances to large borrowers classified as special mention accounts-2 (SMA-2) also increased sharply by 56.5 per cent during the same period.