Banks will have to make higher provisioning on 12 large loans being referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016 (IBC). The RBI, in a letter to lead banks last week, had asked them to make 50 per cent provisioning on these 12 loans which are worth around Rs 2,00,000 crore. It has asked banks to set aside 50 per cent provision against the secured portion of these loans and 100 per cent provision against the unsecured part. If the cases are not resolved and these companies end up for liquidation, banks will have to make 100 per cent provisioning.
When a company is referred to the NCLT under the Insolvency and Bankruptcy Code, an interim insolvency professional is appointed and will take control of the assets and form a creditors committee. The committee will appoint a resolution professional to oversee the process and could change management of the debtor. The committee also has to come up with a resolution plan (approved by 75 per cent majority of the creditors) or decide to liquidate the assets. If the resolution plan is not accepted by the NCLT or no plan is formed within 180 days (it can be extended by 90 days), the company would go into liquidation.
Of these 12 loans, Bhushan Steel and Bhushan Power and Steel loans account for over Rs 80,000 crore of stressed loans. “Some of the provisioning has already been made. The additional provisioning will eat into the bottom line of banks in the next two or three quarters,” said a banking source.
As per the RBI’s provisioning norms, if an account turns into a non-performing asset, banks are required to set aside 15 per cent of the loan amount as provisioning in the first year. The provisioning rises to 25 per cent in the second year and 40 per cent in the third year. After the third year, banks are required to make 100 per cent provisioning against the loan.
The RBI recently referred 12 large NPAs in the banking system for resolution under the IBC, based on the recommendations of its internal advisory committee (IAC). Banks have already provisioned 40 per cent for these NPAs worth Rs 2 lakh crore, or equal to a quarter of the NPAs in the banking system, before the RBI’s move.
Says Krishnan Sitaraman, senior director, CRISIL Ratings, “Based on CRISIL’s assessment of embedded value in the top 50 NPA cases, we estimate a 60 per cent haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another 25 per cent this fiscal, compared with 9 per cent in the last.” But the impact of that could be mitigated if banks are allowed to amortise the provisioning across 6 to 8 quarters.
The IAC, set up by the RBI, has reviewed the top 500 exposures that are partly or wholly classified as NPAs, and given its recommendations which include the referral of the top 12 NPAs for resolution under the IBC.
The IAC also recommended that for the other corporate NPAs, banks should finalise a resolution plan within six months and where a viable resolution plan is not agreed upon within that period, banks should initiate insolvency proceedings under the IBC.
With this step, the RBI has addressed the reluctance of banks to further mark down the asset values of these NPAs by having an oversight committee to provide guidance.