Shares of public sector banks on Wednesday plunged by up to 10 per cent on stock exchanges as loans worth Rs 2,46,000 crore of corporates — 50 large borrowers having exposure of Rs 2,000 crore or more — are likely to face resolution by September 1, 2018 after the Reserve Bank of India (RBI) put in place the revised framework on resolution of stressed assets.
The RBI’s plan to scrap existing recast plans and introduce a new system has come at a time when banks are already reeling under bad loans, losses and the rise in bond yields. Yes Bank slipped 4.40 per cent, SBI 4.06 per cent, Axis Bank 3.35 per cent, ICICI Bank 2.29 per cent, Bank of India 7.87 per cent, Canara Bank 5.82 per cent, Union Bank 4.90 per cent, Allahabad Bank 7.79 per cent and Corporation Bank 4.83 per cent.
Punjab National Bank plunged 9.81 per cent after the lender said it has detected fraudulent transactions worth $1.77 billion. The sell-off in bank stocks pulled down the Sensex which ended 144.52 points or 0.42 per cent down at 34,155.95. “PSU banks witnessed sell-off as the RBI scrapped a number of loan-restructuring schemes which may lead to further jump in provisions, impacting profitability of these banks,” said Vinod Nair, head of Research, Geojit Financial Services.
If the resolution plan entails restructuring of the loans, the standard loans will get classified as NPAs. Also, if the resolution plan fails to get implemented by September 1, 2018, the banks will need to initiate proceedings under Insolvency and Bankruptcy Code (IBC) against these borrowers. This will require more provisions, leading to more losses. Further, some of the banks may require more capital from the government to salvage the situation.
The spike in NPAs is likely to be an outcome of implementation of resolution plan for large borrowers that are currently under Special Mention Accounts (SMA) categories. Further, in the event the banks are unable to implement a resolution plans for the large borrowers with exposure of Rs 2,000 crore and above, these accounts will required to referred to National Company Law Tribunal for resolution under Insolvency and Bankruptcy Code (IBC), 2016. “This has been the case with most of the NCLT 2 list of borrowers, whereby the resolution plans failed for most of borrowers and were referred under IBC; this is expected to further spike up the credit provisioning requirements for banks during FY2019,” ICRA said.
Karthik Srinivasan, group head, ICRA, said, “While in the short-term this will increase the pain for the borrowers as well the lenders, however the early identification of stress and resolution will prevent future ever-greening of loans and ensure a good financial health for the banking system in long-term.”
According to Crisil, by mandating weekly information on large delinquent accounts, by directing that a resolution plan be scripted immediately after default, and by setting stringent timeliness (180 days from default) for referring an account to the Insolvency and Bankruptcy Code process, the RBI is establishing an ecosystem where NPAs would get recognised on time and their resolutions are structurally quicker than before.
Krishnan Sitaraman, senior director, CRISIL Ratings, said, “The revised RBI framework sets in motion a change in the paradigm of stressed assets resolution. The streamlining of the NPA resolution process affords simplicity, timeliness and credibility, so is a long-term positive for the banking sector.”
The revised RBI guidelines on resolution of stressed assets entail proactive resolution of the stressed assets whereby the lenders need to finalise the resolution plans as the accounts slips into SMA (special mention account) category. However unlike earlier Joint lender forum (JLF) framework, which formulated the resolution plans for SMA accounts, the revised guidelines also require the resolution plan to have independent credit evaluation (ICE) from credit rating agencies (CRAs).
Gross NPAs and standard restructured advances of banks are estimated at 12.6 per cent as on September 30, 2017. Additionally, as per the financial stability report of RBI, SMA 2 advances are estimated to be 3.5 per cent of the gross advances of banks. Hence the overall stress levels of banks including SMA0 and SMA1 borrowers is much higher than the reported GNPA level of 10.3 per cent as on September 30, 2017.