‘New norms to boost bad loan recovery prospects’

NEW RULES STIPULATE THAT FROM MARCH 1, LENDERS MUST IMPLEMENT A RESOLUTION PLAN WITHIN 180 DAYS FOR ACCOUNTS OF AT LEAST ₹2,000 CRORE

MUMBAI: The Reserve Bank of India’s (RBI) decision to tighten norms for resolution of stressed loans, currently estimated at over ₹10 lakh crore, will improve recovery prospects from soured loans but keep banks’ provisioning requirement at an elevated level, analysts said.

Late on Monday, the central bank withdrew a host of norms such as strategic debt restructuring (SDR) and scheme for sustainable structuring of stressed assets (S4A) among others, and made the process time-bound. The new rules stipulate that starting March 1, lenders must implement a resolution plan within 180 days for accounts of at least ₹2,000 crore.

“To begin with, lenders will have to start finalising and implementing resolution plans for cases where restructuring has been done. The fact that most cases remain in stress despite restructuring under various RBI schemes means that there is a high probability that most of these could be referred for (insolvency) proceedings,” said Udit Kariwala, senior analyst, financial institutions at India Ratings.

“To that extent, provisioning cost will increase.” He added that as per the rating agency’s analysis, at the end of September, large banks—six each from private and public sectors—are sitting on a restructured loan pool (including SDR and another scheme called 5/25) of around ₹1.9 lakh crore.

Accounts from highly leveraged thermal power and capital goods sectors are at high risk of landing in bankruptcy courts.

However, Krishnan Sitaraman, senior director at Crisil Ratings, said the circular in itself may not lead to materially higher provisioning on an aggregate basis, since banks are already steadily increasing their provisioning levels on bad loans owing to the resolution processes under way.

Public sector banks on an aggregate basis are looking to enhance provision coverage levels from 40-45% to 55-60%, he said.

Banks must kept aside at least 50% in the form of provision for accounts referred to bankruptcy court. Currently, lenders are finalising resolution plans for 11 of the 12 accounts in RBI’S first defaulter list referred to bankruptcy court. They are also filing insolvency petitions for some of the 28 accounts which were part of central bank’s second defaulter list.

Analysts said the revised rules—which, for instance, call for credit rating agencies to evaluate resolution plans will make the process of restructuring more transparent, enable lenders to get better market-linked pricing for the underlying asset, and sync bank balance sheets with expected loss from the stressed asset pool.