Clock is ticking for ~3.8 trillion stressed assets

Failure to achieve resolution by Monday may land 70 big companies in NCLT

The fate of about 70 big-ticket stressed accounts with loans of over ~3.8 trillion is uncertain as the deadline of August 27 for firming up resolution plans for them approaches. Failing to stitch a plan might leave lenders with no choice but to take these companies to the bankruptcy court.

The Reserve Bank of India’s (RBI's) new rules for resolving stressed assets (issued on February 12) require banks to finalise a plan within 180 days of default. For large defaulting accounts (~20 billion and above), the rules came into effect from March 1. If lenders are unable to firm up resolution plans within the deadline, then insolvency proceedings will have to be invoked against the defaulters.

According to rating agency ICRA’s assessment of the RBI’s February circular, 70 large accounts totaling ~3.8 trillion in loans require a resolution by August 27 to avoid being taken to the National Company Law Tribunal (NCLT). Of these, 34 accounts with ~2 trillion of exposure belong to the power sector alone. The engineering, procurement and construction (EPC) sector is the second largest, accounting for about a fifth of exposure.

Senior public sector bank executives said the accounts have been identified. Most are already NPAs and banks have been making provisions required by rules. Banks might have to cough up more in the near term for cases which are taken to bankruptcy court. That's because, the minimum provision required for the NCLT cases is 40 per cent.

Thus, banks are working at a hectic pace to firm up resolution in most of the cases before the deadline and to avoid taking the NCLT route. Simultaneously, under the Sashakt program, banks are also planning to sell some of large stressed loans to asset management companies (AMCs) and alternate investment funds (AIFs). Also, lenders have special scheme Samadhan for resolving dud power sector assets. But, the time is running out.

Anil Gupta, head for financial sector ratings, ICRA said of the ~3.8 trillion exposure, nearly 92 per cent is already classified as NPAs by the lenders. There is limited recovery witnessed in some of the earlier cases undergoing resolution, except for accounts belonging to the steel sector. Uncertainty prevails on the haircuts banks might need to take upon resolution of these 70 accounts.

From a broader perspective, assuming a scenario of 60-65 per cent provisioning requirements on loan accounts to be resolved and normal slippages of three per cent, the credit provisions (additional money to be set aside for bad loans) for public sector banks are estimated at ~1.4-2 trillion, according to ICRA. And this would hurt their already weak bottomlines and balance-sheets.

Power sector players have approached the courts against the RBI, with a plea to give extra time for working on resolution package.

While the Allahabad High Court is yet to decide on whether powersector entities should be treated differently, the RBI has been unwavering in its stance.

They are seeking an extension to the last date for finalising resolution plans for insolvent powerplants from 27 August to 16 November, 2018.

The RBI has stated that its February circular provides enough room to lenders for restructuring stressed power assets, therefore no special dispensation is needed.