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Thursday, June 22, 2017

Bad loan resolution: Haircuts and how to keep baldness at bay


Receding hairlines are not new in the banking world but everyone fears the fast road to baldness. So far, the toxic loan pile has driven bankers into losing their hair as well as hurtled bank balance sheets towards complete baldness.

The Reserve Bank of India’s (RBI) latest on a framework towards bad loan resolution seeks to put the brakes on this.

The central bank’s internal advisory committee has pulled up 12 accounts (out of a pile of 50 large borrowers) that in total form 25% of the current bad-loan stock to be referred under the Insolvency and Bankruptcy Code (IBC). This means that this bankers’ dozen will find their way to National Company Law Tribunal (NCLT), and into the hands of a professional to prescribe a turnaround plan.

To their credit, the fact that the central bank wasted no time in using its new powers conferred upon by the government only two months back shows that policymakers are not cooling their heels.

But there are several pitfalls, the first of which is an untested bankruptcy court. If a sizeable number of cases are resolved through IBC, it would be a game changer for future bad- loan resolution. But the court already has a formidable caseload due to older cases being transferred from other courts.

IBC is a time-bound mechanism instead of the other existing prosaic laws. But time has been the biggest foe of lenders and still remains so. From the day of entering the gates of NCLT to that of exiting, the entire process will take at least 230 days and at worst 320 days if the 90-day grace period is sought. This means lenders are unlikely to get a dime from these accounts that total to Rs2 trillion during the current fiscal year. Whether they will lose more money is in the hands of the courts and RBI.

The success will depend on how much of a hit bankers are willing to take and how much would the promoter cough up. This has been the reason for the stalemate between banks and borrowers that delayed the resolution process and led to stressed loans ballooning to Rs10 trillion. The government’s own calculations in the Economic Survey suggest that haircuts could be as high as 75% in many cases. Analysts at Credit Suisse note that banks have already provided at least 40% towards these 12 accounts but higher provisioning cannot be ruled out.

The real danger is the absence of an agreement on haircuts which would force liquidation. If a large swath of assets go up for sale, getting a realizable value would turn into a nightmare for many creditors.

In this pursuit of value, it is certain that bankers will lose more than promoters. The courts, RBI and the government will have to ensure that bankers don’t become bald.

RBI’s bad loan resolution move throws bankers into a tizzy


Mumbai: The Reserve Bank of India’s (RBI’s) decision to refer large cases of stressed loans for bankruptcy proceedings has thrown bankers into a tizzy on how to start the process, signalling that the bad loan resolution process could be long-drawn.

Bankers are awaiting the list of accounts from RBI despite having access to the Central Repository of Information on Large Credits, a centralized database of large exposures.

“We have to move to NCLT (National Company Law Tribunal) and get going with the plan. Apart from the list, we are expecting some directions from the RBI, on things like whether a joint lenders’ forum will be called and so on,” said the head of a mid-sized state-owned bank on condition of anonymity.

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NCLT is the arbitration authority for cases filed under the Insolvency and Bankruptcy Code (IBC).

RBI on Tuesday said 12 accounts representing about 25% of the gross bad loans in the banking system would be eligible for immediate reference for bankruptcy proceedings.

Indian banks are sitting on a stressed asset pile of close to Rs10 trillion; of this, gross bad loans account for Rs7.7 trillion and the rest are restructured loans.

An internal panel of the central bank has suggested that accounts with outstanding loans of more than Rs5,000 crore, of which at least 60% was classified as non-performing by banks as of 31 March 2016, can be referred for bankruptcy proceedings.

Bankers said that before moving the cases for bankruptcy proceedings, all details of these accounts will have to be checked and addressed to ensure that possible loopholes are plugged.

The so-called special dispensation provided to borrowers under the terms of restructuring is seen as one loophole. Bankers and lawyers say borrowers could use this to delay proceedings.

“Before the application (to NCLT) is moved, we will have to ensure that there is no specific leeway the borrower had availed, either on bilateral basis or from the consortium (of lenders), which would be a hurdle during the proceedings,” said a senior official at another bank.

Under the IBC, once a case is admitted by the NCLT, a resolution plan must be in place within 180 days of admission. This is extendable up to 90 days. In case there is no plan or the committee does not agree on one, the company will go into liquidation.

Another problem for banks is the sacrifice they have to make to resolve the bad asset and the subsequent provisioning that will be required once bankruptcy proceedings start.

To be sure, RBI has said that it will detail revised provisioning norms for cases accepted under the bankruptcy code. However, state-owned banks, especially smaller ones, are lobbying for some relief in the provisioning, either in the amount or on spreading the amount over a few quarters, according to two bankers. This is to ensure that balance sheets are not further stressed at a time when bad loans have risen and capital is scarce.

Since the 12 cases are relatively old and probably well-provisioned for, it may not be an immediate problem, Seshadri K. Sen and Rahul Jain of JP Morgan India wrote in a note Wednesday. However, for a lasting resolution, state-owned banks will have to be recapitalized as the haircuts needed are likely to exceed the current provisioning norms, the note added.

“Referral to the NCLT is a double-edged sword: should the banks fail to get a resolution proposal approved in the predefined time-frame, the borrower automatically goes into liquidation and the lenders may have to take large losses in that event,” the note said.

In order to prioritize the resolution, RBI has said that IBC proceedings in respect of identified accounts will be accorded priority by NCLT. However, lawyers argue that this will be at the discretion of the arbitration authority, with principles of natural justice as the guiding factor.

As such, going by the 5 May ordinance, the central bank can ask banks to invoke proceedings against defaulters but has no say over NCLT proceedings, lawyers said.

In an interview to Mint, M.S. Sahoo, chairman of the Insolvency and Bankruptcy Board of India, said that it is understood that the government has plans to add more benches to the 11 NCLT currently has.

Bankers also question whether NCLT has enough infrastructure to deal with the expected rise in the number of bankruptcy cases.

“ NCLT does have bandwidth constraints, but NCLT judges have been generally trying to adhere to the timelines under the Bankruptcy Code. I think as we move ahead, there will be a more nuanced approach,” said Ashwin Bishnoi, partner at law firm Khaitan and Co.

Andhra Bank, Allahabad Bank, UBI put NPAs worth Rs6,750 crore on sale


Mumbai: Banks have stepped up their loan recovery efforts and sought bids from asset reconstruction companies (ARCs) for their bad loans, especially those that have few chances of being recovered.

This comes at a time the Reserve Bank of India (RBI) has identified at least 12 stressed accounts for starting bankruptcy proceedings against defaulters using powers granted to the central bank under a 5 May ordinance amending the Banking Regulation Act.

Andhra Bank, Allahabad Bank, and United Bank of India (UBI) have put on the block non-performing assets worth over Rs6,750 crore, according to tenders posted on the websites of the banks. A few other banks may join the effort.

Last week, State Bank of India concluded the bidding process related to the sale of around Rs1,471 crore in bad loans. The bank is in the process of evaluating the offers, a person close to the development said on condition of anonymity.

“The trend is positive because it keeps the resolution process ongoing, especially when the recovery from the big-ticket loans is yet to gather momentum,” said Saswata Guha, a director at Fitch Ratings.

Indian banks are sitting on a stressed asset pile of around Rs10 trillion. Industry experts said the final outcome of these sales will also help gauge whether the revised norms of the RBI, in effect since 1 April, are a deterrent for using the ARC route for bad-loan resolution.

From the beginning of this fiscal, if a bank invests in more than 50% of security receipts created against the sale of its own stressed assets, it has to set aside more money as provisions. From 2018-19, this threshold of 50% will be reduced to 10%.

Bankers said they are keen on all-cash deals for their stressed assets, but given the capital-starved asset reconstruction industry, most deals are priced under the 15:85 rule. Here, ARCs give 15% of the net asset value as upfront cash and issue security receipts to cover the rest of the amount.

A majority of the accounts on sale are those with outstanding balance of below Rs100 crore and have remained as non-performing assets (NPAs) for at least four years, officials at Andhra Bank, Allahabad Bank and United Bank said, requesting anonymity.

While bankers say that it is easy to sell small-value accounts as the haircut, or the sacrifice banks have to make for selling NPAs, is smaller, ARCs have different views.

Given the vintage and size of the assets, it is unlikely that ARCs would buy the entire bad loans on offer and instead opt for cherry-picking.

“Recovery in such accounts is difficult and in most cases, the associated legal and other costs do not bode well if you keep in mind the expected recovery,” said the head of a leading ARC, which plans to participate in evaluating the NPAs on sale. This person requested anonymity.

ARCs have played an active role in the past in disposal of bad loans owed by small and medium-size enterprises and even mid-corporate entities, said Fitch’s Guha. “But for larger accounts, their appetite may be constrained by their limited individual balance sheets,” he added.

As of the end of March, India had 23 ARCs certified by RBI.

As per a report released in April and prepared jointly by the Associated Chambers of Commerce and Industry of India, Society of Insolvency Practitioners of India, and Edelweiss Asset Reconstruction Co. Ltd, about Rs2.44 trillion of gross bad loans have been sold to ARCs so far.

Standard Chartered, IDBI Bank, Yes Bank top compliance rankings in survey


Mumbai: Twelve out of 51 banks were rated “high” in a compliance survey for 2016-17 conducted by the Banking Codes and Standards Board of India (BCSBI).

Twenty-nine banks were rated “above average” and 10 “average”. No bank figured in the “below average” category. The ratings were based on five parameters: Information dissemination, transparency, grievance redressal, customer centricity and customer feedback.

Among private banks, Yes Bank Ltd received the highest rating of 94 out of 100, while Standard Chartered led foreign banks with a score of 95. IDBI Bank Ltd led public sector banks with a score of 88.

Weighted average is given to the five parameters and the score is determined out of 100. Customer centricity has the highest weightage of 30%.

BCSBI surveyed 26 public sector banks (including State Bank of India and its associates), 17 private sector banks, three foreign banks and five urban cooperative banks.

Overall, private sector banks performed better than public sector banks. Among public sector banks, only IDBI Bank scored a “high” rating, against eight private sector banks. All foreign banks—Citibank, Standard Charted Bank and HSBC—scored “high”.

The survey was conducted across 2,733 branches of these banks and 8,485 customers.

Under information dissemination and transparency, 15 and 8 banks, respectively, got below average rating. However, in case of customer feedback, no bank got below average rating which points to the fact that customers gave biased view when asked about their respective banks, the Board said.

According to A.C. Mahajan, chairman of BCSBI, public sector banks were asked to upgrade their information technology (IT) systems after the survey results came out. Information is not disseminated quickly across branches in case of public sector banks, BCSBI said.

RBI says 12 accounts with 25% of bank bad loans identified for bankruptcy proceedings


Mumbai: The Reserve Bank of India (RBI) on Tuesday said 12 accounts representing about 25% of the gross bad loans in the banking system would be eligible for immediate reference for bankruptcy proceedings.

Indian banks are sitting on a stressed asset pile of close to Rs10 trillion; of this, gross bad loans account for Rs7.7 trillion and the rest are restructured loans.

An internal panel of the central bank has suggested that accounts with outstanding amounts of more than Rs5,000 crore, of which at least 60% was classified as non-performing by banks as of 31 March 2016, can be referred for bankruptcy proceedings.

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RBI did not disclose the names of the accounts. The accounts were shortlisted by an internal advisory committee (IAC), which mainly comprises the central bank’s independent board members.

Under a 5 May ordinance amending the Banking Regulation Act, the central bank has the powers to suggest to, and even compel, banks to invoke proceedings against defaulters.

At its first meeting on Monday, the panel discussed the top 500 stressed accounts of the banking system that could be referred for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC).

“The Reserve Bank, based on the recommendations of the IAC, will accordingly be issuing directions to banks to file for insolvency proceedings under the IBC in respect of the identified accounts. Such cases will be accorded priority by the National Company Law Tribunal (NCLT),” the central bank said.

NCLT is the arbitration authority for cases filed under IBC.

So far, 81 cases of bad loans have been referred to NCLT, finance minister Arun Jaitley said on Monday after meeting bank chiefs. About 18 were referred for bankruptcy by their creditors, the minister said.

RBI also said that it would detail revised provisioning norms for cases accepted under the bankruptcy code.

“We are expecting RBI to give us forbearance on provisioning requirement for 8 quarters. Else, weak banks will find it difficult to take a haircut under the resolution plan of IBC,” said a senior banker on condition of anonymity

For accounts that don’t meet the criterion set by the advisory panel, the IAC suggested that banks should finalize a resolution plan within six months. In cases where a viable plan is not agreed within six months, banks have to file for insolvency proceedings, the RBI statement said.

The details of the resolution framework for these other non-performing accounts will be released in the coming days, it said.

“It is a bold and much-needed move in line with the ordinance. The stakeholders should see bankruptcy as a positive move and as an opportunity to restructure rather than only liquidation,” said Sapan Gupta, national practice head of banking and finance at law firm Shardul Amarchand Mangaldas & Co.

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