Govt banks devise three-tier plan for bad loan resolution


Mumbai: Public sector banks have devised an informal rule of thumb to resolve stressed asset cases beyond the 12 identified for bankruptcy proceedings by the Reserve Bank of India (RBI).

A three-tier strategy is being evolved internally, according to four bankers who spoke on condition of anonymity.

Relatively smaller stressed accounts of less than Rs1,000 crore will be sold to asset reconstruction companies (ARCs), mid-sized cases of Rs1,000-5,000 crore will be resolved through the various RBI restructuring schemes and larger cases will be tried at the National Company Law Tribunal (NCLT) in accordance with RBI rules, according to the plan.

The need for a 360-degree approach to resolving the stressed asset cases comes as lenders want to ensure faster recovery from the stock of Rs10 trillion of stressed assets choking the banking system.

Earlier this month, RBI identified 12 large stressed accounts with outstanding debt of more than Rs5,000 crore to be referred to the NCLT. In other cases, the central bank asked banks to finalize a resolution plan within the next six months, failing which it will be filed for bankruptcy proceedings.

On Thursday, it announced the members of its oversight committee on bad loans and said this panel will also oversee stressed loans greater than at least Rs500 crore.

While RBI has kick-started the process, industry watchers say this is going to be a long-drawn process. Meanwhile, banks are keen on continuing the resolution process by referring eligible cases to various schemes such as strategic debt restructuring and scheme for sustainable structuring of stressed assets. Bankers said the involvement of the oversight panel would ensure that they can take higher haircuts, or sacrifice of the loan amount, without the fear of investigating agencies.

For other smaller cases, lenders have intensified their resolution efforts in the current quarter by clearing the old stock of non-performing assets (NPAs), a phenomenon which is usually seen in the fourth quarter of the fiscal year. Banks including State Bank of India, Andhra Bank, Allahabad Bank, and United Bank of India have already put on the block NPAs worth at least Rs8,500 crore, a majority of which are outstanding balance of less than Rs100 crore.

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%.

“Over a period of time, the redemption of these security receipts falls to nil as there is very little realization from the underlying assets of the company. Until then, banks have to keep higher provisions. So it’s best to sell smaller loans to ARCs,” said the executive director of a public sector bank, who is one of the four bankers cited above.

Given their capital position, most ARCs would also prefer smaller deals as they cannot afford an upfront cash payment of 50% for the underlying asset.

“If ARCs have no capital, then banks will have to look at bifurcating the NPA cases and selling the small accounts to ARCs while addressing the larger ones through the NCLT,” said Eshwar Karra, chief executive officer, Phoenix ARC, which manages Rs6,000 crore of stressed assets primarily in the small and medium enterprises.

According to a 2016 report by EY, the capitalization of all ARCs put together adds up to around Rs3,000 crore.

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