On Monday, the Allahabad High Court (HC) declined to grant interim relief to power sector companies against the RBI’s circular. Power producers had approached the HC to seek relief from the central bank’s circular, which set a strict timeline of 180 days for the resolution of defaulting corporate accounts.
However, senior bankers said there will be no impact on banks with respect to provisioning. “There is a lot of hype around today's date (August 27), but as far as non-performing assets (NPAs) of banks or provisioning requirements on these NPAs are concerned, it has no impact,” said Rajnish Kumar, Chairman of State Bank of India, on Monday morning, prior to the Allahabad HC verdict.
The RBI circular states that banks have to start a resolution process for all their large NPA accounts, from the first day of the default. Any inability to structure a resolution plan, internally, within the 180-day period would mean that lenders have to initiate insolvency proceedings against the corporate debtor.
The 180-day deadline, effective from March 1, ended on August 27.
“The IBC, in itself has no prima facie obligation on a creditor to trigger the insolvency process, and this, to a certain extent, creates a conundrum and recognises a very harsh reality. The RBI circular essentially required banks to identify loans as special mention accounts, following a default. Therefore, the central bank has directed lenders to trigger their rights as creditors under the IBC,” says Ran Chakrabarti, Partner at IndusLaw.
Analysts, though, believe that banks will be impacted. They say banks are estimated to have made 25-30 per cent worth of provisions against these 60-odd corporates, therefore “additional provisioning requirements would amount to about Rs 0.8 trillion to Rs 1 trillion”.
“Although banks have made provisions as per the ageing norm, there is no clear stipulation as to whether the minimum 50 per cent provisioning requirement that was made for the NCLT 1 and NCLT 2 list of companies, applies to the ‘NCLT 3’ accounts,” says Anil Gupta, vice-president at ratings and research agency, ICRA.
“The minimum 50 per cent provisioning requirement is probably not there for the next set of accounts to be referred to the NCLT, on the basis of the February 12 circular,” says Udit Kariwala, associate director at India Ratings and Research.
The estimates of additional provisioning is based on the assumption that banks will have to follow the precedent set by the RBI in case of NCLT 1 and 2 stressed accounts.
Analysts estimate that the total banking exposure to the next set of NCLT accounts (on the basis of RBI’s circular) stands at Rs 3.76 trillion as of August 2018.
And, if the RBI instructs the banks to make a minimum 50 per cent provisioning against each of these stressed corporate accounts, including power sector companies, the total provisioning could rise to Rs 1.8 trillion to Rs 2 trillion, Gupta said.
“In such a situation, the losses and capital requirements for public sector banks are also expected to increase,” he said.
The central government plans to provide Rs 650 billion in new capital to public sector banks during the 2019 fiscal, having already infused Rs 900 billion in the 2018 fiscal.
Of the Rs 650 billion, the government allocated Rs 113 billion to five public sector banks in July.
Last week, global rating agency Moody’s said that the existing capital injections by the central government will enable the banks to strengthen their provision coverage. However, this would not be sufficient if they continue to incur large write-downs on accounts classified as NPAs. An increase in provisioning requirements could raise their capital needs significantly, it added.
In the case of the stressed power companies, industry experts estimate that the large accounts may see 30 to 40 per cent haircuts on the outstanding debt exposure of the banks, while smaller accounts will see higher haircuts of around 45 to 60 per cent.
“Because of the uncertainty surrounding future tariff rates over the next 5 to 10 years, companies will build-in higher margins when they are looking to buy these stressed companies and banks will lose heavily as all these assets will hit the market at one go. They will have to accept whatever offers they get from existing players like Adani, Tata’s or JSW,” said Gupta.