Huge haircut needed on largest NPAs, says CRISIL

Rating agency CRISIL said the banks in question would need to find an extra Rs 40,000 crore as bad loan provisioning for the 12 big-size cases being referred, on Reserve Bank of India (RBI) order, to the National Company Law Tribunal (NCLT) for resolution.

These 12 large accounts had become non-performing assets (NPAs) on the banks' books by end-March 2016. CRISIL's study shows the banks had already provisioned 40 per cent for these NPAs worth Rs 2 lakh crore — that is, about Rs 80,000 crore.

CRISIL believes the lenders will have to take a haircut (the term for difference between the market value of assets used as loan collateral and the amount of the loan) of 60 per cent. That means banks will have to make a total provision for Rs 120,000 crore, said Krishnan Sitaraman, senior director at CRISIL.

If banks were asked to provide the additional Rs 40,000 crore in this financial year, this would create huge pressure on their bottom line. The impact could be mitigated if they were allowed to amortise the provisioning across six to eight quarters, he said.

RBI recently ordered that these 12 large NPAs be referred for resolution under the new Insolvency and Bankruptcy Code (IBC). Time-bound resolution of these cases will indeed be a big positive for bank balance sheets, CRISIL said.

The 12 accounts RBI named are Bhushan Steel (Rs 44,478 crore), Lanco Infra (Rs 44,365 crore), Essar Steel (Rs 37,284 crore), Bhushan Power (Rs 37,248 crore), Alok Industries (Rs 22,075 crore), Amtek Auto (Rs 14,075 crore), Monnet Ispat (Rs 12,115 crore), Electrosteel Steels (Rs 10,274 crore), Era Infra (Rs 10,065 crore) Jaypee Infratech (Rs 9,635 crore), ABG Shipyard (Rs 6,953 crore) and Jyoti Structures (Rs 5,165 crore).

Six of these have already been referred to NCLT. State Bank of India, lead banker to six of these 12 accounts, has already referred Bhushan Steel, Essar Steel and Electrosteel Steels to NCLT; Punjab National Bank sent the Bhushan Power case to the body last week. IDBI Bank referred Lanco Infratech. Last week, Corporation Bank sent the Amtek Auto case.

CRISIL said its assessment was based on embedded value in the top 50 NPA cases. "We estimate a 60 per cent haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another 25 per cent this fiscal, compared with nine per cent in the last."

The total provisioning for NPAs by banks stood at Rs 2.2 lakh crore by end-March, up from Rs 2 lakh crore a year before. In the normal course, at nine per cent, they would have made a provision of about Rs 20,000 crore in this financial year.

The Internal Advisory Committee set up by RBI, which recommended the step, reviewed the top 500 exposures that are partly or wholly classified as NPAs. For other corporate NPAs, the panel has said banks should finalise a resolution plan within six months. Where a viable plan is not agreed upon in that period, banks should initiate insolvency proceedings under the IBC.

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