BQ Exclusive: Banks May Be Staring At Another Rs 60,000-Crore Hit Next Quarter

Indian lenders may need to set aside another large chunk of money for provisions against stressed assets in the January-March quarter as a regulatory standstill period comes to a close.

On June 7, the Reserve Bank of India had issued a new circular for stressed asset regulation which asked banks to sign inter-creditor agreements within 30 days and finalise a resolution plan within 180 days. If a resolution plan is not arrived at within this time-frame, banks would need to set aside incremental provisions or refer the account for insolvency, the RBI had said.

Following the circular, inter-creditor agreements had been signed for nearly Rs 3 lakh crore in stressed assets, according to three people in the know. Most assets, for which such agreements were signed, are yet to be resolved. In the absence of a resolution, banks are staring at nearly Rs 60,000 crore in additional provisions, these people said.

As per the RBI’s current stressed asset rules, banks must make an additional provision of 20 percent if they fail to resolve the asset within 180 days of signing the inter-creditor agreement. If no resolution plan is implemented within 365 days, the additional provision requirement goes up to 35 percent.

The additional provisions, the RBI mandates, will be over and above any provisions which the banks already hold against these assets. As an incentive, the RBI had said that banks can write back a part of the incremental provisions if the stressed accounts are resolved using the Insolvency and Bankruptcy Code.

Following the June 7 circular, banks had swung into action to sign the agreements and most had been closed by the end of that month. As such, the 180-day clock began ticking in July and by January or February, the standstill on incremental provisions will come to an end.

Inter-creditor agreements had been signed for cases such as Reliance Infrastructure Ltd., Reliance Power Ltd., Reliance Home Finance Ltd., Reliance Commercial Finance Ltd. and Suzlon Energy Ltd. The list isn’t exhaustive.

Why The Delays In Resolution?

The idea behind the RBI’s June 7 framework was to allow bankers a free hand in deciding the contours of a resolution plan but within strict timelines. The additional provisions, it was understood, would act as a deterrent to any delays in the resolution process.

According to a senior banker, the first of the three people cited earlier, the guidelines didn’t cover other key creditors such as insurance firms, mutual funds and bondholders, which has led to considerable delays in resolution.

While the insurance regulator has allowed insurance companies to participate in inter-creditor agreements, the Securities and Exchange Board of India has allowed it only in cases where mutual funds use the “side-pocket” mechanism to separate the stressed exposure. Other bondholders are also not mandated to participate in the agreements, leaving banks with limited control over resolutions.

The second person cited earlier, a stressed asset resolution consultant, said that despite the timelines mandated by the regulator, public sector banks have been moving slowly. The process being followed currently seeks a resolution plan to be proposed by the promoter, which is then reviewed by the lenders. After negotiations, lenders may choose to continue with the promoter’s plan or work on their own scheme, the second person said.

“It’s likely that we will see some elevated provisions for the short term but the recoveries will gradually improve and will help the banks report better profits,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services. “Moreover, the multiplicity of lenders in corporate lending is also coming down, which will help in quicker resolution in the future.”

More References To IBC?

In the meanwhile, banks may look to use the IBC route to avail of lower provisioning.

The third person cited earlier, another senior public sector banker, said the only way to avoid high provisions would be for banks to make more references to the insolvency and bankruptcy code.

According to the RBI’s guidelines, banks may write back the additional provisions after the 180 day deadline, if:

A borrower is not in default for six consecutive months after the paying back outstanding dues.
If the company is sold to another promoter.
If the company is referred to the National Company Law Tribunal for insolvency proceeding and the case is admitted.

Since the chances of repaying dues and selling the company aren’t immediately applicable to most of the cases under inter-creditor agreements, banks will end up using the insolvency route to protect their profits, the banker said.

“The inter-creditor agreements were designed as a fast-track mechanism to enable collective resolutions pre-insolvency and preserve maximum ,” said Dinkar Venkatasubramanian, partner, EY. “A number of such agreements have been signed.”

The success and sustainability of inter-creditor agreements would depend on 1) how seriously borrowers take to the process and 2) the pragmatism of lenders to drive a resolution and build consensus around it. While a few, particularly in the power sector may be resolved, we fear that many will land up in insolvency owing to lack of one or both.

Dinkar Venkatasubramanian, Partner, EY

Dinkar added that inter-creditor agreements are being seen as a way to execute one-time settlements rather than a way to revive a stressed company. This limits the kind of people who can fund such resolutions, he said.

As on Sept. 30, insolvency proceedings are still ongoing for 1,497 companies, out of the 2,542 which were admitted by various benches of the National Company Law Tribunal, according to data provided by the Insolvency & Bankruptcy Board of India.

So far, Dewan Housing Finance Corporation Ltd., which had seen its lenders signing an inter-creditor agreement in June, has been admitted for insolvency proceedings after the government amended the code to allow non-bank lenders to use resolved under its aegis.