People Outside the RBI Headquarters in Mumbai (Photographer: Dhiraj Singh/Bloomberg)

RBI Seeks Higher Provisioning Against Insolvency Cases

The Reserve Bank of India has asked lenders to set aside additional capital against stressed assets that are being referred to the bankruptcy court, two public sector bankers confirmed on condition of anonymity.

The RBI, through a letter, has asked banks to set aside 50 percent provision against the secured portion of these loans and 100 percent provision against the unsecured part, according to the two bankers quoted above. The additional provisions can be spread over three quarters starting the next three-month period, said the bankers. RBI did not respond to an email sent by BloombergQuint on Monday.

If in regular course of business any of these assets need higher provisioning, then the higher amount will apply, the first of the two bankers quoted above said.

Under the RBI’s provisioning norms, if an account turns into a non-performing asset, banks are required to set aside 15 percent of the loan amount as provisioning in the first year. The number rises to 25 percent in the second year and 40 percent in the third year. Beyond this, banks are required to make 100 percent provisioning against the loan.

The Economic Times first reported the news of increased provisions on Monday morning.

Earlier this month, the RBI asked banks to refer 12 large stressed accounts for resolution under the Insolvency & Bankruptcy Code (IBC). These accounts make up about 25 percent of the total gross NPAs in the banking system, the regulator had said. The banking sector was sitting on gross NPAs worth over Rs 8 lakh crore as on March 31.

Since these cases have been NPAs for a while, banks would have already made 25-40 percent provisioning against these loans. In some cases, banks have fully provided against the asset as previous resolution schemes have failed, the first banker quoted above said.

The higher provisioning norm isn’t limited to the 12 cases which are being admitted to the National Company Law Tribunal for insolvency proceedings, but will be for all such cases in the future, the first banker added.

A formal circular in this matter has not been sent to all banks, a senior official at a large private sector bank said requesting anonymity. It is likely that the RBI has circulated the letter only among some lead lenders, the private sector banker said.

Among the dozen cases which have been shortlisted for immediate insolvency and bankruptcy proceedings, lenders in eight cases – Essar Steel Ltd., Bhushan Steel Ltd., Bhushan Power & Steel Ltd., Monnet Ispat & Energy Ltd., Jyoti Structures Ltd., Jaypee Infratech Ltd., Lanco Infratech Ltd. and Electrosteel Steels Ltd. – have met and agreed to approach the NCLT.

BloombergQuint had confirmed the names of the cases involved and those where insolvency proceedings have been approved, based on conversations with bankers on the condition of anonymity.

Lenders are yet to meet in four cases – Alok Industries Ltd., Amtek Auto Ltd., ABG Shipyard Ltd. and Era Infra & Engineering Ltd.