The Reserve Bank of India’s clean-up act could increase bad loans under insolvency resolution by another 40 percent in six months to about Rs 5 lakh crore—more than half of the non-performing assets in the Indian banking system.
That’s the estimate from Credit Suisse after the central bank overhauled the nation’s stressed asset resolution mechanism. The RBI did away with a number of interim schemes introduced before India adopted the new bankruptcy law. Instead, lenders must now agree on a resolution plan within 180 days. If they fail, large stressed accounts must be immediately referred for resolution under the Insolvency and Bankruptcy Code.
The rules come at a time when Indian banks are close to completing the process of recognising bad loans, but resolution is still in early stages. Credit Suisse estimates total NPAs in the banking system at Rs 8.8 lakh crore.
“Another Rs 1.5 trillion (or Rs 1.5 lakh crore) of non-performing assets are now likely to be with the National Company Law Tribunal in the next six months,” according to a Credit Suisse report on RBI’s new rules. That’s in addition to the Rs 3.5 lakh-crore loans already under insolvency resolution, it added.
Restriction on promoters to bid for stressed assets coupled with a spike in bad loans will lead to larger haircuts, the report said. The first set of companies to undergo the IBC process, excluding a couple of large steel accounts, have seen haircuts of 60-80 percent of debt, Credit Suisse pointed out.
“With the revised guidelines, NPA slippages are likely to accelerate, upgrades are likely to be more difficult and provisioning needs are likely to rise as more cases are referred under the IBC,” it said. Credit Suisse estimates that if defaults as a percentage of bad loans increase by 10 percent, capital needed for provisioning will rise by Rs 60,000 crore.
ICICI Bank Ltd. and Axis Bank Ltd. are relatively better placed as large provisioning needs have already been accounted for. Among the public-sector lenders, Bank of Baroda is better placed with an already high stressed assets cover.
While capital in the hand of India's largest lender, State Bank of India, is low, the report said recapitalisation by the government will “aid accelerated clean-up of books".