Banks Set To Report Higher Recoveries In September Quarter
The Indian banking sector is set to report increased recoveries in the July-September quarter as the resolution process for large accounts concludes.
During the quarter, two large accounts were resolved under the Insolvency and Bankruptcy Code — Ruchi Soya Ltd and Bhushan Power & Steel Ltd. The dues from these accounts will help lenders report lower bad loan ratios.
This month, the Mumbai bench of the National Company Law Tribunal (NCLT) approved the Ruchi Soya resolution, where Patanjali Ayurveda is set to take over the company with a repayment plan of Rs 4,350 crore. Separately, the New Delhi bench approved a resolution plan submitted by JSW Steel Ltd to take over Bhushan Power. The plan includes one time payment of Rs 19,350 crore for lenders.
As most banks made provisions of close to 80 percent against these accounts, the recoveries will result in write back of provisions and improve profitability.
Recoveries have slowed down since June 2018, when banks had reported larger write backs on their provisions owing to Bhushan Steel Ltd’s resolution. Both Bhushan Power and Bhushan Steel were part of the first list of companies which were referred for insolvency after the Reserve Bank of India mandated banks to do so. In the first quarter of FY20, recoveries and upgrades for the nine largest banks in India were at Rs 23,722 crore, as compared with Rs 45,214 crore a year ago.
To be sure, banks will continue to grapple with fresh slippages or new bad loans. In the first quarter of financial year 2019-20, banks reported a rise in their slippages, owing to a large government owned entity slipping into NPA category.
BloombergQuint reported on August 20 that the case in question was Ratnagiri Gas & Power Ltd, where the bankers have approved a resolution plan to restructure the company’s Rs 9,000 crore debt. The RBI allows banks to upgrade an account to standard category only if the borrower shows signs of improvement and so banks will see the benefit of this restructuring plan only after a few quarters, said a senior public sector banker speaking on conditions of anonymity.
Despite the increased recoveries from one-off large accounts, analysts are not hopeful of significant improvement in asset quality just yet.
“If you were to look at the recoveries and upgrades banks have made outside the IBC route, it is not up to the mark. This will play on the future results, since resolution of these accounts would be essential to reduce the stock of bad loans on bank books,” said Siddharth Purohit, senior banking analyst at SMC Global Securities.
Moreover, since the public sector banking system is going through a phase of consolidation in the current financial year, it is likely that the slippages may rise in the December 2019 and March 2020 quarters, said Purohit. Typically during a merger, the weaker banks start aligning their books according to the classification standards of the parent bank, which will result in additional slippages and provisions, he said.
Gross non-performing assets (NPAs) for the listed banking space rose to Rs 9.3 lakh crore as on June 30, as compared with Rs 8.98 lakh crore in the March quarter.
Recoveries Under IBC
According to data collated by the Insolvency and Bankruptcy Board of India, financial creditors have managed to recover Rs 1.09 lakh crore through the insolvency route, between January 2017 and June 2019. Overall, 123 cases have been resolved within this period of time, where financial creditors had made claims worth Rs 2.56 lakh crore, which puts the recovery rate around 43 percent. Banks constitute the largest share of financial creditors in India.
In comparison, operational creditors had made claims worth Rs 33,267 crore in the same cases and managed to recover about half of it, the data showed.
While the recoveries from certain large accounts is encouraging, the time taken for resolving these assets has been extended beyond what banks had originally planned for, said a second public sector banker, also speaking on conditions of anonymity.
Essar Steel Ltd, for example, has been under a resolution process since August 2017 and is yet to be completed. ArcelorMittal is set to pay over Rs 42,000 crore, out of which, over Rs 30,000 crore will be paid to lenders of Essar Steel as part of a resolution plan.
If the Essar Steel case is closed before September 30, that too will also boost recoveries for banks. The Supreme Court is set to hear the matter in the third week of September. The Ahmedabad Bench of the NCLT and the National Company Law Appellate Tribunal have already approved ArcelorMittal’s resolution plan. However the appellate tribunal suggested that operational creditors be made higher repayments than what was approved by the committee of creditors earlier. This led to the financial creditors led by State Bank of India, approaching the Supreme Court.
Of the 123 cases resolved, only 47 cases were resolved within the 270 day period stipulated under the IBC, while all others have taken longer. In certain cases like the resolution of Deccan Chronicles Holdings Ltd, the banking system had to wait for 23 months before a resolution plan was approved.