A worker walks through a new tunnel. (Photographer: Simon Dawson/Bloomberg)

Three Years Into The Bad Loan Clean-Up, Resolution Remains A Distant Dream

After having failed to finalise resolution plans for most of the accounts which were in default on March 1, the Indian banking system is preparing to refer at least 60 stressed corporate accounts for insolvency.

These 60-odd cases add to the 12 accounts first referred for insolvency in June last year and the 28 sent to the National Company Law Tribunals in December. Together, these 100 accounts account for close to Rs 7.5 lakh crore in bad loans from a total non performing assets pool of about Rs 10.8 lakh crore on the books of Indian banks.

While cases have piled up, many believe that resolution of stress is still some time away. At least three senior bankers, who spoke to BloombergQuint on conditions of anonymity, felt that any material resolution of stressed assets will take another 12-18 months.

The industry acknowledged as much.

Resolution is likely to be an FY 20 event, noted a report by Boston Consulting Group, released ahead of an annual gathering of bankers last month.

Steady But Slow

To be fair, banks are chipping away at the pool of stressed assets. Meetings are being held, resolutions plans are being discussed and so on. But at each step, promoters faced with losing their businesses for the first time, are fighting back.

The result is that cases are taking much longer than the 180-day resolution timeline, which is extendable up to a maximum of 270 days under the Insolvency and Bankruptcy Code (IBC).

So far, only five large companies have seen deals being finalised, with all necessary approvals in place. All of these five companies were part of the first list of 12 stressed accounts which the regulator had sent to bankers in June 2017. Of this list, Lanco Infratech Ltd. is facing liquidation proceedings for lack of a successful bidder.

Among the 29 accounts in the second list of the RBI, none have been resolved.

According to data collated by Debtwire, 18 large corporate cases at the NCLT have crossed the 180-day mark. Of these, 13 have stretched even beyond the 270-day limit. The data by Debtwire is not exhaustive and does not cover all 40 accounts in the first two lists.

Bankers quoted above said that the first list of cases sent for insolvency had some businesses, such as steel companies, which were attractive to investors. This helped in deals getting closed. However, most firms in the second list have seen prolonged periods of stress and many failed restructuring schemes over the last two financial years. As such, finding buyers for these firms may prove difficult.

Three Years Into The Bad Loan Clean-Up, Resolution Remains A Distant Dream

Light At The End of The Tunnel

Owing to the resolution of a few large accounts under insolvency, banks have shown some improvement in recoveries during the April-June quarter results.

According to a presentation by rating agency ICRA Ltd, recovery and upgrades as a share of outstanding gross non-performing assets (NPA) rose to 5.8 percent as on June 30, 2018 as compared with 4 percent at the end of March quarter.

Recoveries and upgrades also outpaced write-offs for the first time in a year, according to ICRA. Indian banks wrote off nearly Rs 45,000 crore worth of loans as part of their clean up drive, while they managed to recover and upgrade loans worth nearly Rs 60,000 crore.

Even the generation of fresh bad loans has tapered off, according to the ICRA presentation. In the April-June period, banks reported Rs 92,000 crore worth of fresh slippages, lower than the Rs 2.42 lakh crore in the quarter ended March 31.

The level of gross and net NPAs will drop by 10 percent and 4.3 percent respectively by March 2019, according to Anil Gupta, head- financial sector ratings at ICRA.

Three Years Into The Bad Loan Clean-Up, Resolution Remains A Distant Dream

Provisioning Pain Not Over

While stronger recoveries and slower accretion to bad loans is positive, the pain on provisioning will continue.

Presently, the average provisions that banks hold against assets under the two lists put out by RBI is between 55-65 percent, according to Gupta. If banks are forced to take steep haircuts on the accounts that are still to be resolved, provisions may need to be stepped up.

Moreover, for accounts which are not under insolvency, delays in resolution would mean that the NPAs would age and attract higher provisions as specified in the RBI’s income recognition and asset classification (IRAC) norms. ICRA estimates that in the current financial year, public sector banks alone will be forced to make additional provisions worth Rs 1.4-2 lakh crore.

This could mean that the profitability of banks, especially public sector banks, would not see any major improvement in the current financial year.

Jindal Haria, associate director at India Ratings & Research Ltd estimates that about 20 percent of the banking system’s loans are currently under stress, only due to defaulting corporate accounts. A majority of these assets have already been identified as gross NPAs. Over the next two financial years, recognition and provisioning towards existing NPAs could mean that the credit costs for the system may be between 200-300 basis points (bps) each year.

“There might be some profitability reported in the sector, but most will be centered towards private sector banks since they tend to have higher pre-provisioning buffers than public sector banks,” said Haria.