Banks are expected to take companies to the National Company Law Tribunal (NCLT) in cases where resolution is still not in sight despite having signed inter-creditor agreements (ICAs). This is on account of the 180-day deadline expiring, following the Reserve Bank of India’s June 7 circular that had mandated banks to resolve cases within such a timeframe.
In addition to 180 days, the RBI has allowed for a grace period of one month to find resolution to these assets or refer them to the NCLT. Banks have an exposure of nearly Rs 3.8 lakh crore to 70 stressed assets, where the resolution process is stuck.
The recent verdict on Essar Steel via the NCLT route has given reason to bankers to take these cases to the NCLT. Sumant Batra, managing partner, Kesar Dass B. & Associates said, “Banks were waiting for Essar Steel judgment, whether they should shift to IBC or continue doing resolution under RBI’s June 7 circular. Now that Essar Steel judgement has given them validation, banks will be more inclined to use the NCLT route against out-of-court restructuring.”
Post the 180-day deadline, banks need to make additional provisioning of 20% in cases where resolution is not implemented. The provisioning coverage ratio (PCR) in such accounts is close to 50-60%. For instance, State Bank of India has already provided 60.3% for 21 NPA accounts where resolution process is in works through the ICA.
As per SBI’s September quarter results, there are 21 NPA accounts which are under the process of resolution via ICAs and another 15 standard accounts (SMA status) where ICA is signed or is likely to be signed. Sources told FE few power companies like Rattan India Nashik, Supreme Infra and Coastal Energen were resolved under ICA in past 5 months. The situation of other power companies with bad debt of close to Rs 1.5 lakh crore still remains unresolved.
A senior banker who did not wish to be named said, “We have one extra month as grace period after December 7 deadline, but we will prefer the NCLT route as only 3-4 cases have been resolved via ICA. Taking these cases to NCLT will also reverse the provisioning. The consortium members will meet in first week of December to decide on future course of action.”
As per RBI’s June 7 circular, where resolution is pursued under IBC — half of the additional provisions made may be reversed on filing of insolvency application and the remaining additional provisions may be reversed on admission of the borrower into the insolvency resolution process under the IBC.
Another problem that banks may face is the double impact of the provisioning on the accounts, which may turn into NPAs in the next few weeks. The accounts which are in SMA status run the risk of turning into NPAs if payments are not made. Dewan Housing Finance (Corp) is one such example.
Another senior PSU banker said on condition of anonymity, “In the cases which are turning NPA, we have to make 15% provision, plus 20% additional provisioning after breaching 180 days deadline as per June 7 circular.”
Source: Financial Express, November 19, 2019