“When one door closes, another opens…,” AG Bell, the great inventor, scientist and engineer once said. This adage is probably relevant for India’s banks when it comes to making recoveries from dud loans amid the Covid-19 pandemic.

With one door (the National Company Law Tribunal) open only to a limited extent (vis-a-vis insolvency cases filed before March 25) due to the pandemic, banks are keenly eyeing the other door – one-time settlement (OTS) route – for recovery of bad loans.

OTS involves compromise settlement of non-performing loans (NPLs) between a bank and its borrowers as per the board-approved policy of the former. This settlement entails the lender/ creditor taking a hair-cut on the outstanding loan amount.

The move to step up focus on compromise recoveries via OTS comes in the backdrop of the government promulgating an ordinance earlier this month, whereby creditors cannot file insolvency resolution applications for defaults occurring during the 6 month period starting March 25 in view of the adverse impact of Covid-19.

Further, the minimum threshold to initiate insolvency proceedings has been upped 100 times to ₹1 crore.

Bankers to meet borrowers

In view of the freeze on initiating insolvency proceedings, bankers will be meeting big borrowers to explore the possibility of OTS, said a senior public sector bank official.

“In the case of accounts, which have been in the NPL category for more than 3 to 4 years and where almost full provisioning has happened, banks will be in a position to take a little more hair-cut than they normally would.

“In the case of an account that has become NPL in March 2020, provisioning would have been minimal. So, a creditor will take less hair-cut, especially when securities are available,” explained the banker quoted above.

Bankers opine that on a net present value (NPV) basis, whatever amount they realise via OTS, could be better than recoveries via the National Company Law Tribunal, Debt Recovery Tribunal or court cases, where the recovery may happen after 2 or 3 years.

“So, if we get the money now (via OTS), we can re-deploy,” said another PSB official.

In a media conference call with the media, Atanu Kumar Das, MD and CEO, Bank of India (BoI), said: “Many of our potential OTS proposals (which were decided prior to the Covid outbreak) have not been able to meet the terms and conditions and timelines because of the lockdown and cashflow issues.

“We have decided to extend the timeline and not charge interest on the compromise settlement amount. So, from the second quarter onwards, we are going to reinvigorate that (OTS).”

Further, the bank plansto take up the board-approved non-discretionary and non-disciminatory OTS policy very aggressively to address the remaining accounts.

As per RBI data, in 2018-19, scheduled commercial banks’ recoveres via four modes – Insolvency & Bankruptcy Code; Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfeasi) Act; Debt Recovery Tribunals and Lok Adalats – jumped to ₹1,26,085 crore in FY19 against ₹40,352 crore in the preceding years. Details of recovery via OTS are not available.

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