Need for additional provisioning at early stages of impairment: FSR

There may be a need for additional provisioning at early stages of impairment to internalise the costs imposed by delay in resolution of assets under the Insolvency and Bankruptcy Code (IBC), according to the Financial Stability Report (FSR).

The report also called for incentivising all channels of resolution so as to avoid delays and hence prevent erosion in value of assets.

Also, there is a need for reviewing provisioning norms in the light of actual recovery related data, including the impact of collateralisation on final recovery

The aforementioned observations come in the backdrop of the Reserve Bank of India’s analysis of average delays in terms of initiation of insolvency under the IBC.

Impairment shows significant delays in respect of asset classes held by asset reconstruction companies (ARCs) vis-a-vis other classes of creditors, in terms of initiation of insolvency proceedings.

The report noted that while a pre-packaged resolution process under Chapter III A of the IBC is an important watershed for speeding up resolution of small assets, the risk of deferral of unviable units at the cost of imperilling ultimate recovery needs to be guarded against.

Examination of the one-year transition of substandard and various doubtful categories of large loans shows no meaningful recovery once banking assets are impaired, as per FSR.

“Hence, to the extent that the provisions of Income Recognition and Asset Classification (IRAC) norms do not incentivise referral for resolution, prospective recovery of assets is impaired since recoveries decline sharply with vintage.

“This has implications for both PSBs and PVBs which carry impairments of considerable vintage as well as for bad assets transferred to the National Asset Reconstruction Company Limited (NARCL),” the report said.

An analysis of 60 corporate debtors resolved under the Insolvency and Bankruptcy Code, 2016 between September 2019 and September 2021 shows that the sample median recovery rate was 24.7 per cent and the longer bad loans remain on banks’ balance sheets, the lower is the amount banks succeed in recovering, independent of the type of exposure or borrower.

This implies that reduction in the median gap between NPA identification and Corporate Insolvency Resolution Process (CIRP) commencement may have a pronounced effect on ultimate recovery, the report said.

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