While the Insolvency and Bankruptcy Code has been projected by the Finance Ministry and the Reserve Bank of India as a silver bullet to deal with large stressed assets in the economy, bankers are taken aback by the RBI’s provisioning prescription for assets that banks refer to under the Code.

Terming the provisioning requirement, which, according to reports, entails setting aside at least 50 per cent of the loan (account) that banks have proceeded against under the Code, as harsh, a top public sector bank official underscored that banks are already burdened with various provisioning requirements pertaining to not only stressed assets but also additional provisions for standard assets at rates higher than the regulatory minimum based on evaluation of risk in various sectors of the economy.

Many of the large assets referred for insolvency proceedings recently have been classified as non-performing over the last few years and banks have been making suitable provisioning as per the age of the assets. Provision coverage ratio of banks is typically between 50 and 60 per cent.

However, according to the banker quoted above, the problem will arise in the case of assets that are still performing in the books of banks but have been taken up for insolvency proceedings. In such cases, they will have to set aside at least 50 per cent of the loan amount as loan loss provisioning. And this will prove burdensome for banks.

Besides the 50 per cent provisioning requirement, the RBI, in a ‘confidential’ communication to bank chiefs said banks should make 100 per cent provisioning in case an asset referred under IBC goes into liquidation after the mandatory period (180 days plus additional 90 days) given to the committee of creditors to either revive the asset or take into liquidation.

Another public sector banker said: “The more likely situation, as I see it, is that banks’ will not be able to do anything within the stipulated period provided under the IBC.

“Given the state of the legal system in the country, I don’t think the insolvency process can be an exception to the overall efficiency of the system and all that.”

Bankers say they are likely to move the regulator to alleviate the provisioning burden as they simply don’t have the capital cushion.

“In view of the rising bad loans, the consequent provisioning burden and its impact of profitability, capital is a constraint for public sector banks. At this point in time they will not be able to raise funds from non-government sources. So, the government eventually will have to provide additional capital to take care of the provisions,” said a banker.

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