Resolving stressed loans: Banks can no longer kick the can down the road

There was a sense of unease after SBI — the country’s largest lender — declared slippages of ₹25,836 crore in the latest December quarter.

What was also concerning was that of the ₹21,823-crore of corporate slippages, the management stated that a chunk came in from standard restructured accounts, including Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A).

For Bank of Baroda, around ₹3,000 crore of accounts had slipped from restructured to NPA in the December quarter. Its accounts under SDR (standard) fell from ₹3,933 crore in the September quarter to ₹2,167 crore in the December quarter.

The RBI’s revised framework on resolving stressed accounts has now rightly done away with the old restructuring schemes that still left the possibility open of large slippages into NPAs from these accounts.

It has also mitigated the concerns emerging from steep divergences reported by banks in recent times, owing to different classification norms followed by different banks on the same account.

With the formal structure of Joint Lenders’ Forum dismantled, the onus will be on banks to proactively deal with the problem at hand, and quickly.

One-time clean up

The RBI’s asset quality review in December 2015 had dug deeper into banks’ restructured accounts and flushed out loans that it thought required a higher provisioning. Large quantum of loans had moved from the restructured book to NPAs in 2016-17.

What has been lurking in the corner, has been loans restructured under various schemes such as SDR, S4A, and 5/25.

According to a leading ex-banker handling large corporate accounts, the first two lists referred to by the RBI for IBC would probably take care of ₹4.5 lakh crore of bad loans out of the around ₹9 lakh crore in the system.

Excluding retail and agri advances, possibly around ₹2 lakh crore of loans would be left to be tackled under the revised framework. Much of these accounts and other stressed accounts are in the power sector.

Most of these accounts now form part of some restructuring scheme or the other — S4A, SDR, etc. The main issue lies in recognising the accounts quickly, which, with the RBI junking the old restructuring schemes, can happen.

Getting everyone on board

Now, all lenders, will have to take note of an account defaulting with any lender within the consortium. In respect of accounts with aggregate exposure of ₹2,000 crore and above, lenders will have to draw up a resolution plan within 180 days from March 1, 2018 (or default date as the case may be).

“While the formal JLF structure has been done away with, lenders will have to take joint action against the borrower,” says Vinod Kothari, a financial and legal consultant and insolvency professional.

But the new structure leaves little wiggle room for failure. On failure of reaching a resolution plan, banks will have to refer the case for insolvency under IBC, implying higher provisioning.

The RBI has directed banks to set aside 50 per cent provisions for cases admitted under NCLT.

The requirement of all lenders agreeing to the resolution plan could prove challenging. Under JLF, consent of a minimum of 60 per cent of creditors by value was required, which itself was a tall ask, according to market players.

“Getting all lenders on board — 100 per cent consent of all banks — will be very difficult. Dissenting lenders could stall resolution, forcing larger banks, with more at stake, to move to the IBC,” Siby Antony, Chairman and MD, Edelweiss ARC.

But this also adds pressure on the promoters to cooperate, else they would lose control of the company. Once a case is admitted under NCLT for resolution, the power of the board is suspended and the insolvency professional takes over the reins of the business.

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