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23 February, 2019 01:40 IST
Credit provisions to spike up further as RBI steps up pace for resolution of stressed assets: ICRA
Source: IRIS | 13 Feb, 2018, 06.24PM
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In our view, the revised framework on resolution of stressed assets issued by Reserve Bank of India (RBI) is likely to increase the reported non-performing assets (NPA) levels of the banks in coming quarters. This is likely to be an outcome of implementation of resolution plan for large borrowers that are currently under Special Mention Accounts (SMA) categories. Further, in the event, the banks are unable to implement a resolution plans for the large borrowers with exposure of Rs 2,000 crore and above, these accounts will required to referred to National Company Law Tribunal for resolution under Insolvency and Bankruptcy Code (IBC), 2016. This has been the case with most of the NCLT 2 list of borrowers, whereby the resolution plans failed for most of borrowers and were referred under IBC; this is expected to further spike up the credit provisioning requirements for banks during FY2019.

Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA, said, ''While in the short-term this will increase the pain for the borrowers as well the lenders, however the early identification of stress and resolution will prevent future ever-greening of loans and ensure a good financial health for the banking system in long-term.''

The revised RBI guidelines on resolution of stressed assets entail proactive resolution of the stressed assets whereby the lenders need to finalise the resolution plans as the accounts slips into SMA category. However unlike earlier Joint lender forum (JLF) framework, which formulated the resolution plans for SMA accounts; the revised guidelines also require the resolution plan to have independent credit evaluation (ICE) from credit rating agencies (CRAs) subject to a minimum credit opinion of "RP4" on scale of "RP1" to "RP7". In absence of the minimum requisite level of credit opinion, the resolution plan will not deemed to be implemented, and banks will need to initiate bankruptcy proceedings against these borrowers under Insolvency and bankruptcy Code (IBC), 2016. To start with, the resolution plans of large borrowers with Rs 100 crore and above of exposure from banks will need ICE from CRAs.

Also to prioritize the resolution in large stressed accounts, the timeline for large borrowers with exposure of Rs 2,000 crore and above needs to have a resolution plan with ICE approved by CRA before September 1, 2018, in absence of which banks will need to initiate bankruptcy proceedings against these borrowers under IBC. For accounts more than Rs 100 crore but less than Rs 2000 crore, RBI will announce the timelines separately. The Gross NPAs and standard restructured advances of banks are estimated at 12.6% as on September 30, 2017. Additionally, as per the financial stability report of RBI, SMA 2 advances are estimated to be ~3.5% of the gross advances of banks. Hence the overall stress levels of banks including SMA0 and SMA1 borrowers is much higher than the reported GNPA level of 10.3% as on September 30, 2017.

With 40 large accounts accounting for ~33% of the GNPAs of the banks already refereed by RBI for resolution under NCLT, lowering the threshold for resolution to Rs 2,000 crore per borrower will enlarge the overall quantum of debt being resolved on fast track basis. As per data compiled by ICRA for around 50 large borrowers have banking exposure of Rs 2,000 crore or more and will need resolution by September 1, 2018, the total borrowings of these companies stand at Rs 2.46 lakh crore of debt. Some of these accounts are already classified as NPAs and may not add to overall stock of NPAs, however if the resolution plan entails restructuring of the loans, the standard loans will get classified as NPAs. Also, if the resolution plan fails to get implemented by September 1, 2018, the banks will need to initiate proceedings under IBC against these borrowers.

Further, RBI has also tightened the criterion for up-gradation of NPA accounts or accounts which gets classified as NPAs upon restructuring under the resolution plan approved by JLF. The Accounts can be upgraded if the borrower has demonstrated track record of timely debt repayments and has paid at-least 20% of the principal outstanding at time of resolution plan, subject to a minimum investment grade credit rating form a CRA. This is against the earlier norm for restructured accounts, which is one year from the commencement of the first payment of interest or principal, whichever is later. ''With tightening of the criterion for up gradation of loans, the incentive for banks to defer the recognition of problem loans by creating a ballooning repayment schedule with back-ended amortisation of principal will be discouraged.'' Karthik added.

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