In what has come as a shocker for banks amid the ongoing bankruptcy proceedings as part of measures to tackle the bad loan menace, the Reserve Bank of India has reportedly asked banks to undertake a steep increase in provisioning requirements for loans being referred to the bankruptcy courts. The move could lead to a Rs 50,000-crore hit on their earnings this fiscal, an Economic Times report said citing two bankers familiar with the order.
As per the report, the RBI has told banks to set aside at least 50 per cent of the loan amount as likely losses for all cases referred to the insolvency process. The regulator also said that provisioning should be 100 per cent in those cases that don’t get resolved in the initial mandatory period for loan restructuring and instead are forced into liquidation, said the executives.
The RBI’s diktat has left bankers jittery as they were expecting liberal provisioning norms after RBI ordered them to start insolvency proceedings against the country's top 12 defaulters, which include Essar Steel, Bhushan Steel and Alok Industries. The biggest worry for bankers is that with the process at bankruptcy courts untested till now, many cases may not get resolved in the stipulated time and be headed for liquidation, which could double the provisioning for the next fiscal year as well.
According to ET, the confidential letter sent to the CEOs of commercial banks by the RBI also notes that they will have to make a 100 per cent provision on the unsecured loan as soon as a company is referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).
"The saving grace here is that the RBI has given banks time of three quarters to spread the provisioning requirement," said a senior bank official. Banks can spread the provisions across four quarters from June 2017 till March 2018.
The development comes as part of an ongoing effort by the RBI to tackle the bad loan menace following a change in the related laws, thereby giving more teeth to the central bank to deal with defaulters. The RBI plans to resolve 12 large bank loan accounts accounting for 25 per cent of the banking system's non-performing assets (NPA). These 12 accounts referred by the RBI have an exposure of more than Rs 5,000 crore each, with 60 per cent or more classified as bad loans by banks as of March 2016. Once a case is referred to the NCLT, there is a time line of 180 days to decide on a resolution plan. An additional 90 days can also be given. If a plan is not decided, then the company will go into liquidation.
Under the latest RBI instructions, if a substandard account that requires 15 per cent provision is referred to NCLT, this will jump to 50 per cent for a secured loan and 100 per cent if it is unsecured. At the end of the process, if lenders and borrowers are unable to arrive at an amicable resolution and if NCLT orders liquidation of assets, RBI has said that banks should make a provision of 100 per cent on such assets.
At the end of March 2017, listed commercial banks had set aside Rs 1.95 lakh crore as provisions, up 12% from the previous year, for bad loans that had been eating into bank earnings. If State Bank of India is excluded, commercial banks reported a total loss of Rs 10,096 crore in fiscal year 2017.