Saturday , 18 November 2017

Home » Business » Banks face 60% haircut on top 12 bad loans: Report

Banks face 60% haircut on top 12 bad loans: Report

business news

Mumbai: Dragging defaulters to the National Company Law Tribunal (NCLT) and initiating insolvency proceedings will take a heavy toll on bank finances. According to ratings agency Crisil, banks will have to sacrifice nearly 60% of the value of the loans extended to the 12 indebted companies they have referred to the NCLT at the instance of the Reserve Bank of India (RBI).

The RBI has asked banks to set aside half the loan amount as a likely loss for cases referred to the NCLT. If the cases do not get resolved and the bank finds insolvency to be the only option, lenders would need to completely write off the loan. The provisions will all have to be made during the current fiscal.

According to a Crisil study, provisioning for banks will increase by 25% during the current financial year. The study shows that banks have already provisioned around 40% for these non-performing assets (NPAs) worth approximately Rs 2 lakh crore, or equal to a quarter of the NPAs in the banking system.

“Based on our assessment of embedded value in the top 50 NPA cases, we estimate a 60% haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another around 25% this fiscal, compared with 9% in the last,” said Krishnan Sitaraman, senior director, Crisil Ratings
 A panel set up by the RBI had reviewed the top 500 bank loans that are partly or wholly classified as bad loans, and given its recommendations, which include the referral of the top 12 NPAs for resolution under the Insolvency and Bankruptcy Code (IBC). The panel also said that for other bad loans, banks should finalize a resolution plan within six months and where a viable resolution plan is not agreed upon within that period, banks should initiate insolvency proceedings under the IBC. According to a study by investment bank Jefferies, there is an inverse correlation between time taken for insolvency proceedings and realization value (from the assets). In India, it took an average 4.3 years for the resolution process with only a 26% recovery ratio, placing the country at a lowly 136th in recovery. “The need for a speedier insolvency resolution is paramount considering the stressed assets in the system is about $173 billion (around 15% of loans),” the report said, adding that there is hope that the bankruptcy code will lead to a significant improvement in recovery rates for creditors in India.

 Rama Patel, director, Crisil ratings, said, “While the IBC route could entail a substantial markdown of loan assets by banks, the ability, especially of public sector banks, to absorb such losses and the consequent impact on their capital position will need to be monitored closely in the road ahead.”

 

Banks face 60% haircut on top 12 bad loans: Report Reviewed by on . Mumbai: Dragging defaulters to the National Company Law Tribunal (NCLT) and initiating insolvency proceedings will take a heavy toll on bank finances. According Mumbai: Dragging defaulters to the National Company Law Tribunal (NCLT) and initiating insolvency proceedings will take a heavy toll on bank finances. According Rating: 0
scroll to top