Mumbai, June 26, 2017

The Reserve Bank of India shocked bank chiefs late on Friday by demanding a steep increase in provisioning requirements for loans being referred to the bankruptcy courts, a move likely to take a Rs 50,000-crore toll on their earnings this fiscal, said two bankers familiar with the order.

referred to the insolvency process. The regulator also said that provisioning should be 100% 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 central bank's letter unnerved bankers who 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.

Bankers worry that with bankruptcy courts as yet untested, 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, stretching out their woes.

In the confidential letter sent to the CEOs of commercial banks, RBI also said they will have to make a 100% 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.

RBI did not respond to an email over the weekend seeking comment on the matter. It had directed banks on June 13 to take 12 large defaulters to bankruptcy court in a move aimed at speeding up the recovery of bad loans.

"The circular on revised provisioning norms for cases accepted for resolution under the IBC is being issued separately," RBI had said at the time.

These accounts include Essar Steel, Lanco Infratech, Bhushan Steel, Bhushan Power and Steel, Alok Industries, Amtek Auto, ABG Shipyard, Jyoti Structures, Era Infra, Jaypee Infratech, Electrosteel Steels and Monnet Ispat.

The indebted dozen account for 25%, or Rs 2.5 lakh crore, of the total bad loans in the banking system. Bankers said that provisioning on these accounts is now in the range of 30-40% and thus they will need another Rs 30,000-50,000 crore by the end of this fiscal year. These provisions would be reversed one year after the resolution plan is implemented if the company shows a successful track record of repaying loans on time, said an official who saw the RBI’s confidential letter.

Provisions will have to be made for other companies referred to NCLT. Finance minister Arun Jaitley said on June 17 that 81 companies had been referred to bankruptcy courts.

Under the latest RBI instructions, if a substandard account that requires 15% provision is referred to NCLT, this will jump to 50% for a secured loan and 100% 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% on such assets.

"In effect, banks will be very careful in dragging those companies to NCLT that have just slipped into bad loan category on fear of making high provisions," said a bank official. "However, if some other operational creditor takes a company to NCLT, banks will be left with no choice but to provide for it."

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.

[The Economic Times]