Reserve Bank of India (RBI) Governor Urjit Patel on Saturday said banks would need to take a haircut for resolution of current stressed assets, and this would require higher capitalisation.
“The success and credibility of all resolution efforts would be critically contingent on the strength of public sector banks’ balance sheets to absorb costs,” he said, addressing the National Conference on Insolvency and Bankruptcy in Mumbai.
He added, “It is clear public sector banks will need to take haircuts on current exposures under any resolution plan agreed within or outside the Insolvency and Bankruptcy Code (IBC). This would require higher capitalisation of banks.”
According to IBC rules, companies being referred to insolvency tribunals will result in heavy provisioning. In some cases, this could be up to 50 per cent of the exposure right at the referral stage, and could be raised to full provisioning if the asset is earmarked for liquidation.
Patel said the RBI and the government were in talks to strengthen the banks’ financial positions so that they could take the hit. “This could be done through a combination of raising capital from the market, dilution of government holding, additional capital infusion by the government, strategic merger, and sale of non-core assets.”
A swift and time-bound resolution of bad debts would also free up banks, he said, adding that the RBI, the government and the Insolvency and Bankruptcy Board of India (IBBI) were working together. “Early signs were positive,” he said.
“Gross non-performing asset (NPA) ratio of the banking system at 9.6 per cent and stressed advances ratio at 12 per cent as of end-March this year, on the back of persistently high ratio in the past few years, is indeed a matter of concern,” he added.
About 86.5 per cent of gross NPAs are accounted for by large borrowers, defined as those with an aggregate exposure of Rs 5 crore and above.
“The regulatory, or rather the economic, challenge in dealing with the issue gets accentuated when seen against the capital position of some of the banks, particularly PSBs,” Patel said.
Securities and Exchange Board of India Chairman Ajay Tyagi and IBBI Chairman M S Sahoo also attended the event.
Tyagi said, “In my three decades in government, I haven’t seen any Act enacted with such alacrity and implemented so speedily as the IBC. Sebi is committed to successful implementation of this code.”
The IBC would also have a major impact on the corporate bond market, as investors would have confidence to put their money on lower-rated bonds, as recovery would be protected by the code.
About Rs 7 lakh crore was raised through corporate bonds in FY17; in FY16, it was Rs 5 lakh crore. Tyagi said this would increase, as even foreign investors would gain confidence with the effective implementation of the IBC.
“We still need to deepen the bond market. A robust bankruptcy code is vital,” he added.
IBBI Chairman Sahoo said the purpose of the code was not to liquidate companies, but provided them with the ultimate freedom — “the freedom to exit.”