The RBI had on June 13 asked banks to refer a dozen troubled companies to the NCLT.
Additional provisioning requirement for stressed accounts being referred for bankruptcy proceedings is “nothing unusually large” and capital inadequacy should not be the reason for providing under-provisioning by banks for these accounts, Reserve Bank of India (RBI) deputy governor NS Vishwanathan said on Friday.
The comment of the deputy governor of the central bank came in the back drop of concerns expressed by the country’s banking sector after the RBI had directed that the banks would need to set aside up to 50% cover in the form of provisions for the cases referred for insolvency proceedings at the National Company Law Tribunal (NCLT).
Bankers and credit rating agencies feel that the extra provisioning needed would reduce the profits of the lenders, and it could further impact already weak credit growth in the country.
Speaking on “Regulations & Financial Stability” at an event organised by industry body MCCI in Kolkata, Vishwanathan opined that the provision norm, which has to be followed by the banks for the insolvency cases, was ‘logical’.
“Let me explain the logic for the provisioning requirement for the cases referred to the IBC (Insolvency and Bankruptcy Code). Normally, the cases that are referred to the IBC are likely to be those which could not be restructured outside the IBC. The S4A, which is one of the restructuring schemes, envisaged that the minimum sustainable debt to be 50%. It is, therefore, only logical that provisions made for cases referred to the IBC (should be) at least 50%,” he said.
“This is not to say that the reference to IBC would result in the recovery of less than 50% (of the total defaulted amount). But the provisioning is for expected loss… And banks can write back in case the recovery is higher than what the provisions made by them envisaged. Whatever provisioning you are asking for now is nothing unusually large,” the deputy governor pointed out.
The RBI had on June 13 asked banks to refer a dozen troubled companies to the NCLT. The total exposure to these 12 companies adds up to a little over `2 lakh crore, or about 30% of more than Rs7 lakh crore worth of gross non-performing assets (NPAs) in the banking system. The central bank has said the accounts on the first list constitute about 25% of the current gross NPAs of the banking system.
In this context, India Ratings and Research estimated that the banks, taking 12 of the largest defaulters to bankruptcy court, would need to make an additional provisioning of at least Rs 18,000 crore. The extra provisioning needed would reduce the profits of creditor banks by about a quarter in the financial year to March, 2018, according to the credit rating agency. Bankers have also feared that additional provisioning requirements for them could further impact already weak credit growth.
Vishwanathan, however, said that inadequacy of capital for banks should not be the reason for under-provisioning. “Provisioning should be made so that the resilience in the balance sheet is built,” he said.
Earlier this month, RBI reduced the Statutory Liquidity Ratio (SLR), the portion of deposits held by banks in government securities, by 0.5 % to 19.5%, freeing more than `57,000 crore to bank funds for lending.
The deputy governor emphasised on the strengthening of the state-run banks’ balance sheets so that they can report higher credit growths and deal with stressed assets. “I believe sub-optimal restructuring (is) more due to managing the bank balance sheet than dealing with the problem. What it does is obviously sub-optimal outcome,” he pointed out.
He said IBC would enable the country’s banking ecosystem to resolve the problem of stressed assets as internationally it was proved that this proceeding was the best to deal with the insolvency. “We do see a major push towards resolution of large stressed assets through the reference to the IBC,” he said, adding the central bank believed a strong insolvency and bankruptcy regime would improve the credit quality.
