Banks are likely to sell a greater amount of bad loans to asset reconstruction companies this year as they struggle to meet tough central bank norms on loan defaults amid the slow pace of bankruptcy resolution, said a report in the Mint.
The report said, “Whenever a bad loan account is referred to bankruptcy proceedings, banks must set aside a provisioning of 50% of the loan amount. To avoid this, lenders are keeping a close watch on such accounts, according to four bankers.”
According to a senior banker at a large state-owned bank, “The current rate of admission at National Company Law Tribunal (NCLT) is slow given the rising number of cases. This will lower chances of recovery because of the eroding enterprise value of the asset. In case of liquidation, the recovery is expected to be very low. In many cases, we don’t see implementing resolution plan with 180 days."
Asset reconstruction companies (ARC) claim banks will now insist on full cash deals as they have to maintain higher provisioning if the investment in security receipts (SRs), created against the sale of stressed assets, exceed 90% of total sale value. This threshold was 50% in the previous fiscal, according to the RBI’s rules.
The Reserve Bank of India (RBI) has abolished half a dozen existing loan-restructuring mechanisms and instead provided for a strict 180-day timeline for banks to agree on a resolution plan in case of a default or else refer the account for bankruptcy.
Under the new rules, insolvency proceedings would have to be initiated in case of a loan of Rs 2,000 crore or more if a resolution plan is not implemented within 180 days of the default. Banks will face penalties in case of failure to comply with the guidelines.
First Published: IST