Indian banks confront RBI deadline
At the end of August, a key Reserve Banks of India (RBI) deadline in their effort to resolve the country’s stressed asset problem was reached; with no relief or extension from the country’s court system. In February, the RBI withdrew all debt restructuring schemes deeming that they were taking too long and directed banks to classify all restructured loans as non-performing loans (NPLs).
Additionally, it ordered that all defaulting companies with loan balances over Rs 2,000 crore should be referred to the National Company Law Tribunal (NCLT) if the creditors were unable to find a resolution by August 27th that could be approved by all parties by mid-September. It is estimated that over seventy accounts are impacted involving approximately Rs 3.6 trillion ($52bn) of debt.
According to the government and a report from the State Bank of India (SBI), thirty-four accounts with approximately 1.8 trillion rupees of distressed assets are in the power sector. Eight of these cases have been solved, fourteen have already been referred to the NCLT with the rest under negotiation. Reports over the weekend hinted the likelihood that resolution on the remaining twelve looked difficult and may be referred to the bankruptcy court by the end of the week. Major companies on that list include GMR Chattisgarh, Ind-Barath Energy, Lanco, Anpara and Jindal India Thermal Power
Banks have been working feverishly to formulate resolution and work-out plans for these accounts to avoid going through the long, arduous bankruptcy proceedings under the NCLT. It is reported that, on average the haircut, has been 50% of the loan amount, but is preferable to the creditors taking a chance in bankruptcy court.
The Modi government has been struggling to get India’s NPL ratios down despite a variety of policies over the last few years to resolve stressed assets and to recapitalize banks. This year the RBI forecast NPls to increase to 12.2 % by March 2019 from 11.6% in 2018 prompting this directive of more stringent classification and faster work-out.
The fate of these accounts will be watched very closely by the market to see if this new process can speed up disposals and follow on the success of using the Insolvency and Bankruptcy Code (IBC) to facilitate the purchase of Bhushan Steel by Tata Steel in May. This resolution resulted in creditors receiving $5 billion.
Rating agency India Rating and Research is optimistic estimating over the weekend that NCLT using the IBC will be able to resolve 45% of the total bad loans of the top 500 debt-ridden companies by the end of this year. It added that going by the outcome of recent workouts, debt resolution turnaround time in India would come down from 4.5 years to approximately 2-2.5 years. However, it warned that its success is completely dependent on reducing workout times
The VFTP Model Portfolio has been long the Indian banking sector through the Nifty Bank Index (NSEBank). The structure has done well this year, close to a year-to-date high in local terms, on the belief that the government’s workout efforts will ultimately be successful. Looking the results from the last quarter, it is clear that NPLs are rising, but at a slower pace than previously and, encouragingly, because the companies are being more aggressive in recognizing bad and distressed loans.