The Indian banking system is bracing itself for another round of insolvency proceedings, this time due to the impact of the new stressed asset rules put in place by the Reserve Bank of India in February.
As per a circular issued on Feb. 12, the RBI had told banks that they must initiate the resolution of stressed assets as soon as there is a delay in payments. The regulator gave banks 180 days to resolve accounts above Rs 2,000 crore, failing which they would need to refer the accounts for insolvency action.
What the banking system is seeing now is the impact of that circular. The 180-day deadline for accounts—which were in default on Mar. 1—will expire by August, leaving banks with no option but to initiate insolvency.
According to atleast three people in the know, at least 60 corporate accounts are likely to be referred to NCLT after Sept. 1. The banking system has exposure of about Rs 3.5 lakh crore to these accounts, said these people.
The banking sector had been working with a list of at least 70-75 accounts where repayments were due for more than a day as on Mar. 1. Bankers who spoke with BloombergQuint said that resolution schemes for most of these accounts hadn't been finalised, hence they could face insolvency proceedings in the next two weeks.
The 60 accounts which are likely to face insolvency action include Punj Lloyd Ltd., Reliance Defence & Engineering Ltd., Bajaj Hindusthan Ltd., Patel Engineering Ltd., Bombay Rayon Ltd., GTL Infrastructure Ltd., Rolta India Ltd., Shriram EPC Ltd. and Gitanjali Gems Ltd., the people quoted earlier confirmed.
In an emailed response, a spokesperson for Patel Engineering said that the company has no overdue payments with any banks and that the company has been regular in servicing its interest.
The remaining companies did not respond to queries sent by BloombergQuint on Friday.
Some of these borrowers have seen some action from the banking sector in the past. Gitanjali Gems, for example, is in the middle of a scam which unfolded at Punjab National Bank, where the lender has already initiated recovery. Similarly, companies like GTL Infrastructure, Bombay Rayon and Shriram EPC have seen implementation of older restructuring schemes like corporate debt restructuring and strategic debt restructuring.
Bankers who spoke to BloombergQuint also confirmed that State Bank of India had been able to finalise resolution schemes for at least six stressed power companies, which included Coastal Energen Ltd. and Jaiprakash Power Ventures Ltd. Both the companies didn't respond to queries mailed to them.
The fresh accounts to be referred for insolvency will add to the build up of pending resolutions. In 2017, the banking regulator had sent two lists comprising 40 stressed accounts—where the cumulative banking sector exposure is over Rs 4 lakh crore—for insolvency action.
The large quantum of loans moving to the NCLT for insolvency proceedings will also have a direct bearing on the profitability of the banking sector. The RBI mandates that banks must provide for 50 percent of all secured and 100 percent of all unsecured exposures in such accounts.
According to the RBI’s Financial Stability Report released in June, nearly 701 cases had been admitted for resolution across the country’s National Company Law Tribunals. Of these, 525 were still undergoing resolution.
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