As bad debt bites, Indian banks call for US-type bankruptcy law.
By Atmadip Ray, ET Bureau | 1 Apr, 2015, 10.31AM IST
KOLKATA: India may not have the US type bankruptcy law yet but the behaviour of banks will be akin to having it, thanks to RBI's provisioning laws that kick in on Tuesday and the government's non-interference in bank operations.
As all new restructured loans have to be classified as bad loans and provided for, banks will no more have the incentive to sweep defaulters under the carpet.Banks may recall the loan and take recovery action at the earliest or sale of nonperforming assets (NPAs) to asset restructuring companies or ARCs. "The new rule means banks cannot go for restructuring each and every proposal that comes their way. They may sell more bad loans to ARCs, which in turn work out restructuring plans for ailing companies. So, the new asset classification rule would, in some sense, lead to a situation like what happens under the US-type bankruptcy law," said M R. Umarji, legal advisor to Indian Banks' Association.
The new rule may encourage Indian promoters to approach lenders with their revival plans at a much earlier stage of stress and discourage abusing the system. "The intent of new norms is to put more skin in the game by promoters and discourage wilful defaulters. However, banks are also now pro-actively identifying stressed assets through the joint lenders forum mechanism which should aid prompt redressal for companies under duress," India Ratings & Research Associate Director Abhishek Bhattacharya said. The Indian government too has begun work to bring in a comprehensive bankruptcy code to create an easy passage for exiting business and improve the ranking in World Bank's 'ease of doing business'. A bankruptcy law reform committee is working towards this.
The US laws permit a company to preempt insolvency and file for bankruptcy before the situation gets worse. Under Chapter 11 of US Bankruptcy Code, a debtor firm can propose a reorganisation plan much before it turns sick to keep business going and pay creditors over time. From April 1, all the restructured loans necessarily need to be classified as NPAs and the relative provisioning at banks would be 15% of the loan outstanding. This provisioning is an increase by 10% from the existing 5% on `restructured standard asset' as applicable earlier. However, banks may not feel the pressure immediately as they may slow down doing restructuring of loans since the incremental stress on asset quality may not be much due to improvement in the economy. Number of restructuring proposals had also come down over a period.
"No immediate impact," said State Bank of India chairman Arundhati Bhattacharya in a texted message. "Since only future restructuring will be classified as NPA."
The total stock of restructured loans would be about 6% of gross advances or Rs 820000 crore by March 2015 as per India Ratings estimates. This includes those under corporate debt restructuring cell and the loans under Discom financial restructuring plan. The gross NPA ratio is likely to be 4.5% or Rs 3,50,000 crore which would put the estimate of impaired loans as 10.5% or Rs 76,00,000 crore.If one includes ARC receipts and Discom bonds which reflect in the bank's investment book the total estimate of stressed assets would be 12.5% by March 2015.
"While classification of incremental restructuring as sub-standard assets (or NPLs) would add to the GNPL ratio for the system, we expect moderation in pace of fresh NPL formation premised on economic recovery to limit the increase. Our estimate of GNPL ratio by Mar'16 is closer to 5%," said Bhattacharya from India Ratings & Research. "From April, banks may decide to recall the bad loans and take early recovery action if the value of securities is good," said Umarji.
The proposed National Companies Law Tribunal could also help the fight against failed and errant promoters as the definition of sick companies is set to be changed. Under the tribunal, a company is declared sick if it defaults in payment of a secured loan for more than 30 days. Earlier, rules allowed sick companies that operated for at least five years to approach the Board for Industrial and Financial Reconstruction if accumulated losses equaled or exceeded their networth.
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