The Reserve Bank of India advised banks to start insolvency proceedings against defaulting lenders without waiting for the regulator’s instructions. Prompt action by lenders will help realise the best value for stressed assets, RBI said in its report on trends and progress in the banking industry that was released on Friday.
“Banks can take advantage of the IBC (Insolvency and Bankruptcy Code) to clean up their balance sheets and improve performance on a sustained basis to remain competitive,” it said. “Instead of waiting for regulatory directions, banks can file for insolvency proceedings on their own to realise promptly the best value for their assets.”
Lenders need to strengthen due diligence, credit appraisal and loan-monitoring systems to minimise the risk of such events occurring again, it said.
RBI was empowered through an ordinance in May to direct banks to initiate insolvency proceedings against borrowers for resolution of stressed assets. The regulator shortlisted 12 companies with a total debt of over Rs 2 lakh crore in June for bankruptcy proceedings. In August, it issued a second list of 28 defaulters for debt resolution before December 13, failing which the cases would also have to be sent to the National Company Law Tribunal (NCLT) by December 31.
Already Taking Action, Say Banks
Most of them haven’t been able to meet the deadline but while some have got extensions, others are headed for the NCLT.
Banks said they are already pushing such cases toward the NCLT without waiting for the RBI to tell them.
“We are voluntarily taking action in some cases. In fact monitoring of the SMA (special mention accounts, or those seen as being at risk) have been intensified where we have put in early warning systems to find resolutions at an early stage,” State Bank of IndiaBSE 1.04 % managing director B Sriram told ET earlier this month. “If the stress does become more serious, we have various schemes of the RBI, but we expect that the cases that are before the NCLT today will give us guidance in terms of how to resolve under a judicial system faster.”
In the year since it came into effect, cases under the IBC have been rising steadily. RBI data shows that the number of corporates undergoing resolution under IBC increased to 353 in the September quarter from 151in the June quarter and 36 in the January-March period. But resolutions have been negligible in the past six months.
“The overall risks to the banking sector arising from asset quality concerns continue to persist,” said RBI deputy governor NS Vishwanathan. “The ongoing asset impairment in the banking sector and risks on this front have important regulatory implications.”
The RBI’s insistence on the IBC route is also because bad loan recovery through other avenues has been dismal. Data shows that between 2015 and 2017, the average recovery ratio of Indian banks was 26.4%. Private sector banks performed much better than their state-run peers with a recovery ratio of 41% and 25%, respectively.
During this period, the average amount recovered through all existing legal channels including Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, Debt Recovery Tribunals and Lok Adalats was 10.8% of the total amount involved. In the past eight years, recovery of bad loans dropped to 20.8% by March 2017 from 61.8% in 2009.