Poor recoveries under IBC can derail Centre’s ₹70,000-cr recap plan

While the Centre’s decision to frontload capital infusion of Rs 70,000 crore into PSBs has boosted sentiment, unless there is quick resolution of large accounts under IBC, this may achieve little. What is of more concern, is the paltry amount that banks have been realising from the resolution of accounts under IBC.

A look at data available on the Insolvency and Bankruptcy Board of India (IBBI) website from the Oct-Dec 2017 quarter (when the first set of resolutions came about), suggests that barring few accounts such as Electrosteel Steels, Bhushan Steel and Binani Cements - where the amount realised by financial creditors as a per cent of their claims has been between 40-100 per cent - the average recoveries in other cases has been poor at 20-25 per cent. This has meant huge haircuts for banks, accentuating the problem of excessive delays.

The data put out by IBBI pertains to cases where the resolution plan has been approved by the CoC (Committee of Creditors). These may not have translated to actual recoveries for banks as many of the cases have been stuck in endless litigations or even ended up in litigation subsequently.

Of the two list of accounts that the RBI had referred to IBC for resolution - constituting about half of the bad loans in the system - only in a handful of cases such as Bhushan Steel, Monnet Ispat and Electrosteel Steels, banks have actually recovered some amount. In others, while the CoC may have approved the resolution plan, cases are still stuck in litigations. Bhushan Power & Steel, Essar Steel and Alok Industries - are a case in point.

Unless quick and healthy resolution of large accounts under IBC happens, earnings and hence capital of PSU Banks will be under pressure. The ₹70,000 crore capital infusion may not help much by way of boosting credit growth. Persisting slippages and growing stress book can only be offset by huge write-backs of provisions made by PSBs for large IBC accounts.

Sombre picture

As of June 2019, 2162 accounts have been admitted under IBC. Of this only 120 have seen resolution yet, while 475 have gone under liquidation. Data compiled for cases where resolution plan has been approved from the Oct-Dec 2017 to April-June 2019 quarter, reveals that in about 40 per cent of the 120-odd cases, realisation has been less than 30 per cent (as against claims). A fifth of the cases have less than 20 per cent recovery rate.

The 82 odd cases where recovery rate is a high 70-100 per cent, banks’ claims have mostly been less than ₹100 crore.

Big ticket accounts with claims of over ₹3000 crore (85 per cent of total approved cases by value) where resolution plan has been approved are about 15. Here, the recovery rate has been about 38 per cent. If we exclude Electrosteel Steels, Bhushan Steel and Binani Cements - the recovery rate falls below 20 per cent.

Stuck in litigations

Of the first list of accounts referred by the RBI for insolvency, while Bhushan Steel (taken over by Tata Steel) saw 63 per cent of lenders’ claims (about ₹35,000 crore) being settled, for Alok Industries, the resolution plan approved offered only 17 per cent against claims of nearly ₹30,000 crore. Again while Electrosteel Steels yielded 40 per cent recovery rate, Monnet Ispat and Amtek Auto saw only 25-35 per cent realisation against lenders’ claims.

The low recovery is accentuated by the endless litigations in many of the cases that are delaying the end recovery to banks (albeit meagre). For instance, in case of Alok Industries, GAIL had filed a petition in May opposing the resolution plan.

In the Essar Steel matter, the NCLAT had set aside the CoC decision on distribution of the ₹42,000 crore proceeds, and instead prescribed a different sharing arrangement that had not gone down well with secured financial creditors. While subsequent amendments to the IBC have dispelled fears and given priority to secured creditors, the case is yet to see closure and recovery for banks.

In case of Amtek Auto, NCLAT recently ordered liquidation of the company, after the bid winner---Liberty House Group—failed to meets its obligation under the resolution plan.

Write-backs critical

With slippages continuing to rise and stressed book building up, NPA provisioning could continue to weigh on earnings. Much of the proposed capital infusion of ₹70,000 crore could get sucked into provisioning, unless write-back of provisions made for large accounts under IBC, kick in.

SBI, for instance, has about ₹38,700 crore exposure to accounts under the RBI’s first and second list. The bank has made ₹35,500 crore or 91 per cent provisioning against them. The bank’s exposure to all cases under NCLT (including cases beyond the two lists) is over ₹1.1 lakh crore. Unlocking of capital by way of write-backs will be critical to ramp up credit growth. In the latest June quarter, SBI added ₹16,212 crore to its bad loan book which is already over ₹1.6 lakh crore. Hence NPA provisioning will remain elevated in the coming quarters, eating into earnings and impeding credit growth.

Similarly Bank of Baroda has about ₹37,100 crore exposure to IBC accounts (₹12,700 under RBI’s two lists) on which it carries about 88 per cent provisioning. Fraud-hit PNB has ₹42,500 crore of exposure to IBC accounts, with 88 per cent provisioning.

If recoveries under IBC remain poor, substantial write-back of these provisions will not happen, aggravating the issue of weak credit growth and capital ratios for PSU Banks.