The much-awaited revised version of the contentious February 2018 circular, is a less stringent framework to deal with stressed assets.
The new directive does away with the one-day default mandate — where banks had to recognise defaults immediately and attempt resolution — and gives banks a 30-day window (review period) to ponder on the resolution strategy.
With this, and the six-month (180 days) timeframe that banks have to implement a resolution plan, banks essentially have a seven-month window for resolution of stressed accounts, from the time of default.
Under the earlier framework, banks had to refer the case for insolvency under IBC if the resolution failed (within the 180-day deadline). Now, failure to arrive at a resolution within the stipulated period will attract additional provisions for banks — onerous but not as hard-hitting as the IBC threat.
In short, the revised directive gives banks greater discretion to deal with stressed assets. Banks could reach a resolution plan within or outside of IBC.
But given that all earlier restructuring schemes failed miserably, throwing the ball back into banks’ court is unlikely to lead to any significant headway in resolution of stressed assets.
Provisioning burden
Failure to arrive at a resolution within 180 days will attract additional provisions of 20 per cent over and above the provisions already made. After another six months, an additional 15 per cent provisions kick in.
The total debt estimated to have been impacted by the earlier February circular is pegged at over ₹3.5-lakh crore, of which about 90 per cent have already been declared as NPAs.
Banks have already made 25-40 per cent provisioning on these accounts.
While the new directive adds an additional burden on provisioning over and above what banks will have to make as per the NPA norms — first year 15 per cent, second year 25 per cent, 40 per cent for the next two years and 100 per cent after four years — it will kick in after another seven months, if resolution fails. This offers some breathing space for banks.
Will banks act?
Is the provisioning burden onerous enough for banks to act fast on resolution? Past experience with restructuring schemes suggests that resolution failed due to banks’ unwillingness to take decision, accept relevant haircuts and absorb losses.
These structural impediments still persist. Also, the challenge under the joint lender forum (JLF) earlier was to get everybody on board.
The earlier circular, in February 2018, had required all lenders (100 per cent) agreeing to the resolution plan, which was a tall ask. The new directive has reduced the consent requirement to 75 per cent of lenders by value. But this is still higher than the requisite voting share of 66 per cent under the IBC. Hence, imposing additional provisioning alone may not hasten resolution.
IBC tool
Banks will continue to have the discretion to file for insolvency under IBC on a case-to-case basis. The circular has also offered incentives in the form of reversal of additional provisioning if the case is referred to the IBC. But given the slow pace of resolution under IBC, banks are likely to use that route sparingly.
Importantly, of the ₹3.8-lakh crore of debt under question, ₹2-lakh crore pertains to the power sector, where structural issues continue to dog the resolution of these assets whether under IBC or outside. These accounts are unlikely to see any significant headway in resolution.