Banks may take 40-60 per cent cut on loan defaults: Study

Banks may need to take a haircut of 40-60 per cent on loan defaults to facilitate better rating to implement a resolution plan, reveals a joint study.

Published: 13th September 2018 04:21 AM  |   Last Updated: 13th September 2018 07:53 AM   |  A+A-

RBI logo used for representation (File | Reuters)

By Express News Service

MUMBAI: Banks may need to take a haircut of 40-60 per cent on loan defaults to facilitate better rating to implement a resolution plan, reveals a joint study. Loans worth over Rs 50,000 crore are under the Reserve Bank of India’s (RBI) independent credit evaluation (ICE) and as per the RBI’s February 12 circular, all resolution plans with an opinion or rating of RP4 are considered to have moderate degree of safety regarding timely servicing of financial obligations.

“With stressed debts of over Rs 50,000 crore under ICE framework, banks have to take a haircut in the range of 40-60 per cent to achieve a rating of RP4,” revealed a joint report by trade body Assocham and rating agency CRISIL. Improved recovery rate and reduction in resolution timeline boosts investor confidence and restores credibility in the banking system. It may be noted that the RBI’s revised framework requires resolution plans involving restructuring or change in ownership for large accounts with an aggregate exposure of Rs 100 crore and those above need ICE of the residual debt by credit rating agencies (CRAs).

On the other hand, all stressed accounts with an exposure of Rs 500 crore and above will require two such ICEs. The RBI also insisted that only resolution plans that receive a credit opinion of RP4 or better for residual debt from one or two CRAs shall be considered for implementation. Average sustainable debt for these assets is about 50 per cent.

As on June 30, the NCLT had approved resolution of 32 stressed assets under the corporate insolvency resolution process, aggregating Rs 50,000 crore against total claims of Rs 89,400 crore admitted by financial and operational creditors. The average resolution timeline for these accounts was 260 days, as against the stipulated 270 days.

According to the report, IBC process will promote unsecured financing as the distribution waterfall of recoveries following liquidation gives unsecured financial creditors precedence over government dues.

Meanwhile, some of the challenges in effective implementation of IBC include infrastructure issues, adherence to resolution timelines, liquidation impact, criticality of creditors, and limited development of the secondary market.“These would need to be addressed systematically and soon for successful implementation of the IBC over the medium term and achieve the intended outcomes,” it added.

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