The proposed transfer of banks’ bad loans to the National Asset Reconstruction Co Ltd (NARCL) and rise in sale of distressed retail and micro, small and medium enterprises (MSME) loans by lenders will likely result in a rise in stressed deals space in FY23, industry experts said.
“As such restructured loans exit moratorium offered as part of restructuring and if the borrowers are unable to service the loans as per the revised repayment schedule, we could expect an increase in sale of such stressed loans,” said Anil Gupta, vice president and sector head of financial sector ratings at ICRA.
Moreover, the recently issued prompt corrective action (PCA) framework for non-banking financial companies (NBFCs) could also result in increase in sale of stressed loans as the NBFCs attempt to keep their net non-performing assets (net NPA) below PCA threshold.
The volume of stressed assets deals in India will likely rise by around 20% in FY23, reckons Siddharth Srivastava, partner, restructuring & insolvency at Khaitan & Co.
Many insolvency cases that were filed but not admitted may see light of the day in the coming financial year, he says, on account of courts actively taking up cases on account of decline in Covid-19 cases.
As per Insolvency and Bankruptcy Board of India data, since its inception in 2016, around 14,000 cases were filed in the NCLT and of these 5,000 cases have been admitted till now.
Of the admitted cases, 35% are undergoing proceedings, 30% cases have been referred for liquidation, 14% were shut by withdrawals, 11% cases were closed due to bilateral settlements, and only 10% of the cases have been settled through a resolution process.
“…With the large number of cases and limitation of benches, it is not surprising that average time of resolution process under NCLT is clocking around 450 days instead of maximum limit of 330 days as stipulated under IBC,” said Satyaroop Panigrahy, associate partner at Singhi Advisors.
Panigrahy said in FY18 and FY19, lenders resolved large NPAs on priority. A total of 12 major NPAs, were identified by the Reserve Bank of India and thereafter under the June 7, 2019 circular. NPAs over Rs 2000 crore outstanding were prioritized to be resolved within the purview or outside of National Company Law Tribunal (NCLT).
In FY20, a large number of mid-sized deals were resolved and interestingly post RBI’s June 7 circular, deals outside of NCLT started to be aggressively explored by lenders. In FY21, however, the pace of stressed deals reduced due to closure of the NCLT on account of Covid-19 led lockdowns.
This changed in the next fiscal with volumes of large and mid-ticket deals increasing significantly. The JSW Steel-Bhushan Power deal came fruition in FY22 along with other major deals like Jet Airways, Air India and Dewan Housing Finance Corp.
State Bank of India, Punjab National Bank actively participated in the stressed asset deal segment in FY22, as per Srivastava, while other non-bank players like Edelweiss, PFC and REC also were present in the stressed deals space.
Sectors in demand
Experts say stressed real estate, MSME and hospitality are among the top sectors where deals will happen in the next fiscal. These sectors were badly affected by Covid-19 and subsequent lockdowns.
On March 25, Delhi-NCR based developer Supertech went into insolvency after the Delhi bench of the NCLT admitted a petition filed by the Union Bank of India for non-payment of dues amounting to Rs 431.9 crore.
Stressed deals are expected to be done in both the secured as well as unsecured loans segment of retail and MSMEs, Gupta said.
However, the haircuts in the unsecured segment such as credit card, personal loans, among others will be much higher than secured loans such as loan against property, home loans and vehicle loans.
With lenders increasingly becoming digitally savvy and offering a host of banking services online, new-age fintechs believe technology can play a major part in transforming the stressed deal landscape.
As per Nitin Purswani, CEO and Co-Founder of Medius which is an AI driven debt collection solution for banks, collection intelligence platforms are developing retail loan solutions to transform NPA resolution process.
Technological solutions will emerge that will also take ownership of the corporate asset resolution lifecycle--from asset certification to easy auctioning and post-sale asset management.“Such technology, when woven into a permissioned Blockchain, would increase the transparency of our processes and will work wonders in the area of stressed asset resolution,” he said.