After sending 12 cos to NCLT, banks may opt for out of court settlement with others

All of the 12 bad loan cases, as directed by the Reserve Bank of India, will be referred to the National Company law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) by mid-July.

However, lawyers and company turnaround specialists say that post this, for other accounts, bankers and borrowers may look at resolution options outside the NCLT to avoid liquidation and higher provisioning requirements by banks.

Kumar Saurabh Singh, partner at law firm Khaitan and Co, said: “When the case goes to NCLT, borrowers know that there is an immediate 50 percent knock that the banks are staring at. Also, it will be a loss to the borrower or the promoter in most cases if the banks take control of the management to find a new buyer or the case goes for liquidation. So, I don’t think they will rush to NCLT for resolutions.”

Last week, the RBI also asked banks to make more provisions (set aside buffer in banks’ books in case loan recovery fails) towards cases going to the NCLT. The central bank has mandated banks to set aside 50 percent of the loan as provision the moment a case is referred to the NCLT, and 100 percent if the company goes for liquidation.

Hence, banks will have to take an immediate hit on their profitability with more provisions towards such assets.

Apart from large banks, most banks are short on capital and about six public sector banks are already on prompt corrective action (PCA) for high NPAs that has led to erosion of their capital.

Experts say that though in bilateral settlements (between the borrowers and bankers), decision on arriving at a resolution is a tedious process, with the threat of NCLT, this can be expedited.

On June 13, the RBI identified 12 non-performing assets (NPAs) which required to be immediately referred to the corporate insolvency court (NCLT under the IBC) in order to bring quick resolutions.

A senior SBI executive said, “In these cases, 90 percent of the work and decision making will have to be done by banks. Earlier this required to take hair-cuts or loss on our books and bankers could not do that decision. NCLT threat will put some pressure on banks to take decisions faster.”

Moreover, once the case is with the NCLT, coming out with a resolution plan by the insolvency professional or the creditors’ committee within 9 months and getting the clearance by the OCs (overseeing committee) will also take time. So far OCs have taken about 3-6 months. And, what if the OCs do not approve the resolution plan. We need a buyer at a recoverable price and if it goes for liquidation, we anyways lose, the executive added.

According to research firm CLSA, if all the 12 accounts are resolved with 60 percent haircuts, the banks’ earnings may face risk from credit cost towards haircuts (loss taken on the loans).

Nirmal Gangwal, founder and MD of Brescon Corporate Advisors, financial turnaround and debt resolution specialist, said, “Given the tight timeline, the resolutions may have an issue. Also, there is a big disincentive to go for liquidation… it is a lose-all game. But if it finds a resolution, it will be win-win for both banks and corporates.”