Banking sector this week: IDFC-Shriram merger buzz, Essar vs RBI, and banking frauds

IDFC | The share price has risen 30 percent in the last three trading sessions. On August 12, the stock closed at Rs 26.35 against a close of Rs 20.3 on August 7, 2020.

This week, the banking sector was abuzz with big merger talks between IDFC and Shriram Group. Meanwhile, the bad loan resolution cases progressed a step forward in the insolvency courts.

According to sources, IDFC Bank and Shriram Capital are all set to announce their mega-merger plan on Saturday, which would create a USD 10 billion dollar financial behemoth.

On the other hand, the non-performing asset (NPA) resolution process took a step forward as banks started filing cases against the 12 defaulting companies under the insolvency and bankruptcy code (IBC).

Power distribution equipment maker Jyoti Structures became the first of those stressed companies to be admitted at the National Company Law Tribunal (NCLT) under the IBC.

And as our legal precedence suggests, the procedure has hit its first barrier with one of the 12 companies Essar Steel, identified by the central bank, challenging the Reserve Bank of India’s decision in the Gujarat High Court.

This may delay the NPA resolution process, which was pushed by the government and the banking regulator to fast-track the decision-making after failure of older mechanisms.

One of the biggest corporate defaulters with a debt of over Rs 42,000 crore, Essar Steel presented its case before the Gujarat High Court on July 4, questioning the RBI’s cut-off date of March 31, 2016 to file the 12 accounts immediately at the NCLT.

The High court has adjourned or postponed the matter to July 12, before which it had adjourned it to July 7.

The steel major argued that the RBI’s decision to to cherry-pick it as one of the 12 cases to be dragged to the National Company Law Tribunal (NCLT) even as there are more defaulters.

On the other hand, One of the largest ARCs in the country, Edelweiss Asset Reconstruction Company sponsored by Edelweiss Group, plans to buy Rs 1,500-2,000 crore worth of bad loans, largely in the steel sector, in this fiscal year.

The ARC also concluded buyout of Adhunik Power and National Resources’ debt for Rs 2,800 crore from 24-member bank consortium, led by SBI.

On Thursday, the RBI came out with guidelines to insure customers from online frauds. The central bank said that customers will not suffer any loss if unauthorised electronic banking transactions are reported within three days and the amount involved will be credited in the accounts concerned within 10 days of reporting of the fraud.

Meanwhile, Yes Bank is likely to decide on its stock split or not in its Board meeting on July 26. The shares of the bank trade ended at Rs 1503.35 apiece on Friday.

RBL Bank, mid-sized private lender, reported divergences of Rs 340 crore in its gross bad loans numbers when compared to RBI’s classification. The bank also plans to raise Rs 1,680 crore through preferential share allotment of 3.26 crore.

In order to further curb defaults on loans, RBI Deputy Governor Viral Acharya suggested that a public credit registry (PCR) is the need of the hour to create extensive database of credit information in order to help control loan defaults, improve credit culture, efficiency and financial inclusion.

The financial sector registered a loss of Rs 16,770 crore in 2016-17 owing to banking frauds. This was a rise of 72 percent over the last five years

Amid the stress due to bad loans, the non-banking financial companies (NBFCs) and mutual funds took the credit cake in the financial system as bad loans continue to haunt banks who remain cautious on lending.