May 17, 2017 09:13 PM IST

Banks may have to bear at least 25% loss to resolve bad loans: Experts

Banks may be required to take a loss of at least 25-40 percent in the form of haircuts to resolve the stressed loans that mar the sector, according to senior bank officials said.

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Banks may be required to take a loss of at least 25-40 percent in the form of haircuts to resolve the stressed loans that mar the sector, according to senior bank officials said.

A haircut is the difference between the loan amount and the actual present value of the asset using the security against the asset. It reflects the lender's perception of the risk of fall in the value of assets.

Speaking at a webinar panel discussion arranged by India Ratings and Research, Sunil Kakkar, CFO, IDFC Bank, said: "On a blended basis it (hair cut) would be anything between 25-40 percent and how much has been provided for has to be taken into account."

To deal with the mounting bad loans of banks, earlier this month, the Cabinet approved promulgation of an ordinance to amend the Banking Regulation Act by empowering banks and the Reserve Bank of India (RBI) that will allow faster decision making.

State-owned banks are saddled with non-performing assets (NPAs) or bad loans to the tune of a staggering Rs 6 lakh crore. Adding other restructured assets, the total stressed assets in the banking system comes to about Rs 8-9 lakh crore.

The NPAs have largely accrued from the economically and policy-wise worst hit sectors like power, iron and steel and infrastructure.

WATCH: How Banking Regulation Act will clean up India’s bad loan mess

According to R Gurumurthy, Head – Risk & Governance, RBL Bank, who was part of the panel, said, “At an industry level, gas-based projects are worst hit, those which do not have PPS (power pooling stations), have a huge challenge and there is a lot of renewable energy coming into play. So in this space, I would say it would be to the extent of 60-70 percent.

“Under steel, while government has been doing some bit that has helped large and integrated players, lot of secondary companies haven’t seen help, those shut or inoperative would be 70-80 percent while the rest would be maybe half,” he said.

India Ratings and other analysts also say that 25-40 percent of haircut would be a certainty because they will not find a buyer who will give the same price for a deteriorated asset.

With the clearance of the NPA ordinance, they do not see a material change in the resolution of assets unless there is a holistic view taken.

Kakkar said, “Numerically, almost 50 percent of debt is interest. Now, RBI is enforcing a decision making process and that may help but how that plays out needs to be seen. I do not see a response to how the underlying asset will become productive. Just by transferring ownership, the asset cannot become productive and bankers cannot run the power plants. There has to be a holistic approach. The recovery part is to take a holistic view to get policies kicking it.”

I don’t see things change materially with the ordinance but maybe a little positively, he added.

While the ordinance also helps banks take the legal approach, Kakkar and Gurumurthy do not see it helping banks.

From the statistics perspective, of the 30-32 cases filed in NCLT (National Company Law Tribunal) in this calendar year, banks have filed only about 20 percent of it.

“In NCLT, firstly, you tend to move from a “going-concern” to a “gone concern” concept. Secondly, there are expenses that the banks may have to run while fighting the case with professionals and thirdly, there is a deep haircut coming very fast. I think a lot of banks are shying away in that sense,” Gurumurthy said adding that with government not infusing more capital and the RBI taking action on banks, there is a larger issue with banks losing more.
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