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With new measures (power) from the government to tackle non-performing asset issues, the RBI increased pace of NPA resolution process by identifying 12 accounts but that may pose credit cost risk for banks, CLSA feels.
Even the research house is worried about the success of this new tool, especially after limited success to previous tools like Strategic debt restructuring, S4A, insolvency proceedings, 5/25 etc. Hence, it said, quality and speed of resolution will be key going forward.
If all the 12 accounts are resolved with 60 percent haircuts, CLSA sees 8 percent upside to FY19 adjusted net worth (higher for public sector banks), but feels earnings may face risk from credit cost towards haircuts.
Following the government’s announcement of steps to resolve NPLs, RBI announced its plans to speed up the process by identifying 12 large corporate non-performing loans (NPLs) for resolution under Insolvency and Bankruptcy Code (IBC).
These 12 large corporate non-performing loans account for 25 percent of total NPLs or around 2 percent of loans.
"This will require banks to submit a plan to National Company Law Tribunal (NCLT), but more importantly loans have been identified objectively; resolution plan will need to be approved within 180-270 days; and bank employees may get insulated from risk of inquiries," CLSA said.
Internal Advisory Committee of independent Board Members that constituted by RBI recommended for IBC reference all accounts with fund and non-fund based outstanding amount greater than Rs 5000 crore, with 60 percent or more classified as non-performing by banks as of March 31, 2016, the RBI said in its note.
Besides the 12 accounts, the banking regulator instructed banks to finalise a resolution plan for all other accounts within six months, it added.
"We understand that these loans might cover about 35-40 cases and account for 15 percent of banking sector's NPLs (based on overall plan to resolve top-50 NPLs that form 40 percent of banking sector’s NPLs)," CLSA said.
In the case of PSU banks, the government is also likely to link capital infusions with targets on resolution of stressed loans & exiting unprofitable/non-core businesses, it said.
Majority of stressed assets issue restricted to two sectors that are power that dominate the watch-list and steel which lead NPLs (around 30 percent of total loans).
Source: CLSA report
Companies that have huge debts on their books are Adani Power (Rs 52,200 crore), Bhushan Power (Rs 37,300 crore), Bhushan Steel (Rs 43,300 crore), Essar Steel (Rs 36,500 crore), GMR Infrastructure (Rs 46,200 crore), GVK Power (Rs 25,800 crore), Jaiprakash Associates (Rs 67,300 crore), Jindal Steel & Power (Rs 46,200 crore), Monnet Ispat & Energy (Rs 11,900 crore), Reliance Communications (Rs 45,800 crore) and Videocon Industries (Rs 43,300 crore). Figures are based on FY16 financials, CLSA said.
CLSA said improvement in asset quality will be most positive for PSU banks and private corporate banks where stressed loan ratios are high, at 8-20 percent.
ICICI Bank is its top pick in the sector given a valuation discount to peers and potential fall in stressed loans which could abate concerns, the research house said.
Among PSUs, while tier II PSUs may benefit more from stressed loan reduction, it prefers SBI and Bank of Baroda given their stronger franchise/manageable stressed loans.
Posted by Sunil Shankar Matkar
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