NPA measures will turn around big-ticket bad loans, prefer SBI: BoAML

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26 Aug, 2025 12:21

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Identifying 12 big accounts (out of around 500 bad loan accounts) by RBI for NPA resolution under the new bankruptcy code is clearly a long-term positive but banks may require heavy write-down of capital on haircuts, Bank of America Merrill Lynch (BoAML) said.

"A 33 percent hair-cut would result in capital write-down of USD 1.2 billion, let alone a higher quantum of hair-cuts, as may be the case actually," it explained. "Thus, the government may be required to re-capitalise the public banks in order to meet the Basel guidelines."

After the central government passed the ordinance empowering the RBI, the central bank on Tuesday has taken the first step by invoking the Insolvency and Bankruptcy Code, 2016 (IBC) for 12 large stressed accounts that total around 25 percent of sector gross NPLs. Such cases will be accorded priority by the National Company Law Tribunal (NCLT).

With regards to the other NPLs outside of these 12 accounts, the RBI has recommended that banks should finalise a resolution plan within six months. In cases where a viable resolution plan is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC.

At the end of the third quarter of FY17 (latest available data), the gross NPL of PSUs (overall system) increased to a staggering around Rs 6 lakh crore as compared to around Rs 5 lakh crore in at the end of FY16 and around Rs 2.7 lakh crore at the end of FY15.

"About 70 percent of NPLs are largely confined to top big-ticket 40-50 accounts. At the end of Q3FY17, [of our coverage universe], major chunk of net NPLs are with public banks [around 79 percent]," BoAML said.

It believes most of the private players have already initiated insolvency resolution process under the provisions of IBC.

The public players, however, may get a boost in momentum of such resolution, given that the responsibility for any haircuts on loans initiated by RBI direction will solely be passed on to RBI alone, it said.

The research house believes larger lenders such as SBI are relatively better placed to benefit from this theme. Private banks with better provisioning and/ or retail focus lenders such as HDFC Bank, Yes Bank remain its top picks at the sector level.