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Banks may take huge haircut in resolving bad loan cases

Author: Debasis Mohapatra/Tuesday, March 6, 2018/Categories: Banking & Financial Services

Banks may take huge haircut in resolving bad loan cases

Mumbai: Though debt resolution of some of the big corporate accounts at National Company Law Tribunal (NCLT) is likely to conclude in the coming weeks, banks may have to take steep haircut in this loan recovery process.

In a few accounts, the recovery percentage is likely to be less than 30% of the total loan amount owed by the company to lenders. Analysts are of the opinion that the country needs a matured debt resolution market which can ensure higher price for the stressed assets, eventually leading to higher loan recovery for banks.

Haircut is the difference between the actual dues from a borrower and the amount which is recovered by banks in the debt resolution process. 

“As per our estimates, the level of haircuts required for 50 large stressed assets with cumulative debt of over Rs 4.3 lakh crore, may be around 60% at an aggregate level,” the rating agency Crisil has said in a report.

According to Crisil, haircuts worth Rs 2.4 lakh crore is likely from the current debt resolution process at NCLT.

Interestingly, the bidding proposals currently evaluated by lenders for different NPA accounts indicate the same trend. For example, in case of Monnet Ispat, haircut for banks could touch around 70%. Monnet with a 1.5 million tonne steel capacity, owes Rs 10,237 crore to banks. However, reports suggest that the steel unit is being sold to JSW and two private equity firms at less than 30% of the loan value.

According to the deal, the acquiring firms have proposed to infuse Rs 3,700 crore in the company, out of which Rs 2,650 crore will be paid to financial creditors against a claim of more than Rs 10,000 crore. So, in case the deal gets the final nod from lenders, banks will recover less than 30% of the total loan amount.

“Haircut will be quite substantial. Also, earlier the provisioning for bad loan account used to be 20%. Now, the provisioning requirement in case a company is referred to NCLT has been raised to 50%. So, higher provisioning and deep haircut will further complicate the problems of Indian banks,” CH Venkatachalam, general secretary of All India Bank Employees Association (AIBEA) told The Finapolis.

“An additional Rs 3 lakh crore will be required as provisions by the banking system taking into account the number of cases referred to the insolvency court,” he added. Venkatachalam also demanded that law should be amended to make willful default a criminal offence.  

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