RBI’s deadline for Indian banks to resolve ₹3.8 trillion worth of bad loans has expired. What's next?
Reserve Bank of Indiagave banks until 27 August to finalise a resolution plan for 70 stressed accounts worth more than ₹20 billion each.
- Now that the deadline has expired, insolvency proceedings will be initiated against all accounts that do not have an adequate resolution plan.
- There is, however, one slight roadblock to the plan. The Indian
governmentwants to protect power producers, which comprise a bulk of the stressed accounts, from bankruptcyproceedings.
In a circular released in February 2018, the Reserve Bank of India gave India’s banks a total of 180 days, starting on 1 March, to finalise a resolution plan for all non-performing loans in excess of ₹20 billion, barring which the debtors would undergo bankruptcy. This equated to ₹3.8 trillion worth of
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The goal of the circular was to accelerate the resolution process of non-performing accounts by setting a timeline. And now that the 27 August deadline imposed on banks has expired, insolvency proceedings will have to be initiated against all accounts that do not have a resolution plan - something that banks would have wished to avoid because they cede control of the resolution process to the National Company Law Tribunal (
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Within the next 15 days, the fate of a number of accounts will be decided. Two bankers told Mint that Indian banks will refer 20 out of a possible 32 accounts to the NCLT for resolution. The remaining bad loan accounts will likely undergo a private restructuring or liquidation process. The accounts that are set to be transferred to the NCLT include Essar Power, BRG Iron and Steel and Jindal Thermal India Ltd.
Stressed power accounts
There is, however, one slight roadblock to the plan, specifically in relation to the non-performing loans of power companies.
On August 27th, The Allahabad High Court decided against ordering a pause on all resolution proceedings against power companies after they filed a petition to seek relief from the resolution deadline. The power producers now have the option of escalating the issue to the Supreme Court. The move has important implications for the entire bad loan resolution process, since the stressed
The Indian government faces a tough decision in this regard. On one hand, it needs to clean up the banking sector. On the other, it is hesitant about letting power companies undergo resolution or liquidation prematurely because this could cripple the sector if proceedings were to fail because of low investor interest.
Additionally, the government needs these companies to maintain normal operations in anticipation of a pickup in electricity demand as well as for the sake of the progress of public electrification schemes like Saubhagya.
It’s a tricky conundrum, sure, and one that requires a firm hand. As things stand, the government will likely invoke a provision under the RBI Act that allows it to give the RBI special directions that are “in the interest of the public”. It will try and give power producers a short-term breather from bankruptcy proceedings as a precursor to a larger resolution plan for the sector.
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