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The RBI may have dealt a $1.5 billion blow to Indian banks’ bottom line

The RBI may have dealt a $1.5 billion blow to Indian banks’ bottom line
Business3 min read

  • The central bank has told the creditors of the cash-strapped IL&FS, India’s largest infrastructure lender, that they will have to treat their loans to the company as non-performing.
  • As a result, the creditors of IL&FS, which include many of India’s public sector banks, will have to set aside provisions for their stressed loans to the infrastructure lender while also recording an increase in their bad loan ratios.
  • In mid-December 2018, as many as 20 banks had approached the RBI asking for a six-month breathing period prior to the implementation of provisioning norms.

The Reserve Bank of India (RBI) has told creditors of the cash-strapped IL&FS, India’s largest infrastructure lender, that they will have to treat their loans to the company as non-performing, according to media reports.

As a result, the creditors of IL&FS, which include many of India’s public sector banks such as State Bank of India, Bank of Baroda and Punjab National Bank, will have to set aside nearly ₹100 billion (US$1.5 billion) in provisions for their stressed loans to the infrastructure lender while also recording an increase in their bad loan ratios for the quarter ended December. As the current financial year draws to a close, their balance sheets will be severely weakened.

In mid-December 2018, as many as 20 banks had approached the RBI asking for a six-month breathing period prior to the implementation of provisioning norms. The lenders reportedly had a cumulative amount of ₹600 billion in outstanding loans to IL&FS, more than half of which the company has defaulted on. To put things into perspective, IL&FS has a total debt burden of around ₹940 billion.

The banks had also asked for a standard provisioning rate of 0.4% on the loans following the expiry of the six-month period. Normally, bad loans require a provisioning rate of 25% in the first year of default.

The move came as the National Company Law Appellate Tribunal (NCLAT) was hearing a petition to grant a 90-day breather to IL&FS and its subsidiaries on all loan repayments as it devises a resolution plan. In addition to subsequently enforcing a moratorium on repayments, the tribunal has allowed the government to examine all of the company’s unreleased accounts and financial statements.

The right decision

The RBI’s decision is based on a prevailing order that loans that go 90 days without payment will have to be classified as non-performing.

It was a tough choice, but the RBI made the right one, demonstrating that its learnt from its supposed past mistakes. The central bank came under fire from finance minister Arun Jaitley late last year when he said that it had enabled the cloaking of the bad loan issue by allowing some stressed assets to be classified as “restructured.”

It seems that easing restrictions on creditors and hoping for a resolution is no longer a viable option.

Meanwhile, the newly-constituted board of IL&FS, led by veteran banker Uday Kotak, are currently in the process of restructuring operations and monetising the infrastructure lender’s assets in order to pay back maturing loans.

In addition to cutting costs and selling off its financial services unit and road assets, IL&FS is also offloading stakes in its education and wealth management businesses. In fact, no non-strategic asset that can be sold is being left untouched with even high-end furniture and luxury cars on the chopping block. Despite the aggressive liquidation, it is likely that banks will have to take a haircut on their loans.


SEE ALSO:

As India’s shadow banks brace for a tough 2019, the central bank and government will try and prevent a repeat of the IL&FS crisis by solving the data problem

India’s finance minister touts the success of the country’s recently-implemented bankruptcy code — but it still requires significant improvement

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