Banks struggle to resolve stressed accounts, face Rs 30,000 crore provisioning in Q4

Mumbai: Indian lenders are staring at a provisioning cascade of more than Rs 30,000 crore in the March quarter as they struggle to meet the regulatory deadline on resolution of companies that failed to repay within the time limit. The Inter Creditor Agreement (ICA) mechanism has not speeded up resolutions, with creditors squabbling over the nature of securities each class of lenders possesses.

“Hardly any account has so far been resolved under ICA. With the deadline a few weeks away, there is a lot of pressure to close the resolution on these accounts or face higher provisions,” said the CEO at a large bank.

The central bank’s June 7 circular requires banks to put in place ICAs within a month of the review period. Cases where an agreement is not put in place, lenders may continue to negotiate with the borrowers and make higher provisions after six months.

That deadline is expiring on January 7 for most stressed accounts.

Resolutions so far have been slow on the ICA framework. Inefficiencies are one of the biggest impediments, with banks, mutual funds and insurance companies squabbling over the resolution plans. With creditors unable to agree on buyers or the restructuring mechanism, it is taking several weeks to arrive at a consensus. A delay in resolution plans is likely to eat into bank’s profits.

“One of the major roadblocks in implementation of a resolution plan is the lack of an inter creditor agreement,” said Hari Hara Mishra, director, UV Asset Reconstruction. “In view of multiple lenders and several classes of charge over securities, finding an equitable mechanism for distribution of proceeds among lenders gets difficult. Besides, many plans also envisage certain future commitments and participating banks have divergence of views thereon. With non-bank players such as mutual funds and insurance companies in the fray, the problem gets compounded.”

According to a CARE Ratings analysis, on a cumulative basis, banks recorded a net profit of Rs 6,348 crore during Q2FY20 against a net loss of Rs 3,918 crore in the same period previous year.