Public sector banks (PSBs) got a major relief when the Supreme Court struck down Reserve Bank of India's (RBI) controversial single day default rule for pushing stressed companies to the Insolvency & Bankruptcy Code (IBC). In June, the RBI came out with a revised, banker-friendly framework for stressed assets. It provided a month's time as review period followed by a six-month period to implement a resolution plan. During this period, there was no pressure to make provisions in the books. The biggest change was the inter creditor agreement (ICA) among banks where 75 per cent of lenders by value and 60 per cent by number were given complete power to decide a binding resolution for all.
But even this new resolution scheme is struggling. The lending banks have differences over resolution plans, quantum of haircut, quality of security, etc. With no resolution in sight, banks will now be forced to make 20 per cent provisioning by January. In addition, a 15 per cent provisioning would be required after a year. This will not only eat away profits but also absorb capital. There is also no relaxation coming from the RBI.
Partly, the challenging economic environment is to blame. The frequent changes in IBC are discouraging global distressed funds as well as strategic investors. Looks like a long road ahead for resolution of stressed assets.
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