The cases of non-performing assets (NPAs) which have been referred to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC) may see bidders demanding 60% haircut on an average, says a report by rating agency CRISILl.
"A factor that will determine the effectiveness of the resolution process is the level of sacrifice, or haircuts, that banks make. Our account-by-account analysis of the top 50 stressed accounts indicates banks will have to bite a rather large bullet: the haircuts that bidders are likely to demand could be 60% on average," says the report.
The report pointed out that the top 50 corporate stressed assets constitute bulk of the gross NPAs in the banking sector. The steel sector has the highest exposure of this, at 30%, followed by construction and power.
"Four steel NPAs are worth Rs 1.3 lakh crore, accounting for over a third of the top 50 stressed assets with an aggregate bank debt worth Rs 4 lakh crore. However, how much cash will return to banks from this is not yet clear," says the report.
However, it believes the success of Insolvency and Bankruptcy Code (IBC) would go a long way in giving a fillip to the economy, feels the CRISIL Report, which expect the GDP to grow at 7.5% in the next financial year.
According to the report, "Real investment growth is expected to rebound to 7-7.5% next fiscal. The recovery will be gradual, as high leverage and capacity overhang continue to discourage a broad-based recovery in private investments. The recapitalisation of public sector banks and the implementation of the Insolvency and Bankruptcy Code will help speed up resolution of non-performing assets. This, together with continued growth in consumption demand, will raise capacity utilisation, which will support investments."
High stressed bank assets and over-leverage by companies has slowed down the private investment cycle. Stressed assets ratio for the banking system as of September 2017 was 12.2%, which is expected to reach 14% by March 2018. Most experts believe that unless the cases of NPAs are resolved, the investment cycle would not pick up.
The report is hopeful that with nearly half of the large corporate NPAs now referred to the National Company Law Tribunal (NCLT) under the IBC, resolutions will reduce the pile of bad loans in the medium term.
Ashu Suyash, Managing Director & CEO, CRISIL, says, "While these are early days, initial indicators do lend hope. We are particularly positive about the steel sector, where four large accounts have aggregate debt of Rs 1.3 lakh crore, given strong prices and uptick in domestic demand. Quick resolution of some large stressed assets cases is critical to establish the credentials of the new process, boost confidence of bankers and help kickstart the recovery process on a wider scale."