NPAs worth over Rs 4 trillion to be resolved by 2018 end: India Ratings

This is about 45 per cent of bad loans worth Rs 10.2 trillion standing in the books of the top 500 debt-heavy corporates

Showing further traction for asset resolution, bad loans over Rs four trillion are expected to be resolved by 2018, according to India Ratings.

Around 45 per cent of total bad loans worth Rs 10.2 trillion standing in the books of the top 500 debt-heavy corporates are likely to be resolved by the end of 2018 under the Insolvency and Bankruptcy Code (IBC) Act, while the balance is to be resolved largely during 2019.

The bad loans include total borrowings of entities within the top 500 borrower universe as on March 2017, with either a credit rating of ‘C’ or ‘D’. Both are non-investment category ratings.

The total stressed debt resolved (including pre-National Company Law Tribunal restructuring or highest bidder identified under NCLT) totalled Rs 0.82 trillion. Lenders having exposure to such loans will take an average haircut of 43 per cent, lower than the overall estimate of 59 per cent on the entire bad debt portfolio.

The haircut may be low as some of the resolved bad debt were large-sized assets in iron and steel, and a cement asset.

The infrastructure (including power), and metals and mining sectors have the most concentrated stressed debt pending resolution, followed by real estate, telecom, and petrochemicals. The real estate sector may have a high requirement of debt refinancing to avoid falling into the stressed category. Few bad loans relating to metals and mining, cement, and auto and ancillary sectors have been successfully resolved so far.

Resolution timeframe benchmarks are expected to reduce by two years. According to the World Bank, India has the longest bad debt resolution turnaround time of 4.5 years. The Reserve Bank has been proactive in laying down the resolution timeframe in its circular of 12 February 2018, the rating agency said.

Going by the success of the resolutions so far, the outer limit for the timeline could be reduced to about 2-2.5 years including litigation.

Of the RBI's first and second lists of NCLT consisting of 37 corporates, only three have been resolved within the timeframe (first list: 270 days, second list: 180 days) notified. As the process is evolving, the resolution pace is likely to pick up in the next 6-12 months.

The success of the Insolvency and Bankruptcy Code (IBC) 2016 lies in the substantial reduction of the overall resolution time, which is in turn critical for the development of debt capital markets in India, it added.