Moody's: Nothing new in new norms,NPA resolution to take time

Global rating agency Moody's today said the new NPA resolution mechanism are broadly the same as the earlier moves and overlooks key constraints on capital, which makes recovery from dud loans a long-drawn affair.
"The measures do not address the lack of capital at the state-owned banks, that has prevented them from writing down non-performing loans to realistic levels. We continue to expect NPL resolution to be a relatively long drawn out process," Moody's said in a note.
However, the agency said "these measures improve the efficacy of NPL resolution mechanisms and are a credit positive."
But it was quick to point out that "successful resolution, either by through debt relief or asset sale, will require banks to take a big hit when they write down the value of these assets to market value. However, the state-owned banks' weak capital levels mean that they do not have the capacity to take these sort of write-downs."

The agency further said the state-run banks will use their operating profits over the next two years to increase the provision coverage ratios, after which the process of balance sheet clean up will begin.
Government adopted an Ordinance route to come out with amendments to the Banking Regulation Act on last Friday, which gives the RBI greater powers to intervene in NPA resolution.

Government announcement was followed by the RBI issuing a notification lowering the threshold for the lenders in the joint lenders' forum (JLF) to approve a resolution proposal, to 60 per cent from 75 per cent of lenders by value, and to 50 per cent from 60 per cent of lenders by number.

The Reserve Bank can now direct banks to initiate insolvency proceedings with respect to specific borrowers who are in default, and can appoint advisory committees to advise banks on the resolution of stressed asset, it said.
This, along with the expected improvement in coordination among lenders, make the moves a credit positive.
The agency, however, said the measures are "broadly along the same vein as a long series of actions that government and regulators have taken to address banks' asset quality challenges in the past."
Earlier measures like joint lenders' forums, the 5:25 refinancing, strategic debt restructuring and the S4A or the scheme for the sustainable structuring of stressed assets have not materially quickened the pace of NPL resolution, it noted.

Explaining the inefficacy of the earlier measures, the agency said the operating environment in stressed sectors continues to be challenging and the market value of such stressed companies is far lower than that on banks' books.
Meanwhile, foreign brokerage BofA-ML said under the new resolution mechanism banks will focus on 40-50 large dud loan accounts.
"We expect banks to concentrate on the 40-50 big ticket accounts that account for 70 per cent of the over Rs 6 trillion NPAs after the RBI comes out with detailed regulations," it said.
On capital, the brokerage note said government will be able to pump in the promised USD 27 billion by 2019 to meet the Basel III capital requirements without breaching the 3.5 per cent fiscal deficit target.