RBI move on insolvency proceedings credit positive: Moody's

Moody's Investors Service today said the initiation of insolvency proceedings on 12 large loan defaulters is credit positive for Indian banks as it will improve their overall asset quality.

The Reserve Bank last week said it has identified 12 large loan defaulters who account for 25 per cent of the total NPAs or bad loans in the banking sector and will be referred to the banks concerned for filing insolvency proceedings.

These cases will be accorded priority by the National Company Law Tribunal (NCLT).

"This is credit positive for India's banks because any meaningful resolution under this plan can help improve their overall asset quality. Additionally, it also will set a precedent for resolving non-performing loans from smaller borrowers," Moody's said in a report.
 

The directive will negatively affect banks' profitability over the next year if they need to take large write-downs relative to their existing loan-loss reserves for those assets, it said.

"This also will accentuate the capital needs of weaker public sector banks, which may require a large capital infusion from the Indian government," it said.

Moody's estimated that state-owned banks will need up to Rs 95,000 crore of equity capital through 2019.

The capital requirement is much higher than Rs 20,000 crore budgeted by the government towards capital infusion until March 2019. Under the Indradhanush plan for bank recapitalisation, government is infusing Rs 70,000 crore in PSU banks beginning 2015.

RBI has also asked banks to also review other NPAs and finalise a resolution plan over the next six months.

"Given the strict timelines to resolve a case under the IBC within a maximum period of 270 days, after which a company will be automatically liquidated, we expect that this directive will significantly expedite the resolution process and will help in loan recoveries," Moody's said.

The US-based credit rating agency estimates that some of these 12 accounts relate to borrowers in the steel, power and other infrastructure sectors such as engineering, procurement and construction contractors.

"Indian banks' asset quality has significantly deteriorated over the years, although the pace of deterioration has somewhat moderated in recent quarters," Moody's said.