Lenders may go slow on referring SMEs to NCLT

One-size-fits-all strategy is not working, say bankers

Lenders plan to go slow on referring stressed small and medium enterprises to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC), with the chances of recovery of their dues through this process being “slim”.

According to a banker, the process of sending SMEs to the NCLT is delaying their revival, apart from banks losing a significant portion of the loans. There are several cases where the units awaiting debt resolution laid off workers.

The banker said that in the case of Vizag-based Synergies-Dooray Automotive, the first case to get a resolution plan under the IBC, banks had to take a haircut of 94 per cent on the debt, and it was the promoter who took control of the company again.

Besides, according to the Reserve Bank of India (RBI) rule, lenders have to make provision for 50 per cent of the loan in the same quarter when a company is sent to the NCLT.

“Banks would prefer to restructure the debt in small accounts, as their resolution would be faster. The borrowers are also willing to negotiate,” said a banking analyst.

There are 500 NPA (non-performing asset) accounts, most of them SMEs, that are awaiting resolution with the banks. Banks are currently busy with the resolution of 12 large accounts that were recommended by the RBI for resolution under the IBC.

According to the RBI’s criteria, all accounts that were an NPA as of March 2016 and owed more than Rs 5,000 crore to banks were to be sent to the NCLT. The first set of 12 companies has been sent to the NCLT, and bidders are doing their due diligence on these companies. The RBI is also preparing a list of another 29 companies, which are likely to be sent to the tribunal by this month-end.

Bankers said the one-size-fits-all strategy of sending all companies to the NCLT was not working and was increasing the write-offs. “A lot of resolution mechanisms are already there. The banks have to use what is the best mechanism in each case. The NCLT cannot be the solution for all cases,” State Bank of India’s Managing Director, P K Gupta, had said in New Delhi in October.

The Indian banking system is plagued with bad debts worth Rs 8 lakh crore. According to rating firm CRISIL, the banks will have to set aside Rs 3.3 lakh crore for provisioning for the bad loans in the current fiscal year, compared to Rs 2.2 lakh crore last year. The government plans to infuse Rs 2.11 lakh crore in state-owned banks so that they can maintain their capital adequacy norms.