The fourth quarter of the current fiscal year is likely to prove difficult for public sector banks, with the possibility of major restructuring caused by the coronavirus outbreak, and higher provisioning needs due to failed resolutions of accounts under ICA (inter creditor agreement). In addition, with no visibility on recovery from Bhushan Power, which is currently under NCLT (National Company Law Tribunal), many public sector banks that had recently turned profitable after months of losses, might once again slip into red, say bankers.
Last quarter, several lenders had drawn comfort from Essar Steel's resolution, which alone yielded close to Rs 42,000 crore for banks. From Bhushan Power, banks were expecting to recover nearly Rs 20,000 crore in the current quarter. But they may now need to wait as it is still caught in legal wrangle.
JSW has been legally advised that it is not obligatory to implement the resolution plan while appeals are pending. The next date of hearing in Supreme Court is around mid-April. Bankers were pinning their hopes on the resolution being completed this quarter.
“Due to coronavirus, sectors like MSME, hospitality, airlines are badly hit. Many banks might slip into loss due to this. Further, banks are required to make higher provisioning on accounts which have not yet resolved under ICA (inter-creditor agreement)," said a top executive of a public sector bank.
Banks have the option to refer them to NCLT, but in most cases, the resolution value is as low as the liquidation value. "So this will be a very difficult quarter for banks. If the resolution of Bhushan Power had taken place, it would have given big comfort to banks,” the executive added.
Another head of a public sector bank said, however, that he still hoped for resolution from Bhushan Power in the near term.
According to an earlier data from rating agency Icra, an estimated Rs 3.8 trillion of loans across 72 large accounts were to be resolved under ICA. Bankers said that a substantial number of accounts remain unresolved.
“There is no unanimity among lenders on ICA. Many banks have not signed ICA, even though six months have elapsed,” a senior official of SBI told Business Standard recently.
A circular of the RBI on June 7, 2019 mandated banks to sign ICAs within 30 days from the first date of default by companies with bank exposure of more than Rs 2,000 crore. After the 30-day review period, 180-days were allowed for implementing a resolution plan, which ended in the first week of January. Failing the deadline, banks have to make a 20 per cent provision and refer cases to the NCLT within 30 days, followed by additional 15 per cent if no resolution is found within 365 days.
Public sector banks had started showing signs of recovery after months of stress. According to Anurag Singh Thakur, Minister of State for Finance, in a reply to question in Lok Sabha in December 2019, public sector banks (PSBs) returned to profitability in 2019-20, posting an aggregate profit of Rs 3,221 crore in the first half ending September.
PSBs had posted aggregate operating profits during FY2017-18 and FY2018-19 of about Rs 1.55 trillion and Rs 1.54 trillion, respectively. However, primarily due to continuing ageing provision for NPAs, they made aggregate provision for NPAs and other contingencies of Rs 2.41 trillion and Rs 2.36 trillion respectively, resulting in aggregate net losses of Rs 85,370 crore and Rs 81,752 crore respectively.
PSU banks recorded a net profit of Rs 507 crore in the first three quarters of this financial year, Thakur had further said in Lok Sabha recently.
“In the next quarter, the restructuring pressure might be high due to the ongoing economic conditions,” said a senior official of a public sector bank.
- Aggregate PSB operating profits during FY18 and FY19 stood at Rs 1.55 trillion and Rs 1.54 trillion, respectively
- Aggregate provisions were Rs 2.40 trillion and Rs 2.36 trillion in FY18 and FY19 respectively.
- Net losses stood at Rs 85,370 crore and Rs 81,752 crore in FY18 and FY19
- PSBs reported an aggregate profit of Rs 3,221 crore in the first half of current fiscal.
- PSBs recorded a net profit of Rs 507 crore in the first three quarters of this FY
Source: Lok Sabha