The Reserve Bank and the government will come up with a recapitalisation package for state-run banks, which have been hit by higher provisioning for mounting bad loans, RBI Governor Urjit Patel said here today.
System level non-performing assets (NPAs) have crossed the level of sanity and banks will have to take bigger haircuts as gross NPA ratio has touched 9.6 per cent and stressed advances ratio was at 12 per cent as of March end, he said.
Besides, he said, 86.5 per cent of gross NPAs are accounted by large borrowers.
"Higher provisioning requirements for NPAs and other factors will affect capital position of several banks, necessitating a higher re-capitalisation. Government and RBI are in dialogue to prepare a pack of measures to enable state- run banks to shore up the requisite capital in a time bound manner," Patel told a CII-organised insolvency and bankruptcy summit, chaired by Finance Minister Arun Jaitley.
The government has made a budgetary provision of pumping in Rs 75,000 crore into state-run banks for the four-year period ending March 2019.
Patel said the measures being thought through could include a combination of capital raising from markets, dilution of government holding, additional capital infusion by government, mergers based on strategic decision and sale of non-core assets.
The government and the RBI have been working together to comprehensively address the NPA issue through a multi-pronged approach for some time now and the early signs are encouraging, he said.
No successful and credible NPA resolution can happen if the banks' balance sheets are weak as the outcome of the efforts is critically contingent on the strength of the balance sheets of lender to absorb the costs, Patel said.
State-run banks, which sit on over 75 per cent of over Rs 8 trillion (Rs 8 lakh crore) NPAs "will need to take haircuts on their current exposures under any resolution plan agreed within or outside the IBC", he added.
This calls for urgent recapitalisation "as regulatory and economic challenges in dealing with NPAs gets accentuated when seen against the poor capital position of public sector banks," Patel said.
He called for swift and time-bound resolution of bad loans through resolution or liquidation for efficient reallocation of bank capital.
It is critical for de-logging balance sheets of over- leveraged companies, Patel said, admitting that the balance sheet of most state-run banks are not healthy enough to take large haircuts.
On June 13, the RBI had drawn up a list of 500 largest defaulters and made public 12 of the largest among the larger list and asked banks to get these accounts cleared through the National Company Law Tribunal.
These 12 accounts comprise Bhushan Steel, Bhushan Power & Steel, Essar Steel, Lanco Infra, Amtek Auto, Electrosteel Steel, Jaypee Infra, Alok Industries and Jyoti Structures, Era Infrastructure, ABG Shipyard and Monet Ispat which together account for over a quarter of the total bad loans of Rs 8 trillion of which Rs 6 trillion are with public sector banks alone.
These accounts have an exposure of more than Rs 5,000 crore each, with 60 per cent or more classified as bad loans by banks as of March 2016. Accordingly the banks have taken these 12 companies to NCLT and the hearing on them is on.
Patel also said being referred for the insolvency process under the IBC does not necessary mean that the company is being liquidated.
"It simply puts a timeline within which various stakeholders have to come up with a feasible resolution plan approved by 75 per cent of creditors. Only if this effort fails, would the entity end up for liquidation," Patel said.
But the Governor was quick to apportion the NPA pains to banks, saying that a weak credit discipline - right from the appraisal to sanction stage - is one of the main known systematic factors in the build-up of stressed assets.
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