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Why Bankers are Now Wary of Using Bankruptcy Code

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cal year alone, leading to huge losses, and in some cases, it could trigger prompt corrective action (PCA) — where RBI restricts banking activities of banks when financials deteriorate substantially. Already six banks have been placed under PCA as they lost money for two straight years and bad loans crossed the 10% threshold. What worries bankers now is the nuisance that a minority creditor can create.For instance, an operational creditor with Rs 1 lakh overdue can knock the doors of NCLT the very next day of default. This means that even if an account is not classified as a non-performing loan, banks will have to set aside more money from their profits. In a way, it should not be surprising if large creditors take proactive steps to settle dues with some minority lenders. However, what will be difficult to manage is a situation where the corporate itself files for bankrutcy.

Bankers beleive they may end up beling worse off than before due to provisions. As it has been the past, banks have choosen an easier path of making lesser provision rather than taking a holistic view in restructuring since it required just 5% provisioning. The moment it was raised to 15%, the incentive dried up. With provisioning mow almost half the loan amount, it is a classic case of frying pan to fire.

The Economic Times New Delhi, 28th June 2017

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