Relief ahead for banks as deadline for resolving 10 major NCLT cases nears

 Relief ahead for banks as deadline for resolving 10 major NCLT cases nears

The pruned second NCLT list comprises 25 companies whose loans have turned into NPAs

The coming weeks will be important for the banking sector, especially the government-owned ones. For, the last date for resolving 10 of the 12 major cases of bad loan accounts referred to the National Company Law Tribunal (NCLT) is within the next month.

These 12 cases were in the first list of such cases which the Reserve Bank of India (RBI) had ordered to be sent to NCLT for resolution under the Insolvency and Bankruptcy Code (IBC). The final resolution date for eight of these 12 (commonly referred to as the NCLT-1 list) is between April 14 and April 30; another two are between May 4 and May 6. Another is mid-November. The 12th, Jyoti Structures, had its last date on March 31.

The pruned second NCLT list comprises 25 companies whose loans have turned into non-performing assets (NPAs).The more important point is if the bad loans in NCLT-1 of an estimated Rs 2.78 trillion (total claims at Rs 3.22 trn) get resolved, it should mean significant relief for the banks, especially the public sector ones (PSBs); they are currently not earning a paisa on these. CLSA, in a report dated March 21, estimates the recoverable value of these 12 accounts at Rs 1.34 trillion or almost 48 per cent of the debt. As a result, the haircut (write-off) to be taken by the banks will be 52 per cent of the dues.

Graph Sources: Companies, industry, media reports, CLSA The companies have been offered for bidders. Among the entities vying for these assets, Tata Steel has emerged the highest bidder for Bhushan Steel, with an offer to pay Rs 352 billion in cash to the creditors, beside offering 12 per cent equity in the company. Analysts at CLSA, led by Aashish Agarwal, have estimated the recoverable value from sale of Bhushan at the Rs 352 bn figure, which is 75 per cent of Rs 470 bn of dues or a haircut of 25 per cent.

Bidding for Essar Steel is now a three-way fight. JSW Steel has joined hands with Numetal (backed by Russia’s VTB Bank), while Vedanta is also in the fray to acquire these assets, adding to competition for ArcelorMittal, the other bidder. JSW-Aion Investments were the sole bidder for Monnet Ispat.

In a late-February report, Edelweiss Securities analysts Kunal Shah and Prakhar Agarwal had estimated a haircut of 57 per cent on the total exposure of Rs 2.5 trillion in 11 of 12 NCLT-1 accounts. However, the latest report by CLSA says, “Better bids for steel projects like Bhushan Steel and potentially Essar Steel indicate haircuts on these could be just about 20 per cent (on the principal). However, the blended haircut on the (NCLT-1) list should still be 50-55 per cent, given the higher losses in other steel plants and sectors such as textile and power (60-80 per cent haircuts).”

The banks have already provided in their balance sheets for a little over half the amount owed by these NCLT-1 and NCLT-2 companies, on an aggregate basis. So, the additional write-offs for NCLT-1 could be small in the March 2018 quarter, given the higher rate of recovery.

NCLT-2 companies owe about Rs 1.3 trillion to banks. Although the aggregate amount is smaller as compared to NCLT-1, the banks might have to take a bigger haircut of 68-70 per cent, given the higher share of engineering, procurement and construction (EPC) companies in this list, where the chances of recoveries are low.

The total additional provisioning required for 37 companies in the two lists in the March quarter, after considering those made so far, will be Rs 53 billion, of which Rs 39 bn will be by PSBs, estimates CLSA (based on the 13-14 banks under its coverage).There are some risks to these estimates. The immediate one is from two cases pertaining to NCLT-1, Alok Industries (Rs 300 bn) and Jyoti Structures (Rs 80 bn), which have dues of Rs 380 bn. The bids for these haven’t been exciting, which could increase the write-offs for banks (potentially another Rs 100 bn). The upside risk is if existing bidders raise the offer for steel companies such as Essar, etc.

Graph Sources: Companies, industry, media reports, CLSA Overall, the relief possible for banks could be gauged from the fact that the first list of companies account for a third of all banking NPAs; the NCLT-2 companies account for 15 per cent of bad loans. So, a resolution of these loans could bring down NPAs by 30 per cent in the near term and by half over the next 12-18 months.

 

The major beneficiaries among lenders with respect to NCLT-1 would be Punjab National Bank (PNB), Canara Bank, IDBI Bank and State Bank of India (SBI), say analysts at Edelweiss.

 

CLSA estimates the estimated FY19 book value (or net worth) of banks to increase by an average 14 per cent, assuming the recoveries in the two NCLT lists. The biggest gainers would be Union Bank (146 per cent), Canara Bank (67 per cent), PNB (42 per cent), Bank of India (41 per cent) and SBI (24 per cent).

 

“Our bottom-up assessment of the top NCLT cases (Rs 4 trillion of bank debt – five per cent of total loans and 45 per cent of bad loans or NPAs) indicates that haircuts will range from 20 per cent to 90 per cent; the total haircut is likely to be less than 60 per cent. Large steel projects should see the least haircuts, while the EPC and power sectors would be the highest; NCLT-1 cases are likely to see higher recovery rates vs NCLT-2. The next four weeks would be a litmus test for the NCLT mechanism,” said CLSA.

 

After resolution, gross NPAs (of the banks covered by the foreign brokerage) could fall from about nine per cent of loans to six per cent by FY20; the upside to the adjusted book value per share could be about 15 per cent in FY19. Haircuts for private corporate banks should be higher as compared to PSBs, due to their higher exposure to non-steel NPAs, the brokerage adds.

 

Having said that, banks could see pressure on account of the new NPA rules, as mandated by the financial regulator, wherein higher provisions would be required in the March and June 2018 quarters, estimate analysts. On the other hand, some write-back of provisions on the losses in the bond portfolio could help their results for the March quarter.

 

The Business Standard, New Delhi, 05th March 2018