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* RBI’s amended resolution framework: More pragmatic
Suffice to say that the RBI’s new circular for resolution of stressed assets released on Friday is more pragmatic than the one issued on 12-Feb in two respects:
1. It reduces the requirement of 100% approval from all lenders for the resolution plan to 75% by value and 60% by number of lenders
2. It effectively gives 30 more days to implement the resolution plan – taking up the total time to 210 days after the first instance of default
Also, banks need to make higher provision in case the plan is not implemented in 210 days.
In summary, lenders involved in stressed power cases are likely to be the biggest beneficiaries – including SBI from the banks which has the largest exposure to these cases as they are now likely to see a near-zero impact upon resolution.
Other changes vs the earlier guidelines include applicability of this framework not only to borrowers with more than Rs20bn exposure to lenders, but even to those with exposure ranging from Rs15bn-20bn effective from 1st Jan’20
* Higher provisioning requirements:
While the earlier circular made it mandatory for lenders to take the borrower to the bankruptcy Courts if the resolution plan was not implemented in 270 days, the Courts ruled this ‘ultra vires’. Now, the amended rules mandate additional provisioning to be made by the lenders in case the resolution plan is not implemented within the stipulated 210 days – 20% after the 210 days and an additional 15% after another 155 days (i.e. an additional 35% after 365 days from day-1 of the default). This is in addition to the provisioning already made by the lenders or to be made per current IRAC norms (e.g. 15% on 90 day past due, etc). But, if the plan is subsequently implemented, this additional provisioning would be reversed, including in the event that the case is filed and admitted to the bankruptcy Courts.
We believe the major near-term impact of these amendments is likely to be felt mainly on the stressed power cases, which we have discussed in our recent report (Banking on power revival dated 6th Mar’19) where about 32GW out of the 42GW of stressed assets is likely to see resolution with an average recovery rate of about 63% (excluding the ~10GW of capacities that are likely to recover only liquidation value). Within our coverage universe, we expect SBI to be the biggest beneficiary given its 10% exposure to the power sector, 19% of which are estimated to be stressed. With its existing estimated 46% provisioning coverage on these assets, a 63% resolution rate would imply a near-zero impact on its equity hereon.
* Stock reaction expected on market opening is likely to be positive for banks as not only would the stressed power assets see quicker resolution, but also future resolution of stress cases would be more flexible for lenders without necessarily burdening the bankruptcy courts further.
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