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The Bad Loan Burden Just Got Heavier
Tue, 27 Jun Pre-Open

Banks are fearing the worst after the Reserve Bank of India (RBI) announced its new guidelines aimed at tackling the growing non-performing asset (NPA) problem. According to the new guidelines, banks need to set aside 50% of the loan amount as provisioning for all the cases that it refers to the National Company Law Tribunal (NCLT).

The NCLT was formed in order to provide a quick resolution to the NPA problem. Under the NCLT, there is a 180-day timeline with a 90 day extension to finalise a plan to resolve the bad debt issue. In case the company and banks are unable to arrive at a solution, the company will go into liquidation. In the past few days, 12 large corporate loan accounts were referred to the NCLT.

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But what is alarming is that this may just be the tip of the iceberg.

In the recent 5 Minute WrapUp, Taha had mentioned how companies are struggling to pay their interest costs:

  • "Business Standard highlights that based on its sample of 761 frontline companies that constitute the major indices, companies that couldn't even make enough operating profits to cover their interest costs is up significantly in FY17. While this number averaged 68 in the four years until FY16, it's up to 85 companies in FY17.

    These 85 companies racked up an interest bill of Rs 600 billion in FY17. To cover this, their operating profits were just Rs 120 billion! Woefully inadequate by all measures.

    Mind you, that's before even subtracting depreciation costs - a non-cash but nonetheless very real cost for companies.

    This is serious stuff. Being able to pay interests costs is as basic as it gets for a company. If it can't, things can get very nasty very fast."

As per finance minister, 81 companies had been referred to the bankruptcy courts.

With the higher provisioning norms for cases referred to NCLT, the earnings of banks are likely to be constrained further.

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Jan 19, 2018 (Close)