RBI's NPA resolution move is credit positive, Moody's says

The insolvency and bankruptcy process in India

RBI's move on NPA resolution credit-positive for banks: Moody's

Moody's Investors Service today said the initiation of insolvency proceedings on 12 large loan defaulters is credit positive for Indian banks as it will improve their overall asset quality.

In a bid to crack down on defaulters, an independent advisory committee commissioned by the Reserve Bank of India (RBI) has made a decision to refer 12 companies, who have been identified as the top defaulters, to the insolvency and bankruptcy proceedings. While, on receiving the names of these 12 defaulters, the lead bank in the joint lender forums (JLFs) will further forward the case to the National Companies Law Tribunal (NCLT).

"Additionally, it also will set a precedent for resolving non-performing loans from smaller borrowers", Moody's said.

"We expect that the directive will negatively affect banks' profitability over the next year if they need to take large write-downs relative to their existing loan-loss reserves for those assets".

"This also will accentuate the capital needs of weaker public sector banks, which may require a large capital infusion from the Indian government", it said. Under the Indradhanush plan for bank recapitalisation, government is infusing Rs 70,000 crore in PSU banks beginning 2015.

The RBI has asked banks to also review other NPAs and finalise a resolution plan in six months.

Moody's said the effectiveness under the IBC will be limited because once a resolution is initiated, control of the company shifts from existing management to insolvency professionals, though the management team in some cases will continue to play a role in preserving day-to-day operations.

Companies in sectors like steel, power, infrastructure, telecom, etc are the highest borrowers in India that constitute a major chunk of these NPAs or bad loans.

This is published unedited from the PTI feed.

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