Deputy Governor Viral Acharya on Friday confirmed the Reserve Bank has asked banks to set aside 50 per cent provisions for accounts being resolved through the insolvency law, and termed the same as ‘very reasonable’".
“I think it is better to mark the books ahead of time, I think 50 per cent is a very reasonable level of provisioning given...The historical record,” Acharya told reporters here. “I think the provisions are very reasonable based on any historical recovery rates that banks even on secured debt have typically earned in out system,” he added. The deputy governor incharge of monetary policy making said till now, the banks have neglected the crucial aspect of provisions against the expected losses which have resulted in lack of success in earlier resolution attempts.
“If you think about the CDR (corporate debt restructuring) scheme or the SDR (strategic debt restructuring) scheme, they have been primarily used to not provision for these assets rather than to actually resolve the underlying assets,” Acharya explained.
“In my opinion, going about the same way, again the third time will not be appropriate,” the academic-turned- central banker said. Media reports earlier this month had said that the banks have been asked to set aside 50 per cent as provisions on the 12 identified accounts to be dealt with under the provisions of the insolvency and bankruptcy code (IBC). The RBI had not come out with a notification on the provisions aspect after declaring the names of the accounts to resolved.
Some estimates had pegged the total provision to be made against the exposures at Rs 40,000 crore, which had led to investor anxiety which was seen in correction in banking stocks.
Country's largest lender SBI said that it does not expect a huge hit on the bottomlines, while third largest from the private space, Axis Bank, came out with details of exposures and provisions made to drive the point of it being guarded adequately. The largest 12 accounts named by RBI are Bhushan Steel, lanco Infra, Essar Steel, Bhushan Power, Alok Industries, Amtek Auto, Monnet Ispat, Electrosteel Steels, Era Infra, Jaypaee Infratech, ABG Shipyard, and Jyoti Structures. These companies together owe more than Rs 2 trillion to banks.