RBI's dirty dozen list: Legal wrangle at NCLT cost banks Rs 25,000 crore, says report

It's been a year since the Reserve Bank of India announced the first list of 12 companies to be referred to the National Company Tribunal Law (NCLT).

Since then, only two among the so-called 'dirty dozen' have managed to find some success through the insolvency resolution proceedings - Electrosteel Steels and Bhushan Steel. But the winning bids for both these companies are also currently facing scrutiny of the National Company Law Appellate Tribunal (NCLAT). All these stretched-out court battles have reportedly cost banks a whopping Rs 25,000 crore, and counting.

According to the Hindu Business Line, NCLT's only success stories so far have seen banks taking a significant hair-cut and settling for recovery of Rs 50,000 crore.

In the case of Electrosteel, which was acquired by Vedanta for Rs 5,320 crore, lenders with an exposure to this account took a haircut of 60 per cent. With Tata Steel's acquisition of Bhushan Steel, lenders had to write-off 37 per cent of the total loan amount.

Given that the 'dirty dozen' reportedly boasted a debt pile of Rs 2.5 lakh crore, even if we assume that the NCLAT will eventually dismiss the petitions challenging the winning bids, the banking sector is still left with bad loans worth Rs 2 lakh crore. The daily added that the interest chargeable on this debt pile works out to Rs 25,000 crore.

Citing a banker, the report said that the figure would have been much higher had the loss of interest on the loans of Bhushan Steel and Electrosteel during the moratorium period was also included - the Insolvency and Bankruptcy Code (IBC) allows  a window of 270 days to resolve a case.

In fact, the levy on NPAs reportedly comes to a halt once the NCLT accepts a case.

The source added that lenders are losing about Rs 15 crore of interest income per day in the case of Essar Steel alone, and the bill will keep mounting with no early resolution in sight. According to him, before the companies on RBI's first list were referred for insolvency, banks were getting a huge chunk of their revenue as settlement for loan outstanding.

That apart, the uptick in steel demand in recent times would have helped the lenders - according to a latest ICRA note, seel consumption grew by around 6 per cent during FY2018 and is likely to grow between 5-6 per cent in FY2019.

Due to the upturn in the steel cycle, experts had already predicted maximum recovery happening in the steel sector. But the interest in the other sectors has been rather muted - the stressed assets in the infrastructure and power sectors, for instance, have seen little interest among buyers.

Moreover, the bids that potential buyers are making for these bankrupt companies envisage banks taking a huge haircut of 60-90 per cent. Worse, as Businesstoday.In has previously pointed out, most of the companies that have been referred to the NCLT to date are headed straight for insolvency, which means that the assets are likely to fetch meagre amounts, if anything at all.

That's not all. Banks have to also stay braced to take a further revenue hit from the 28 companies identified for insolvency resolution in the RBI's second list sent to banks last August. These companies together have a loan outstanding of around Rs 2 lakh crore. According to the report, the interest moratorium will start once NCLT accepts the cases and, with no time-bound resolution in sight, banks will continue to lose revenue there.

Meanwhile, the bad loan problem continues to snowball in the sector. Only two public sector banks (PSBs) reported a net profit in the year ended March 31 - Vijaya Bank and Indian Bank. The remaining 19 state-owned banks collectively posted a net loss of over Rs 87,583 crore. In other words, these banks ran up a loss of almost Rs 10 crore per hour during the last fiscal.

In a written answer to the Rajya Sabha in end-March, Minister of State for Finance Shiv Pratap Shukla had admitted that the PSBs had collectively written-off over Rs 1,154 crore in NPAs in the last fiscal till December 31. As per the PSB data that he submitted, that's a 103 per cent jump from the amount written off in 2016-17 and a scary 519 per cent higher than 2015-16.