Here Is What Moody’s has to Say Regarding RBI’s Move on Insolvency Proceedings

Moody’s Investors Service 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.

The Reserve Bank last week said it has identified 12 large loan defaulters who account for 25 per cent of the total NPAs or bad loans in the banking sector and will be referred to the banks concerned for filing insolvency proceedings. These cases will be accorded priority by the National Company Law Tribunal (NCLT).

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,” Moody’s said in a report. Moody’s estimated that state-owned banks will need up to Rs 95,000crore of equity capital through 2019. The capital requirement is much higher than Rs 20,000crore budgeted by the government towards capital infusion until March 2019.

“Given the strict timelines to resolve a case under the IBC within a maximum period of 270 days, after which a company will be automatically liquidated, we expect that this directive will significantly expedite the resolution process and will help in loan recoveries,” Moody’s said.

The US-based credit rating agency estimates that some of these 12 accounts relate to borrowers in the steel, power and other infrastructure sectors such as engineering, procurement and construction contractors.

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