NPA Ordinance: Angel Broking

Views of Mr. Siddharth Purohit (Sr. Equity Research Analyst- Banking, Angel Broking):

The incorporation of the Insolvency and Bankruptcy code (IBC) by the central Govt and RBI is a welcome move to address the bad asset menace. The ordinance shall give greater power's to RBI to direct banks in having a time bound mechanism to resolve the asset quality issues at the bank's end. Though definite guidelines are yet to be issued by RBI, the ambiguity remains on the quantum of hair cut (if any) desired to be undertaken on the asset sale or liquidation of the said asset as an alternate recourse. Albeit the overhang on the banking stocks shall be the excess provisioning required to be undertaken if deep hair cuts are taken on the stressed assets ( the kind of provisions undertaken by banks till date on these assets might be insufficient, if deep hair cuts are undertaken). The advantages of the implementation of the IBC are as follows:

1. A definite time frame to resolve insolvency cases
2. IBC shall consolidate existing laws like SARFAESI, SICA, and Recovery of Debt Due to banks and Financial Institutions Act
3. Bankers can pursue cases under the RBI/ Overseeing committee without facing undue fear of being questioned at a later date by investing agencies.
4. Any dissenting banker has to come on board and this will drive the efficacy in efficiently implementing the IBC

However, there are certain grey areas which still needs to be addressed, which are as follows:

1. Whether RBI will be part of the commercial making decision.
2. Are banks in state of health to take deep hair cut? If they are not will the onus of recognising the hair cut taken will be reflected on the bank's balance sheet or will the RBI provide some cushion in absorbing the excess stress.

Though the intent of the IBC is in right direction, implementation of the same in a time bound manner and in a cost effective way shall be deeply desired.

Source : Equity Bulls

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