Resolving Bad Loans To Cost Banks About 18,000 Crore, Hurt Margins, Says Report

Since the Reserve Bank of India identified 12 of the largest loan defaulters in June, the government has given the central bank power to direct lenders to initiate bankruptcy proceedings against those with loan defaults. The process - being carried out under the Insolvency and Bankruptcy Code (IBC) enacted in 2016 - is expected to break the deadlock between the creditors and loan defaulters. However Indian banks which were the primary lenders for a majority of these loans may need to provide a bare minimum Rs 18,000 crore additionally towards the 12 accounts which could eat into the banks' profits by around 25 per cent in FY18, India Ratings and Research (Ind-Ra) said.

The agency also warned that the additional provision burden could add disproportionate pressure on the profit and loss accounts of a few mid-size public sector banks as the RBI has mandated that the banks would need to make provision for up to 50 percent of the amount of soured loans.

According to Ind-Ra, provisioning for bad loans is the highest in the iron and steel sector, contributing around Rs 10,500 crore out of the Rs 18,000 crore of provisioning. This is because of the deep entrenchment of stress in the sector, low capacity utilisation and high expected ultimate haircuts, the study said. The infrastructure sector came in second with required provisions of Rs 4,100 crore.