Global brokerages positive on revised RBI circular on NPAs, say welcome move for banks

The June 7 circular by the RBI on the Prudential framework for the Resolution of stressed assets aims at providing a framework for early recognition, reporting and time-bound resolution of stressed assets and will be applicable to not just banks but also NBFCs and other financial institutions with immediate effect said BofAML in a report. Here's what brokerage expect from the new circular:

The RBI offers leeway to banks and the onus of resolutions is now on them. The new framework addresses banks’ concerns by giving four concessions. There is no rule-based reference to NCLT. The central bank gave an extra 30 days that is a total of 210 days for implementing resolution plans.

It will be a tad easier for norms for loan upgrades. The new norms may address the risk of NCLT references to Rs 1.5-2 lakh crore of loans. The brokerage prefers private corporate banks like ICICI Bank, IndusInd Bank, and among PSUs, it prefers SBI.

The new NPA norms are likely to provide flexibility in the resolution process. Deutsche Bank expects some pick-up in the pace of resolution. Overall, it is positive for banks. It could provide some relief to power companies. The new norms should help in expediting resolution for power sector lending.

Most changes to the resolution process for stressed assets are practical. The changes rightly incentivise banks to find a time-bound resolution. RBI has mandated additional provisions of 20-35 percent if lenders do not find a resolution plan. The resolution would need a nod of 75 percent of lenders by value or 60 percent by the number of lenders.

The revised framework eliminates the stringent rule of one-day default. Nomura prefers corporate banks as the credit cycle is peaking for larger corporate banks. The corporate banks have limited exposure to recently stressed names in NBFC/infra space.

BofAML welcomes RBI Governor Das's circular on managing stress assets that support lending rate cuts by rationalizing the Bankruptcy Code. This replaces February 12, 2018, circular that was struck down by the Supreme Court. This circular is far more practical in providing creditors with the choice between resolution with the borrower or referral to the NCLT for auction, he added.

They continue to expect bank lending rates to come off by 50bp by March to aid recovery. After all, the RBI should cut another 50bp by March to pull down yields further. RBI will also likely continue to infuse $2-3 billion of durable liquidity in the April-September 'slack' season to ensure liquidity in the October-March 'busy' season.