The global credit rating agency Moody's Investors Service in its latest report has said that the Reserve Bank of India’s (RBI) plans to resolve 12 large bank loan accounts, which account for 25% of the banking system's non-performing assets (NPA), is credit positive for the banks as any meaningful resolution will improve their overall asset quality. It will also set a precedent for resolving non-performing loans from smaller borrowers.
The rating agency further said that given the strict timeline under the Insolvency and Bankruptcy Code (IBC) of 180 days, which is further extendable to 270 days, after which a company will be liquidated, resolution process will get accelerate and help in loan recoveries. However, the strict timelines may force some companies into liquidation and may have a negative effect on banks, particularly in cases where little collateral is available.
According to Moody's, though the RBI has not yet provided details of the provisioning norms, the directive is expected to 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
