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Slow outcome Moody's biggest concern with IBC: Alka Anbarasu

Alka Anbarasu, Moody’s-1200
Our big issue with the whole process is that with IBC -- whether the old circular or the new one -- the progress is slower than what we have anticipated so far. We have not seen the cleanup in the bank balance sheet take place as quickly as we were anticipating, said Alka Anbarasu, Vice President - Senior Credit Officer, Moody's, in an interview with ETNOW.

Edited excerpts:

The bankers seem to be lapping up the new RBI circular saying it is far more pragmatic, fare more realistic. Whichever you look at it, there are crores riding on this circular. What is this going to mean for one of the biggest pain points in Indian economy?
We have followed the circular and we think it is reinstating the spirit of February 12th circular which the Supreme Court struck down a few months ago. In spirit, we see that the circular has been reinstated and which is positive because the circular still requires banks to proactively plan a resolution. There are certain tweaks to the circular but in spirit, the focus is on timely resolution of assets and providing for those assets and build up of loan loss provisioning against those assets. The banks can take haircut whenever the resolution makes progress.

One of the points that is being celebrated about this circular is that the spirit seems to be the same. The Street considers it more pragmatic. What is your view on the circular being extended to NBFCs? Should it be considered a big positive?
Yes. We do see that extension of the circular to NBFCs is positive. Now when it comes to the NBFCs, let us split the situation into two aspects; one is the ongoing liquidity issues of some of the NBFCs which are very well known in the market and that is a different topic where we are seeing there is stress in the entire NBFC sector.

But what this circular is addressing is that NBFCs and particularly we are talking about large corporate assets here. We are talking about NBFCs which are involved in infrastructure financing or large corporate financing. Those NBFCs will need to confine within the banking norms as well when it comes to providing for those assets. Earlier, coming to large power sector assets, banks may have provided that asset at x percentage; NBFCs were following a different norm because they did not come under the same banking norms and that is where when it comes to all the lenders, at the same forum different lenders had different capacity to haircuts and that was also an impediment to the resolution process.

We think that extension of this circular to the NBFCs is positive because again the NBFCs are also a large lender to large corporates, infrastructure sector and this will align the objectives of all the lenders and bring them all on the same page as well.

There is also another view that you are going to see many more cases headed to the NCLT. The circular is talking about a timeline. How feasible is the entire process that has been laid down?
Procedurally, perhaps it is not a big departure from the earlier circular. This circular also says that IBC may not be the route for every single asset and so banks have the flexibility of determining the resolution approach. Having said that, in practice we would expect that banks would go down the IBC road because it offers more transparency.

Also having that IBC stick on the head means that the borrowers have to adhere to certain timelines. So from that perspective, procedurally we do not see that as a big departure while perhaps the semantics have changed. Having said that, our big issue with the whole process is that with IBC -- whether the old circular or the new one -- the progress is slower than what we have anticipated so far. And which means that we have not seen the cleanup in the bank balance sheet take place as we were anticipating.

Even under this circular, banks have their own discretion to go out and file cases with the IBC but there are still a number of legal loopholes and there are a number of legal issues cropping up which has delayed the resolution process. While there are some assets which are attractive and perhaps we need to find the optimum resolution, this whole delay or the slow process under IBC could mean that some of these assets may even lose value eventually if a resolution is not found in a timely manner.

And that is our big concern because everybody in the system -- whether it is the banks or the whole process around it, RBI, -- is focussed on ensuring that the assets get resolved but the outcome has been extremely slow.

Net-net Moody’s view seems to be this is credit positive but you still are concerned about the timeline which has perhaps always been strictly followed with the insolvency and bankruptcy code (IBC), but to be fair it is a new law and every case is turning out to be an acid test. In spirit it seems, a joint lender forum is back but it has been tweaked where it is carrying along everyone including small banks. Why should a smaller bank feel it is losing out just because its exposure is smaller? Do you think this is a positive development?
That is true. The circular maintains the spirit in terms of say 75% of the lenders aggregating by value need to agree on the resolution or 60% by number on table. Perhaps the circular has tried to address some of the issues that had cropped up so far in the process. It is bringing in operational creditors as well because we know that operational creditors have been one of the limiting factors for the resolution of one of the very large steel sector assets in the system.

From that perspective, the circular seems to be addressing aspects that have delayed the resolution of some of the larger known assets. If the circular was to be expanded to say that everybody on the table needs to agree to the outcome, then it can be very difficult to come to a resolution.

So from that perspective, we do see the circular is trying to balance out different stakeholders in the process but our main concern is we need to see the outcome and that is perhaps also in the interest of all lenders to go out, resolve the assets, perhaps take haircuts and then move on to something else. But right now, we see the banks are just saddled with the legacy NPLs which are very slowly moving out of their balance sheets.

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