BS: Covid-19 related provisioning knocks off 45% of top private banks’ profits

31 May 2020: A look at Q4FY20 numbers of top private-sector banks such as HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank, shows that Covid-19 related provisioning has dented their profits.

On a cumulative basis, Covid-19-related provisioning at Rs 8,678 crore has shaved off 45 per cent of their pre-tax profit. In other words, had these banks not made the provisions, their combined reported pre-tax profit of Rs 10,792 crore would have stood at Rs 19,740 crore.

Due to a likely deterioration in borrowers’ credit profile, banks were mandated to make provisions in Q4. The Reserve Bank of India (RBI) had earlier announced a 3-month moratorium for repayments due between March to May (now extended to August) and had asked banks to provide at least 10 per cent for such accounts, which were overdue as of March 1, 2020 and have availed moratorium.

Many of these banks have made a higher provisioning based on their own assessment of the impact due to the moratorium following the Covid-19 outbreak and subsequent lockdown. According to data, Axis Bank and ICICI Bank consumed 37-59 per cent of their operating profit for Covid-19 provisioning, while the figure is 24 per cent in case of Kotak Mahindra Bank and 10-12 per cent for IndusInd Bank and HDFC Bank. As a proportion of advances, the Covid-19 provisioning of these lenders stood at 14-61 basis points in Q4.

“Banks have taken prudent step by making provisioning towards Covid-19, which had sharp impact on their bottom-line,” said Anil Gupta, head of financial sector ratings at ICRA. He, however, believes that the provisioning pain would remain elevated in the coming quarters and its impact on banks’ earnings could widen. This is due to uncertainty on the stress that could emerge because of the lockdown’s impact on borrowers’ ability to repay loans as well as the moratorium by the regulator. Banks’ loan book under the moratorium is expected to grow in the coming quarters, as borrowers may choose to conserve liquidity (cash) amid rising uncertainties.

Prakash Aggarwal, head-financial sector ratings, at India Ratings, shares a similar view. According to him, “While the proactive provisioning by banks is in the right direction, more will be needed given the way the pandemic is moving and the extension of the moratorium.”

Analysts at Edelweiss estimate that banks like Axis Bank, Kotak Mahindra Bank and ICICI Bank have 25-30 per cent of their loan book under the moratorium.

In the present situation, when income levels of individuals are getting impacted, either through salary cuts, or job losses, and a rating downgrade of key industries/companies is likely, concerns on asset quality are justifiable.

Credit Suisse also recently increased its credit cost estimates by 20-60 per cent for banks, due to lockdown and moratorium extension.

The silver lining, however, is that private banks have higher and relatively better provision coverage ratio, say experts. The foreign brokerage estimates that Indian banks would need to raise $20 billion in the next 12 months, of which $13 billion would be required by public-sector banks.

Against this backdrop, the position of public-sector banks’ moratorium book, provisioning for Covid-19 stress and management commentary would be critical.

Source: Business Standard

FE: McLeod Russel urges NCLT to quash ‘status quo’ order

19 September 2019: Debt-laden McLeod Russel on Wednesday urged the Kolkata-bench of the National Company Law Tribunal (NCLT) not to continue the interim order of “status quo” against its assets as it has very “serious repercussion” and negative “ramifications” for the operations of the bulk tea producer.

On September 3, the NCLT Kolkata bench passed an interim order of status quo of assets of the Kolkata-based company – once the biggest bulk tea producer in the world – as disclosed in the financial statement for the year ending March 31, 2019, till the next date of hearing.

The order was passed after one of the company’s financial creditors, Techno Electric & Engineering, apprehended disposal of the assets of the corporate debtor (McLeod) for defeating its interest.

Earlier, Techno Electric filed a petition for Corporate Insolvency Resolution Process (CIRP) before the tribunal under Section 7 of the IBC against the tea maker after it had defaulted on repayments of Rs 100-crore loan. “The documents referred to us add strength to the apprehension on the side of the applicant that if an ad interim order is not passed, there is every chance of removal of the assets of the CD (corporate debtor) for defeating the very purpose of (CIRP) resolution if any passed in favour of the applicant,” a two-member bench of Justices Jinan KR and Harish Chander Suri observed while passing the interim order.

On Wednesday, in his submission before the bench, Joy Saha, the counsel for McLeod Russel, said: “My entire line of credit will dry up because of this order. I am not able to pay the wages to around 65,000 workers of our tea gardens. It will have a catastrophic effect on the operations of the respondent company and likely to cause unrest amongst the workers. So far, as the interim order of injunction is concerned, this has very serious repercussion.”

According to Saha, each of the assets over which Techno Electric has asked for injunction are already mortgaged in favour of the banks. Stating that banks were considering a restructuring of loans proposal, Saha said, “All the banks, in common words, have been chastising me because I have not been defended the claim of an unsecured creditor.”

According to the latest annual report of McLeod Russel, part of the Williamson Magor Group, its financial creditors are ICICI Bank, HDFC Bank, State Bank of India, Yes Bank, RBL Bank, Axis Bank, Allahabad Bank, Uco Bank and United Bank of India.

The counsel for the tea company contended that the operational creditor now has taken the driver seat, while the banks, which are the the secured creditors and want to enter into loan restructuring agreement, are now “languishing in the background”.

“If an asset be mortgaged, can it be sold?” asked Saha, adding that as the assets were already mortgaged, the operational creditor would not need further protection from the tribunal. Saha urged the bench not to continue the interim order of ‘status quo’ against the company’s assets.

In his counter-argument, seeking continuation of status quo against McLeod’s assets, Techno Electric & Engineering’s counsel Ratnanko Banerjee said: “In one year, the corporate debtor sold Rs 500 crore worth of assets, even assets were mortgaged. For the purpose of the insolvency resolution process, their assets have to be preserved. I have expressed apprehensions that they will sell their assets, that is why the injunction is required.”

Banerjee allegedly said the Williamson Magor Group had siphoned off money from one group company to other group company. “This is a case for a forensic audit when the time comes,” he added.

Hearing the argument and counter argument, Justice Jinan KR said the bench was “only concerned” about whether the interim order required a ‘modification’ or not. “We are not going to confirm the order, we are not going to set aside the order,” he averred.

The Financial Express reported

ET: Lanco Thermal Power gets financial claims worth Rs 24,000 crore

20 August 2019: Lanco Thermal Power, the holding company for investments in thermal power plants by Lanco Group, has received financial claims of Rs 24,000 crore, said two people with direct knowledge of the matter.

Among the 15-20 lenders to the company are Andhra Bank, ICICI Bank, Axis Bank, Canara Bank, and IDBI Bank, sources said. The NCLT’s Hyderabad chapter admitted the case for insolvency proceedings on May 9 this year. Andhra Bank moved the petition under the Insolvency and Bankruptcy Code.

Parveen Bansal, designated partner of Delhi-based AAA Insolvency Professionals LLP, was appointed the resolution professional. Bansal confirmed the quantum of financial claims to ET. Emails sent to individual lenders remained unanswered. Axis Bank declined to comment.

About 99% of the claims have been submitted by banks/financial institutions marked as indirect lenders, which extended loans to holding, subsidiary and associate companies. Most of these companies are undergoing insolvency process or are under liquidation. Direct lenders, with 1% of the claims, loaned funds to the holding company.

“The corporate debtor secured these loans by extending corporate guarantee or by pledge of share investments,” an executive linked to the resolution process said. Lanco Thermal Power also invested in a 10MW hydel plant located in Himachal Pradesh.

With no single bidder officially submitting any interest to buy all the assets, lenders may have to wait for liquidation to receive their dues. Bids were sought on July 24. “Preliminary interest has been shown by investors for submission of expression of interest. Nothing can be said at this stage about their seriousness for investments,” Bansal told ET.

The Economic Times reported

BQ: IBC: Axis Bank Joins SBI To Protest NCLAT Order On Essar Steel

11 July 2019: Private sector lender Axis Bank Ltd. also joined State Bank of India by going public with its displeasure on the recent National Company Law Appellate Tribunal judgement putting secured creditors at par with the operational creditors.

SBI chairman Rajnish Kumar had Wednesday gone public with his anguish on the same order of the NCLAT awarding higher payout to Essar Steel’s operational creditors and treating them on par with secured lenders and said the banks would challenge the order at the Supreme Court.

“The NCLAT order does beg the question if this is how the proceeds will be shared, then secured creditors will ask why is the need to go to the IBC and not wait for liquidation,” Axis Banks managing director and chief Amitabh Chaudhry told reporters.

He said it is still unclear on what is the formula which was adopted by the NCLAT while approving ArcelorMittal’s Rs 42,000-crore bid for the bankrupt flagship company of the Ruias-led Essar Group, which gave operational creditors equal status as the secured lenders.

Chaudhry said the banks will exercise their right of taking the matter to the Supreme Court and hoped clarity can emerge in the matter from the apex court.

The appellate tribunal said secured creditors would get only 60.7 percent of their Rs 49,473 crore claims as it ordered the rest of the money to be paid to operational creditors, treating them at par with the financial creditors.

“What has happened here is that secured, unsecured and operational creditors have been ranked equal,” Axis Bank’s chief of corporate lending Rajiv Anand said.

Drawing from the statutes, including the provisions in the Companies Act, SBI’s Kumar had pointed out that there was a distinction between secured and operational creditors, and that the former had a greater right on an asset at par with the employees of company facing bankruptcy resolution.

“If secured creditors are given the same treatment as operational creditors, then it is a huge disincentive for secured creditors and an incentive for operational creditors,” Kumar had said.

He also warned that with this ruling, bankers would be hesitant to use the IBC provisions for resolving bad assets till such a time that the principles of the law were clearly laid out and hoped that the Supreme Court would clarify the same once they challenge the Essar Steel order by the NCLAT.

BloombergQuint reported

BS: Two-thirds of lenders have voted for Dhanuka Laboratories’ resolution

11 June 2019: More than two-thirds of the lenders of Chennai-based Orchid Pharma are believed to have voted in favour of the resolution plan of Gurugram-based Dhanuka Laboratories, leading its bid to reach the National Company Law Tribunal (NCLT) for further proceedings, sources said. The banks are expecting a haircut of 35-40 per cent.

The resolution plan of Dhanuka Laboratories, among the three bidders, was discussed by the Committee of Creditors (CoC) and it was later taken to the banks for further decision-making. The voting by the lenders started on June 7 and ended on Tuesday. A banker, close to the development, said the plan has been approved with 67.7 per cent votes. According to an earlier disclosure by the company, if 66 per cent of the CoC votes are in favour of the highest bidder, it will be submitted to the NCLT for approval.

However, the highest bid this time would see a larger haircut compared to the bid the previous successful bidder Ingen Capital has submitted for Rs 1,490 crore. 

The quote is less than Rs 1,000 crore this time and is below the liquidation value. Another banker, who has an exposure to the company, has said while the final voting figures would be known only on Wednesday, they are expecting a haircut of 35-40 per cent. 

It may be noted, the banks have already agreed for a haircut when US-based Ingen Capital’s bid was approved. A consortium of 24 banks has lent a total of Rs 3,200 crore to the drug maker, said company sources earlier. The resolution professional might submit the lenders’ vote on a prospective plan with the National Company Law Tribunal on June 13. Lenders include State Bank of India, Union Bank of India, Allahabad Bank, IDBI Bank, Indian Bank, Axis Bank, Canara Bank, Kotak Mahindra Bank, Indian Overseas Bank, City Union Bank among others.

Three pharmaceutical companies —Dhanuka Laboratories, Chennai-based Accord Life Spec and Hyderabad-based Covalent Laboratories — were in the fray in this second-time resolution process. Dhanuka Laboratories is a prominent manufacturer and exporter of Oral cephalosporin APIs.

Orchid Pharma is in its second attempt to find a resolution plan under the corporate insolvency resolution process, as the previous resolution plan by Ingen Capital was annulled by the NCLT.

The Business Standard reported

ET: Goldman Sachs and SSG in talks to buy RattanIndia bad loans

5 June 2019: Goldman Sachs Group Inc and Asian distressed credit specialist SSG Capital Management are in separate talks to buy about Rs 2,500-3,500 crore worth of bad loans at RattanIndia Power, where lenders are planning to sell a part of their exposure to the debt-laden energy firm in the current round of negotiations.

In September last year, state-run Power Finance Corp (PFC) filed an insolvency plea against Rattan India Power, formerly known as Indiabulls Power, to recover unpaid dues. The company has defaulted on about Rs 20,000 crore of loans. Besides PFC, lenders to Rattan India include State Bank of India, Bank of India, Axis Bank, Bank of Baroda, and IDBI Bank.

There are other contenders for the portfolio besides the two private-equity financiers, two finance industry executives aware of the talks told ET.

“We are negotiating and hope to see some portion of the debt taken over,” said one of the persons cited above. “This would be big relief to the lenders as they are struggling to find a solution for such cases in the energy space.”

Goldman Sachs, SSG and RattanIndia Power didn’t respond to ET’s mailed queries until the publication of this report.

RattanIndia has two under-construction thermal power plants at Nashik and Amravati in Maharashtra.

Financing of power assets and recovery of loans stuck in these projects have become rather challenging after the Supreme Court struck down a crucial central bank order, which had given defaulting companies 180 days to concur on a resolution plan with lenders or face bankruptcy courts for unpaid debt of at least Rs 2,000 crore.

Goldman Sachs has been active of late in India’s special situations space. ET reported on May 29 that Goldman is in talks to buy up to Rs 2,000 crore exposure of the Piramal Group in real-estate firm Lodha Developers, which builds top-end properties in Mumbai and downtown London.

Founded in 2009 by Edwin Wong, Andreas Vourloumis and Shyam Maheshwari, former top Lehman Brothers bankers, SSG manages more than $2 billion across Asia. The firm focuses on assets in China, India and Southeast Asia. SSG is seeking to raise another $2 billion special situations fund to invest across its focused territories in Asia.

Private equity funds and special situation credit specialists are scanning the Indian landscape to buy into one of the world’s largest distressed debt markets. India’s banking sector, dominated by state-run lenders, is seeking to extricate about $210billion stuck in bad loans, the central bank’s recent estimates showed.

“New asset classes, such as Alternative Investment Funds and distressed-asset management, have increasingly gained traction in the Indian market, aided by government regulations and tax breaks,” Bain & Co said in its India Private Equity Report in May.

The Economic Times reported

LM: Ratings downgrade of ICICI Bank, Axis Bank reflects impatience in investors

5 June 2019: ICICI Bank and Axis Bank both found their rating for foreign issuances downgraded to so-called junk rating or below investment rating earlier this week by Fitch.

Fitch’s reason: The operating environment doesn’t warrant a bbb- rating for these lenders. Both these lenders now carry the rating bb+ on their foreign currency issuances and depository receipts. Other ratings pertaining to domestic issuances are unchanged.

The problem for the lenders arising out of these downgrades is that cost of borrowing overseas goes up. Indeed, Bloomberg shows that the yield on both ICICI Bank and Axis Bank’s dollar bond rose in international trade after the downgrades.

But the rise was marginal largely because Fitch’s reasons for downgrade have already been largely factored in by the markets.

Fitch’s argument is that there seems to be no resolution in sight for assets stuck in insolvency proceedings and bad loans outside courts as well. Considering the slowing economy of India, resolution for banks is going to be tricky.

This means that further additions to bad loans cannot be ruled out which in turn has implications for capital and profitability.

“Indian banks are looking at a tough year ahead as resolution is slow. These are known facts but FY19 has been a good year for some of them. A downgrade now sends a wrong signal,” said an analyst from a global brokerage firm requesting anonymity.

To be sure, analysts believe that the rating agency’s move is unfair as lenders have reported improvement in their metrics in FY19.

Both ICICI Bank and Axis Bank reported a notable improvement in asset quality compared with their peers.

That said, Fitch’s downgrade is a wake up call for Indian policymakers and lenders.

Foreign capital is impatient and to keep attracting it, it is not just necessary to fix the banking sector but to fix it quickly.

For that to happen, insolvency resolutions should pick up pace and recoveries should increase. Most large corporate lenders have shown encouraging signs in recoveries but their write-offs too are high. In other words, lenders are simply writing off loans after providing for them through capital instead of getting their money back from errant borrowers.

As for rating agencies, analysts believe that Fitch’s move may not hurt the private lenders but if other rating agencies follow, banks would find themselves in a bind for raising capital.

The LiveMint reported

ET: Five power producers prepare to oppose insolvency proceedings

10 April 2019: Five major stressed power producers are preparing to oppose insolvency proceedings on the grounds that lenders filed petitions against them as per a central bank circular on debt resolution that was recently quashed by the apex court, people familiar with the plans said.

The five power projects of Lanco Amarkantak, Avantha Power, KSK Mahanadi, Rattan India Power (Amravati project) and Rattan India Nashik Power (formerly Indiabulls) account for over Rs 50,000 crore of unpaid dues. Power Finance Corporation and Axis Bank filed the insolvency petitions in the five projects, though all major lenders are part of the consortia that provided the loans.

Lanco Amarkantak, which owns a 1,920 MW project in Madhya Pradesh, sought time from the National Company Law Tribunal on Wednesday to provide documents to support its contention that Axis Bank had initiated insolvency proceedings against it under the now-defunct RBI circular on stressed assets, the people said.

KSK Mahanadi, an operational project for which the Adani Group had bid and later backed out, cited the apex court ruling at the NCLT on Monday to argue its case for withdrawal from insolvency proceedings. Power Finance Corporation had initiated the insolvency proceedings in this case.

Avantha Power’s Jhabua project has also made a similar contention in the National Company Law Appellate Tribunal (NCLAT). Rattan India Power and Rattan India Nashik are likely to follow suit shortly.

The Supreme Court ruled on April 2 that the Reserve Bank of India’s circular of February 12, 2018, on the resolution of stressed assets was ultra vires, or beyond the scope of its legal authority. In its circular, the RBI called on lenders to identify assets “immediately on default,” starting with loans on which any amount was due from one to 30 days, and provided a six-month window to resolve the default or take the borrower to insolvency proceedings.

However, lenders are of the view that there is no scope for any restructuring in these projects and invoking corporate insolvency is the only way forward.

“We are awaiting fresh guidelines from the central bank on resolution of stressed assets, but in cases where there is no other way out, we will file an affidavit in court stating that they need to be resolved through the Insolvency and Bankruptcy Code,” said a senior executive with Power Finance Corporation.

He cited Rattan India’s Amravati project, where a one-time settlement offer was worked out, but the investor who had initially offered Rs 600 crore didn’t turn up later.

“In case of Avantha Power (Jhabua), already one of the operational creditors has approached the Kolkata bench of NCLT. So there is no going back on that as well,” he added.

Mails sent to Lanco group, Avantha, KSK Energy and Rattan India went unanswered.

“As a matter of policy, Axis Bank does not comment on client-specific matters,” a spokesperson said in response to ET’s queries.

The power producers have argued that their projects suffered from time and cost overruns and lack of adequate power purchase agreements with distribution companies as well as fuel supply issues. They sought government assistance to bail out the projects.

“In the light of the Supreme Court order, the RBI will take necessary steps, including issuance of revised circular as may be necessary for expeditious and effective resolution of stressed assets,” central bank governor Shaktikanta Das said on April 4.

A senior bank executive said state-run lenders will not be keen to go for further restructuring unless there is some government support, as in the case of Jet Airways. “Who will take that risk and be open to undue vigilance investigation? Going through NCLT is a clean and court-approved process,” he added.

The Economic Times reported

ET: Plea against Valecha unit for Rs 105-cr default

8 April 2019: The dedicated bankruptcy court has admitted an insolvency plea filed by India’s third largest private sector lender Axis Bank against Valecha LM Toll, a subsidiary of infrastructure firm Valecha Engineering, for defaulting on about Rs 105-crore loans.

Axis Bank had given term loans of Rs 100 crore to the company in November 2010. However, the company was declared a Non Performing Asset (NPA) in November 2016.

“The lender has annexed the annual report for the year ending March 2017 to show that liability has been admitted by the company and to show that the erosion of substantial net worth raises doubt about the company’s ability to continue as a going concern,” said the NCLT bench presided over by VP Singh and Ravikumar Duraisamy.

The tribunal has also appointed Udayraj Patwardhan as interim resolution professional (IRP) for the resolution of the company.

“During one of the hearings, the corporate debtor stated that it does not oppose the admission of the petition,” observed the tribunal in its order.

Valecha LM Toll is primarily a road infrastructure company that works on the ‘build, operate and transfer’ (BOT) model.

To reduce debt, the Mumbai-based civil engineering firm Valecha Engineering had decided in 2014 to sell its three road assets Valecha LM Toll to US-based New Generation Infrastructure Inc, a subsidiary of New Generation Holdings Inc, for Rs 309 crore ($50.3 million), said a stock market disclosure.

The Economic Times reported

BT: Jaypee Infratech lenders ask NBCC, Suraksha Group to sweeten takeover bids

14 March 2019: Lenders of debt-ridden Jaypee Infratech on Thursday asked state-owned NBCC Ltd and Suraksha Group to sweeten their offers for acquiring the bankruptcy-bound realty firm, sources said.

NBCC, which has the backing of the government to takeover Jaypee Infratech, is unlikely to increase the offer of Rs 500 crore capital infusion but is ready to help lenders in monetisation of the Yamuna Expressway and the land offered by the PSU in its resolution plan, they said.

In a meeting with lenders, the state-owned firm even proposed that it was ready to work as project management consultant and charge fees for completing the stalled projects, while lenders could keep control of Jaypee Infratech, the sources said.

A meeting of the Committee of Creditors (CoC) was held to discuss resolution plans submitted by NBCC and Suraksha Group. The CoC will soon formally write to both the bidders to submit revised bids based on the discussions held.

In the meeting, NBCC submitted that the company would complete and deliver stalled projects to homebuyers in three years instead of the earlier promise of four to five years, sources said.

In its resolution plan submitted last month, NBCC offered 1,400 acre land worth Rs 6,000 crore as well as Yamuna Expressway to lenders.

It proposed that banks should raise about Rs 2,000 crore against the expressway and provide half of the amount (Rs 1,000 crore) to the state-owned company, which would utilise the fund as an upfront payment.

NBCC has offered to fund the gap of about Rs 1,500 crore between estimated construction cost and receivables from customers.

In contrast, Suraksha Group made an offer of about Rs 20 crore as an upfront payment and land worth Rs 5,000 crore, sources said. The Mumbai-based group promised to complete the pending projects in three years.

The National Company Law Tribunal (NCLT) in 2017 admitted the application of a consortium led by IDBI Bank seeking resolution of Jaypee Infratech under the insolvency law.

Anuj Jain as the Insolvency Resolution Professional (IRP) to manage the company’s business and invite bids from investors.

In the first attempt under the insolvency process, lenders had rejected the Rs 7,350 crore bid of Lakshdeep, part of Suraksha Group, as they found it to be substantially lower than the company’s net worth and assets.

Therefore, the IRP in October 2018 started a fresh initiative to revive Jaypee Infratech on the NCLT’s direction.

Sources had earlier said the settlement proposal of promoter Jaypee group would not be taken up in the CoC meet but lenders could deliberate on it separately.

For the second time in less than a year, Jaiprakash Associates Ltd (JAL) has sought to retain control of its cash-strapped subsidiary. The latest offer is almost similar to what JAL offered last year to the lenders and homebuyers.

In April last year, JAL made an unsolicited offer of about Rs 10,000 crore to settle the dues of Jaypee Infratech. It had offered 2,000 equity shares each to the buyers.

The realty firm has an outstanding debt of nearly Rs 9,800 crore, of which Rs 4,334 crore pertains to IDBI Bank. Other lenders are IIFCL, LIC, SBI, Corporation Bank, Syndicate Bank, Bank Of Maharashtra, ICICI Bank, Union Bank, IFCI, J&K Bank, Axis Bank and Srei Equipment Finance.

Jaypee Infratech is developing about 32,000 flats, of which it has delivered 9,500 units. JAL had deposited Rs 750 crore in the registry of the Supreme Court for refund to buyers. However, this amount was transferred to the NCLT as per an order of the apex court.

Business Today reported