India Banks:India’s bankruptcy law,Miles to go before we reap

In this report we outline the resolution process under the new Bankruptcy Law, theprogress it has made so far, potential uncertainties it faces and the impact it can haveon banks. We also provide some historical perspective on past measures and whythey were unsuccessful.

    The IBC (The Insolvency and Bankruptcy Code, 2016) is off to a slow start. Aftermultiple delays due to court interventions initiated by borrowers, the bankruptcyprocess has now got judicial backing that can be used in future cases to preventsimilar delays. Along with the recent ordinance providing RBI powers to direct banksto initiate insolvency proceedings against borrowers (refer to our recent note on theGoI Ordinance dated 8 May 2017), the IBC is likely to quicken the pace of stressedasset resolution as the mechanism provides a definite time frame for resolution (180-270 days), beyond which the case will proceed for liquidation.

    Recent events are positive for the IBC: With the Gujarat High Court dismissingEssar Steel’s petition against its bankruptcy proceedings recently, the stage is nowset for admitting the remaining nine of the 12 cases referred by RBI to the bankruptcycourt – the NCLT (National Company Law Tribunal) (refer our note (Dis)solving theNPL problem, dated 19 June 2017). While the path to resolution is filled withuncertainties expected from both the promoters’ side as well as the banks’, thecurrent resolution process appears more result-oriented than earlier efforts madeover the past 15-20 years.

    Impact on banks: The 12 large cases which are likely to be referred for bankruptcymay see resolution, in which case the potential write-off of debt could be as much as60%, or go down the path of liquidation where the write-off could be larger. For banksin our coverage universe this would imply a best-to-worst case impact of 0-6% onFY17 book value, higher for PSU banks and lower for private ones. There are somegrey areas on how minority/dissenting creditors would be dealt with in this process.

    Overall, we remain more optimistic than earlier on stressed asset resolution andrecommend ICICI Bank as the preferred way to play this theme. Our preferred playsin the sector include ICICI Bank, YES Bank and HDFC Bank (all rated Buy) given thatthe former two are at the inexpensive end of private bank valuations in our universeand the latter has higher growth along with earnings consistency.