Bank stocks took a rather deep plunge by as much as 10% in the Monday morning trade. This could be due to underlying concerns regarding asset quality as the Centre announced to suspend the filing of fresh insolvency cases under Insolvency and Bankruptcy Code (IBC) for the next 12 months. This resulted in shares of ICICI Bank trading 6.59% lower at Rs 301.40, IndusInd Bank flagged 6.47% to Rs 391.70, Axis Bank down 6.29%, Kotak Mahindra Bank down 4.61%, SBI 4.6% lower and HDFC down 4.3% at Rs 850. Another reason for the slump was the news regarding the extension of the lockdown period and the failure of stimulus packages to reinforce confidence among investors.
IB Code
FM Nirmala Sitharaman has announced several fiscal measures and structural reforms for the enhancement of ease of doing business to reduce the impact of COVID pandemic and extensive lockdown. The minimum threshold to initiate insolvency proceedings has been raised from 1 lakh to 1 crore – which largely shields MSMEs. They are also planning on suspending fresh cases of insolvency proceedings up to one year. Special insolvency resolution framework for MSMEs are also being considered. The Centre has also proposed to exclude COVID related debt from the ‘default’ under the IBC, which prompts insolvency proceedings.
Bad bank
The Indian Banks Association (IBA) has submitted a proposal to set up a ‘bad bank’ for around Rs 75,000 crore worth NPAs. A ‘bad bank’ is a corporate structure that isolates risky assets held by banks, all in one place. IBA has requested the Centre for an allocation of Rs 10,000 crore as initial capital for this purpose. The IBA proposed to set up Asset Reconstruction Company (ARC) which will be owned by the government, Asset Management Company (AMC), and Asset Investment Fund (AIF), both involving public and private participation. For the time being, the government has postponed all further discussions on the matter.
As banks may not be able to recover from stressed accounts through the virtue of IBC, they may face asset quality deterioration. To maintain asset quality, brokerage firms and banks advise investors to invest in those banks which are lucrative and have the capacity to absorb COVID shockwaves. From the perspective of stressed units that have the potential to get back into operation, these proposed fiscal reforms could serve as a ray of hope to elevate themselves on the economic curve.
