The Reserve Bank of India (RBI) has asked banks to increase provisions to cover visibly stressed assets in the second half of this fiscal year—a directive that may cause bad loans and provisions to bloat.
The directive followed an intensive asset quality review conducted by the central bank over the last two months, two bankers familiar with the conversations held between the regulator and banks said, on condition of anonymity.
It marks the start of a long overdue clean-up of stressed assets by the banks, which are already laden with bad loans piled up during the economic downturn when a slowdown in demand and stalled projects made it difficult for borrowers to repay debt.
The process may put pressure on the capital position of banks, but adequate funding has been assured by the government, said a senior RBI official.
Liquidity support from the central bank will also be forthcoming if it is needed, said the official who declined to be identified.
The banking regulator has also told banks that if a majority of lenders in a consortium have classified an account as a non-performing loan, others must do so as well, said one of the two bankers cited above.
Restructured assets that do not hold out much hope of recovery may also have to be provided for.
This could mean that gross non-performing assets (NPAs) and provisions could rise substantially when banks report their earnings for the December and March quarters, putting pressure on their profits.
The clean-up will likely be extended through the next fiscal year if banks are to meet RBI governor Raghuram Rajan’s deadline of March 2017, by when he wants banks to complete the process of recognizing and providing for existing stressed assets.
One of the issues discussed was the divergence in asset classification of certain shortlisted accounts across different banks.
During the meetings, bankers were asked why these accounts deserved a better asset classification on their books when they were classified as NPAs by other banks, the first banker said.
This person said that RBI had asked banks to consider provisions against accounts where there have been last-minute payments for a substantial period. The regulator has also asked bankers to consider providing for weak companies belonging to stressed sectors before 31 March 2016, he added.
As per RBI rules, an account is classified as an NPA when payments are overdue for more than 90 days. Once this is done, banks need to set aside money to cover 25% of the loan amount in the first year.
While RBI conducts a review of bank books every year, this time the idea was to do an intensive asset-quality review across the sector.
The gross NPA ratio of the banking system was about 5.1%, as of 30 September, according to the December edition of RBI’s Financial Stability Review (FSR).
The ratio of stressed advances (including restructured loans and gross bad loans) to total advances rose to 11.3% as of September from 11.1% in March.
The ratio of stressed assets in public sector banks was 14.1% in September, RBI said in its report.
While FSR said gross NPAs could rise to 5.4% by the end of the current fiscal year, that number could now be higher given RBI’s diktat to banks.
Provisions will also rise more than expected over the next few quarters.
For 39 listed banks, provisions grew 24.83% to Rs.9,808.67 crore in the September quarter from Rs.7,857.36 crore a year ago.
This, however, will not lead to a capital shortage across the banking sector,.
“The government has assured adequate capital support and the RBI will provide additional liquidity support, if needed, although they do not anticipate any liquidity shortage,”.
Analysts said it was difficult to put a number on the additional provisioning that may be needed over the course of this fiscal year, but added that this will crimp the banks’ ability to boost credit. The BSE Bankex, a measure of the performance of banking stocks, has fallen by almost 11% since the start of January against a 6.4% fall in the benchmark Sensex due to these concerns.
“Public sector banks have already provided their capital requirements for the year. Now due to additional provisioning, they may have to curtail their credit growth plans as there will be a capital shortfall,” said Vibha Batra, senior vice-president at Icra Ltd.
As part of so-called Basel III requirements, RBI has directed banks to maintain a common equity tier-I capital ratio of 5.5% this year, which is higher than the 4.5% required internationally. This window may be used by RBI to provide a breather for the banks, said Batra.
Separately, RBI will continue to review the implementation of schemes such as 5/25 and strategic debt restructuring (SDR).
The 5/25 scheme allows banks to extend long-term loans of 20-25 years to match cash flow of projects, while refinancing them every five or seven years.
The SDR scheme allows banks to convert loans into a majority equity holding. Banks then have 18 months to find a buyer for these assets.
According to the second banker cited above, RBI will be meeting representatives of some banks on 18 January to discuss whether the schemes are being implemented as intended.
So far, banks have invoked SDR in 15 accounts where the total loans stand at about Rs.83,100 crore, Religare Institutional Research estimated in a 4 January report. Religare analysts expect another Rs.63,900 crore worth of loans to enter the SDR process in next 12-24 months.
Concerns have been raised that the provision is being used to delay recognition of bad loans. To ensure this does not happen, RBI may tweak the scheme, the central bank’s deputy governor S.S. Mundra had said on 21 December.
Resolving asset quality issues plaguing the banking sector and improving credit culture has been a priority for the RBI governor since he took over in September 2013.
On numerous occasions, Rajan has said that promoters do not have a divine right to stay in charge regardless of how badly they manage an enterprise.
“No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop. Importantly, this does not mean being against riches or business, as some would like to portray, but being against wrong-doing,” Rajan wrote in a New Year message to RBI employees.
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