New RBI rules on provisioning, bad loans seen taking a toll on banks

Credit Suisse report says PSU banks are likely to see a 5-15% and private banks 1-2% impact on quarterly results due to new RBI rules on bad loans and provisions


RBI on Tuesday had advised banks to consider setting aside higher provisions for good loans, apart from bad loans, in stressed sectors. Photo: Aniruddha Chowdhury/Mint
RBI on Tuesday had advised banks to consider setting aside higher provisions for good loans, apart from bad loans, in stressed sectors. Photo: Aniruddha Chowdhury/Mint

Mumbai: New RBI guidelines on standard asset provisioning and disclosure of details regarding non-performing assets (NPAs) may create difficulties for Indian banks, thanks to additional provisioning requirements, analysts estimate.

Public sector banks are likely to see a 5-15% impact on their earnings going ahead, while private sector lenders would see their earnings hurt by 1-2% due to the new norms, Credit Suisse said in a report on Wednesday. Prior to this advisory, the Reserve Bank of India (RBI) required banks to set aside 0.4% as provision against standard assets. The RBI on Tuesday had advised banks to consider setting aside higher provisions even for good loans in stressed sectors.

According to Credit Suisse analysts, the hit on profitability has been calculated on a 50 basis points (bps) increase in provisioning owing to the RBI guidelines.

The central bank specifically red-flagged the telecom industry, and asked bank boards to review their exposure to the sector by 30 June and consider making provisions at higher rates “so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date”.

According to data available with the RBI, bank exposure to the telecom sector was Rs82,200 crore at the end of February.

In a report that Nomura released on Wednesday, analysts note that the risk on the telecom sector is likely to be limited owing to the expected consolidation, with the merger of Vodafone Group Plc and Idea Cellular Ltd. Weaker companies like GTL Infrastructure Ltd have already been classified as non-performing assets. In the case of Reliance Communications Ltd, most of the debt is from foreign banks which limits the impact on Indian banks, while in case of Aircel, even though the research firm sees risk, it is not big enough to change much for the sector.

“This, in our view, would lead to faster recognition of future asset quality issues and will help avoid the cliff effect of large and lumpy provisions,” Kotak Institutional Equities Research said in a report on Wednesday.

“This approach is closer to Ind-AS (to be applicable from April 2018 CHK onwards) which requires a dynamic approach to provisioning based on expected credit losses, instead of the current system based on days-past-due,” the Kotak report said.

In addition to these norms, the regulator has also asked banks to disclose any major divergence in reporting of NPAs, when compared with what it had asked banks to do under the supervisory processes. In situations like the asset quality review (AQR), the central bank had asked lenders to classify certain accounts as NPAs even though the banks had classified them as standard.

These norms have already started having an impact on bank results for the quarter ended 31 March. Private sector lenders IndusInd Bank and Yes Bank both reported increased provisions owing to the RBI directions on NPA disclosure.

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