The Reserve Bank of India (RBI) on Tuesday advised banks to consider setting aside higher provisions even for good loans in stressed sectors. The advisory means the central bank is worried that banks have not fully recognized their bad loans, said experts. Indian banks are sitting on a toxic loan pile of at least Rs7 trillion, or 9% of all bank credit.
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." This means banks should consider making higher provisions immediately for the telecom sector.
Under current rules, most standard assets attract a provision of 0.4%. The few exceptions include credit to commercial real estate—which has a 1% provision, and residential real estate (0.75%). However, the regulator hasn’t specified the extent of higher provisioning for good loans to telecom or other stressed sectors.
“We are not surprised that banks will see higher provisioning going forward. We have already accounted for a potential jump in fresh slippages of 2.6% of total bank loans in the next 12 months," said Udit Kariwala, analyst-financial institutions at India Ratings and Research. In a 15 February report, the ratings agency had said that impaired assets would peak at 12.5%-13% by 2018-19.
The central bank has also asked banks to put in place a board-approved policy for making higher provisions depending on the stress in various sectors.
This policy should be reviewed every quarter depending on the performance of the sectors to which the bank has an exposure, the central bank said.
Currently, bank lending to the telecom sector stands at around Rs82,200 crore. The industry has been going through a tumultuous period with the launch of services by Reliance Jio Infocomm Ltd.
A 17 February India Ratings and Research Report had predicted that the industry has lost about 20% of revenues post the launch of free services by Jio. The industry’s debt levels have risen sharply from Rs2.7 trillion in 2014 to Rs4.85 trillion at the end of 31 December 2016.
“Telecom industry is now on a downward trajectory as far as margins are concerned. Profitability is getting thinner. There is no scope for a volume game going forward. Because of these concerns, RBI must have asked banks to keep higher provision," said Dharmesh Kant, vice-president and head of retail research at Motilal Oswal Securities.
“The new regulation will increase credit cost for banks. However, the extent may be limited because the exposure to the telecom sector is only 1% of the total credit in the system," said Karthik Srinivasan, senior vice-president, Icra Ltd.
In a separate notification, the regulator also increased disclosure norms for banks after it noted instances of divergences in banks’ asset classification and the provisioning required as per RBI norms.
“This has led to the published financial statements not depicting a true and fair view of the financial position of the bank," the regulator said.
The regulator told banks to make a disclosure in the “notes to accounts" if the additional provisioning requirement assessed by RBI exceeds 15% of their net profit.
Further, banks also have to make additional disclosures if the additional gross NPAs (non-performing assets) identified by RBI under its asset quality review are greater than 15% of the incremental gross NPAs reported. The first such disclosure will have to be made for financial year 2015-16 in the annual accounts statements for the just ended fiscal 2017.