Mumbai: The government and commercial banks are seeking a relaxation of provisioning norms on accounts identified for bankruptcy proceedings to free up capital and boost credit growth. The finance ministry is in talks with the Reserve Bank of India (RBI) on this issue, three senior government officials aware of the matter said on condition of anonymity.

Credit offtake is hovering around the lowest levels in six decades. After falling to 5.1% in fiscal 2017, growth in non-food credit gradually increased to 7% by mid-September.

 “Credit pickup has slowed down and RBI’s provisioning requirement will further squeeze credit to industry," said one of the officials cited earlier. 

 On 26 June, RBI directed banks to set aside 50% of the loan amount as likely losses for all NPA accounts it has referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code. The central bank also said that provisioning should be 100% in cases that fail to get resolved under insolvency proceedings and are forced into liquidation. 

The provisioning norms are currently applicable for the 12 cases referred to NCLT. In August, RBI sent a second defaulter list to banks of at least 28 accounts where 60% of the outstanding amount had turned non-performing as on 30 June. The regulator told banks to resolve the cases by 13 December, failing which they have to be taken up for bankruptcy proceedings. 

If these cases do go to NCLT, provisioning will go up further. The Indian Banks’ Association had asked RBI to spread the provisioning for these new cases over 12 quarters starting from the July-September quarter, according to a senior banker aware of the matter who did not want to be named.

“Banks have been awaiting clarity on provisioning norms before taking cases to NCLT," said this person. “Banks may need additional provision of Rs50,000 crore on these accounts as some cases in the second list fall under substandard category. This is unlike the first list where banks had already made 40% provisioning."

Sub-standard loans are those which are non-performing assets (NPAs) for a period less than a year and carry minimum 15% provisioning.

RBI had also asked banks to assign higher risk weights of 150% on unrated exposure of at least Rs200 crore starting from June. This includes loans to public sector entities which are largely unrated.

However, the central bank wrote to lenders recently, clarifying that this regulation stood deferred till the end of September, according to the banker cited earlier.

Finance ministry officials are of the view that RBI’s directives to keep higher provisions and risk weights come at a time when state-owned banks are starved of capital and the government’s finances are stretched. “It’s time that RBI loosens its grip on banks and allows them to resolve cases under NCLT," said the second of the three people cited earlier.

In an emailed response, an RBI official said the central bank had no information to share at this point.

According to credit rating agency Crisil Ltd, banks have already provisioned 40% for the 12 identified NPA accounts, which are worth Rs2 trillion in total, or equal to a quarter of the NPAs in the banking system. The rating agency estimates a 60% haircut in these cases.

“In case banks are not able to raise capital and government support doesn’t come in time, then they would not be able to meet provisioning norms," said Karthik Srinivasan, group head of financial sector ratings at Icra Ltd. 

Icra estimates that public sector banks require Rs1.2 trillion in capital over the next two years, way higher than the Rs20,000 crore budgeted under the Indradhanush programme for bank recapitalization.

Even as banks have adequately provided for these large corporate accounts, they believe that keeping higher provisions will be a challenge if more defaulters are identified for trial under the Insolvency and Bankruptcy Code.

“While banks have made enough provision on the 40 cases identified under the Insolvency and Bankruptcy Code, they could face pressure on profitability if RBI refers more cases for insolvency," said a senior banker with State Bank of India.

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