RBI to flag bad loan issues with Finance Ministry in pre-Budget meet

Fresh provisioning and telco loans to figure in pre-Budget meet. Inability to find resolution may put Rs 3.8 trn loans at risk

The Reserve Bank of India (RBI) and the finance ministry will discuss the additional provisioning banks may be expected to make on account of the central bank’s June 7 circular, and the stress in telco loans following the Supreme Court (SC) order on adjusted gross revenue, which entails a payout of Rs 1.33 trillion to the Centre, inclusive of interest and penalties.

The development comes on the heels of North Block’s stand that the overall stress in the banking sector was headed southwards. The central bank’s Financial Stability Report (FSR), released last week, had observed that the gross non-performing assets (GNPAs) of banks may rise to 9.9 per cent by September 2020, from 9.3 per cent in September 2019. It had attributed this primarily to “changes in the macroeconomic scenario, a marginal increase in slippages, and the denominator effect of declining credit growth”.

The additional provisioning due to the follow-on impact of the June 7 circular due to banks’ inability to find a resolution for defaulting companies has the potential to put Rs 3.8 trillion of loans at risk in the last quarter of 2019-20 (FY20). This, and the stress on telecom loans, which cropped up after the SC order in the third quarter of FY20, was not mentioned in the central bank’s FSR. 

The central bank’s revised circular on stressed assets (which replaced the earlier February 12, 2018, circular after it was declared ultra vires by the SC) calls on banks to make additional provisioning on failure to get a resolution moving on. 

It will be 20 per cent on the outstanding amount six months after the review period, and another 15 per cent after a year. The six-month period and a one-month grace period come to an end on January 7, 2020, and cover about 40 large stressed accounts.

While the June 7 circular, on issuance, covered only stressed exposures of Rs 2,000 crore and above, it is to apply to those between Rs 1,500 crore and Rs 2,000 crore, effective January 1, 2020, even as it remains silent on its application to stressed credits lesser than Rs 1,500 crore. This, sources said, “is only a matter of a follow-on notification” — the point being made here is that the circular will cover such loans soon.

An altogether fresh burden is the telco loans following the SC order and the payout of Rs 1.33 trillion to the Centre. This came on top of telephony operators’ accumulated losses of Rs 1.4 trillion and outstanding debts of around Rs 4.9 trillion in 2018-19 (FY19), making lenders worry about the debt-servicing capacity of these companies. Already several firms have either shut down, or have been referred to the National Company Law Tribunal, making debt repayment difficult in such cases.

Finance Secretary Rajiv Kumar, had on Saturday, said, “It (the RBI’s report) is contrasting its earlier report released a few days back, which showed that NPAs are on a declining trend. You should also look at the stressed assets-to-total assets ratio, which has come down significantly.”

• The January Chill
• 1) June 7 circular calls for additional provisioning of 20 per cent on outstanding amount six months after review period and 15 per cent after a year. Six-month period ends on January 7, 2020.
• 2) Effective January 1, 2020, the circular is to apply for stressed accounts between Rs 1,500 crore and Rs 2,000 crore. 
• 3) Status on circular’s application to accounts less than Rs 1,500 crore to be decided soon.
• 4) Telcos’ AGR payout deadline ends on January 24, 2020, putting loans to sector under stress; its treatment in the fourth quarter, or in the first quarter of FY21 up for review.
• 5) Impact of June 7 circular and stressed telecom loans not mentioned in Financial Stability Report (FSR).
• 6) RBI Report on Trend and Progress of Banking in India(T&P: 2018-19) and FSR did not contradict each other.
• 7) T&P said net NPAs fell to 3.78 per cent in 2018-19 (FY19), from the 6 per cent in FY19; gross NPAs fell to 9.1 per cent.
• 8) FSR said gross NPAs may rise to 9.9 per cent by September 2020, from 9.3 per cent in September 2019.
• 9) Both T&P and FSR mention stress in large borrowal accounts on the rise. 
• 10) Treatment of bad loans by merging banks may need revisit.

The central bank in its Report on Trend and Progress of Banking in India had said net NPAs fell to 3.78 per cent in FY19, from the 6 per cent in FY19; GNPAs fell to 9.1 per cent, from 11.2 per cent in this phase. While this appears to contradict its position in the FSR, the RBI had in the Trend and Progress report also made specific mention that “the overhang of NPAs remains high; further improvements in the banking sector hinge around a reversal in macroeconomic conditions”.

In FY19, banks recorded a synchronised decline in all the special mention accounts (SMA) accounts (SMA-0, SMA-1, and SMA-2), restructured standard advances, and GNPAs, attesting to the broad-based improvement in asset quality. 

The central bank qualified this in its Trend and Progress report, and stated: “Yet, these accounts — which constituted 53 per cent of gross loans and advances — contributed 82 per cent of GNPAs at end-March 2019.” Furthermore, stress in large borrowal accounts has been on the rise for both state-run and private banks in the first half of FY20.

Likewise, the FSR also said that in the large borrower accounts, the proportion of funded amounts outstanding with any signs of stress (including SMA 0, 1, and 2 restructured loans, and NPAs) rose to 21.2 per cent in September 2019, from 20.9 per cent in March 2019. SMA-2 loans increased by about 143 per cent during this period. And the top 100 large borrowers accounted for 16.4 per cent of gross advances and 16.3 per cent of GNPAs. What is also playing in the background are the proposed mergers of four sets of state-run banks.

A host of issues like exposures to firms within a consortium have to be sorted out, even as post-merger these banks will have to deal with them as a single entity. The magnitude of the proposed mergers is huge as these banks collectively have a market share of 24.1 per cent. Senior bankers opined that the additional provisioning aspect of the June 7 circular has the potential to impact their books.

The four sets of merging banks are Punjab National Bank, Oriental Bank of Commerce, and United Bank of India; Canara Bank and Syndicate Bank; Union Bank of India, Andhra Bank, and Corporation Bank; and Indian Bank with Allahabad Bank. The mergers are slated to come into effect from April 1, 2020.