Banks post huge fall in Q4 net numbers as RBI scraps restructuring schemes

No more soft pedalling, says apex bank, as it compels lenders to refer bad loans to IBC if account isn't restructured in six months

Banks have, over the past fortnight, reported substantial falls in their net profits for the financial year ending March 31, 2018, on making larger provisions for stressed accounts, after the Reserve Bank of India (RBI) scrapped all the restructuring tools lenders relied on. 

The February 12 circular from the RBI scrapped six stressed non-performing asset (NPA) restructuring mechanisms such as Corporate Debt Restructuring, Strategic Debt Restructuring (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A) and Framework for Revitalizing Distressed Assets, Joint Lenders Forum and the 5/25 loan scheme, among others. 

Now that the schemes have been withdrawn, the RBI has asked the banks to classify stressed accounts as ‘special mention accounts’, at three different levels depending on the extent to which payment of principal or interest on a loan has been delayed. If an account with a loan of Rs 20 billion and above is not serviced within 91 days, the lender would have to classify it as a ‘default’ and a resolution plan will need to be readied. 

As a result of the RBI’s circular, lenders have to move those stressed accounts that were undergoing resolution under the old schemes to the new framework, which means that if the account isn’t restructured within six months, the lender would have refer the company for IBC proceedings.  

One immediate effect has been that two top private banks and a few medium-sized banks have reported significant declines in their net profit as they had to make higher provisions for NPA accounts.

For example, Union Bank of India, posted a net loss on May 10 of Rs 25.6 billion for the quarter ending March 31 (Q4) as against a net profit of Rs 1.08 billion. The bank’s gross NPA level rose from Rs 337.12 billion at the end of FY2017 to Rs 493.7 billion at the end of FY2018, and there was a slippage in asset quality of Rs 100.4 billion during Q4.

As of the end of FY2017, the lender had 19 accounts undergoing restructuring under the SDR scheme totaling Rs 16.6 billion, but given the RBI’s circular these accounts have been moved to the new framework. At the end of FY2017 the bank had 12 accounts under S4A of Rs 19.12 billion which declined to 2 accounts of Rs 1.16 billion. 

Rajkiran Rai, chief executive officer and managing director of Union Bank, said the lender decided to absorb the provision burden at one go for the slippages, because of the new RBI rules on stressed loans, mark-to-market losses and gratuity in Q4. 

So far, RBI has remained firm and has reiterated that it stands by its February 12 circular. Governor Urjit Patel said in a recent statement, “Rather than resolving stressed credit problems swiftly, banks -- either through loan-level ‘fudges’ or by refusal to recognize the true asset quality of credits -- have allowed promoters in charge of enterprises to have a soft landing.”

Similarly, under the SDR scheme, around 20 accounts were notified to be resolved back in June 2015, but after almost three years only one account was resolved under the mechanism, indicating that the scheme was either badly structured or that the banks were lax in their pursuit of resolving stressed accounts through it and other schemes as well.

RBI deputy Governor N S Vishwanathan told Business Standard last month, that the new framework was in line with the Insolvency and Bankruptcy Code, and that the circular in February withdrew those schemes which resulted in banks postponing their recognition of loans. 

Another lender, Indian Bank, saw its net profit decline by 10.44 per cent from 12.6 billion for the year ended Mar 31, 2018 from Rs 14 billion at the end of FY2017. The lender increased the amount of provisions against stressed assets by 524 per cent from Rs 260 million in FY2017 to Rs 1.64 billion at the of the FY2018.

During the fourth quarter itself the bank made provisions of Rs 1.2 billion, around 153 per cent higher than the levels in the same quarter of the corresponding year. 

Similarly, Federal Bank’s net profit fell by 43.5 per cent from Rs 2.56 billion in Q4 of FY2017 to Rs 1.44 billion for Q4 FY2018, as there was significant slippage in its asset quality, which grew to Rs 8.72 billion (Q4 FY2018)  from Rs 2.44 billion (Q4 FY2017). The lender made provisions for bad loans of Rs 3.7 billion in Q4 FY2018 compared to Rs 1.22 billion in Q4 FY2017. 

The country's top private lenders, Axis Bank and ICICI Bank, both reported significant declines in their net profit for the fourth quarter of FY2018 as both had to make large provisions during the quarter against stressed corporate accounts and the recent revelation of an industry wide Letters of Understanding fraud.

Axis Bank reported its first net loss of Rs 21.8 billion with asset slippages of Rs 165 billion during the quarter, while ICICI Bank saw its net profit decline by nearly 50 per cent to Rs 10.2 billion with asset slippages pegged at Rs 157.4 billion at the end of Q4 FY2018.