New debt recast norms likely to stress state-run banks' profitability

Public sector banks have bigger restructured portfolios than private lenders

The Reserve Bank of India's (RBI) guidelines on restructuring of bank advances is likely to stress profitability of state-run lenders like State Bank of India (SBI), Punjab National Bank and Central Bank of India as these lenders have to set aside more funds to meet the higher provisioning requirement.

Thursday, the banking regulator said provisions for the existing stock of restructured assets will be increased to 5% from current 2.75% in a phased manner over the next three years. In addition, the provisioning requirement for fresh standard restructured advances will also increase to 5% from June 1, 2013. All loans that will be restructured after April 1, 2015 will be classified as non-performing assets.

SBI has the largest restructured loan portfolio among public and private banks in the country. It closed last financial year with Rs 43,111 crore restructured loans. The bank has received requests for restructuring another Rs 4,000-5,000 crore loans.

Central Bank of India has over 13% of its total advances restructured, which is one of the highest in the banking industry. The bank has a restructured loan portfolio of Rs 22,681 crore at the end of March 31, 2013.

Punjab National Bank has restructured Rs 32,143 crore loans or 10.4% of its total advances. Several other public sector lenders including Bank of Baroda, Canara Bank, Indian Overseas Bank and Union Bank of India have large restructured loan portfolios.

Compared to this, private sector lenders have relatively small portfolios of restructured debts. ICICI Bank, the largest private sector lender in the country, has restructured Rs 5,315 crore loans or 1.8% of its total advances.

HDFC Bank has only 0.2% of its total loans restructured, while for Axis Bank and YES Bank the share of restructured debts in total loans are 2.2% and 0.3%, respectively.

Industry players said banks will be reluctant to restructure more loans to restrict the incremental provisioning requirement.

The CNX PSU Bank Index today shed over 3% as investors feared further stress on state-run lenders' profitability. Union Bank of India share fell 5.2%, Indian Overseas Bank stock tumbled 4.8%, Punjab National Bank share declined 4.6% and SBI share shed close to 2% in today's trade.

Rating agency ICRA said RBI's new norms would have necessitated an increase in credit provisioning over the next two years but a reduction in restructured advances would restrict the incremental provisioning requirement on this count. As for 2013-14, if restructured advances get reduced by 20% from March 2013 levels, there would be no impact on P&L of banks in FY14. However, medium term profitability is expected to get impacted by 1-2 bps of average total assets on account of higher provision on restructured advances.