New guidelines likely to stress profitability of state-run banks

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

The banking regulator said yesterday that provisions for the existing stock of restructured assets will be increased to five per cent from the current 2.75 per cent in a phased manner over the next three years. In addition, the provisioning requirement for fresh standard restructured advances will also increase to five per cent from tomorrow. All loans to 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. Its restructured loans at the end of FY13 stood at Rs 43,111 crore. The bank has received requests for restructuring another Rs 4,000-5,000 crore worth of loans. Central Bank of India has 13 per cent of its total advances restructured, one of the highest in the banking sector. The bank had a restructured loan portfolio of Rs 22,681 crore at the end of March 31.

Punjab National Bank has restructured Rs 32,143 crore loans or 10.4 per cent 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 with this, private sector lenders have relatively small portfolios of restructured debts. ICICI Bank, the largest private sector lender in India, has restructured loans of Rs 5,315 crore or 1.8 per cent of its total advances.

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

It is believed banks will be reluctant to restructure more loans, to restrict the incremental provisioning requirement.

The CNX PSU Bank Index today shed over three per cent, as investors feared further stress on state-run lenders' profitability. Union Bank of India's share plunged 5.2 per cent, Indian Overseas Bank's stock tumbled 4.8 per cent, Punjab National Bank's declined 4.6 per cent, and the SBI stock fell close to two per cent 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 per cent from March 2013 levels, there would be no impact on profit and loss of banks in FY14.

However, medium term profitability is expected to get impacted by one-two basis points of average total assets on account of higher provision on restructured advances.