RBI to examine the treatment of stressed loan accounts across banks

The Reserve Bank of India (RBI) has increased scrutiny on stressed loans in the books of banks, examining how they are treating these accounts and provisioning for them.

This is in addition to the annual financial inspection (AFI) the RBI is doing for 2017-18 or FY18.

An executive with a public sector bank said the RBI’s staff going through their books had indicated that accounts under scrutiny could be non-performing assets (NPAs), though there remains some disagreement as to when an account can be classified as a NPA and provisions made for it.

The RBI staff apparently also said the exercise is aimed at bringing all banks with loans to stressed corporate accounts on the same page to set aside money.

Banks are required to classify NPAs as “substandard” assets, “doubtful” assets, and “loss” assets. The classification depends on how long each assent has been a non-performing loan.

If one bank treats a specific account as “doubtful” — one step before it is classified as a “loss” asset — chances of recovery are remote. So it makes no sense for other banks with loans to the same entity to treat it with less provisioning.

Sources in the sector said it is prudent for all lenders to adopt a common standard while provisioning for NPAs. 

If an account is not performing for 12 months, the bank concerned classifies it as a “substandard” asset and starts setting aside 12-15 per cent, based on the nature of its exposure (secured or unsecured). If an asset has remained “substandard” for a year, it is classified as “doubtful”. There are three subcategories — D1, D2, and D3 —depending on the tenure, with rising provisioning liability.

An asset becomes a “loss” when it has been identified as such by the bank’s internal or external auditors, or by the RBI. Lenders have to make 100 per cent provisioning for such an asset.

Confirming the RBI’s exercise, another senior public sector bank (PSB) executive said, “The regulator is conducting an exercise similar to the asset quality review it did in 2015-16. It is an inter-bank assessment, independent of the AFI.”

“This might increase the provisioning burden in the coming quarters. But as big-ticket insolvency cases get resolved at the National Company Law Tribunal, the burden would become lighter,” said the head of the recovery department of a Mumbai-based bank. The RBI collects information about the status of particular corporate borrowers through its Central Repository of Information on Large Credits. But, sources in the sector said it is now going deeper to find out the exact nature and level of provisions made by banks. 

“It might ask for more provisions, based on the assessment of accounts,” a PSB official said.

CLEAN-UP PLAN

• The RBI will examine the treatment of accounts across banks
• The central bank is said to be assessing the provision cover and what steps could be taken to deal with stressed accounts
• The aim seems to be to bring all lenders on the same page for setting aside provisions, sources said
• This exercise may increase provisioning burden in the coming quarters
• Reversal of provisioning for big-ticket NCLT accounts may soften the burden