No immediate gains for banks from new norms

Provisioning and credit cost might remain high in near term despite new loan restructuring guidelines

With attempts to bring in a new promoter, particularly for over-capacitated sectors such as steel and power leading to futile results, banks wanted more objective and viable restructuring norms. What came from the Reserve Bank after market hours on Monday appears to have addressed these concerns, besides allowing more banks flexibility in restructuring assets.

Analysts say establishing a minimum threshold (of Rs 500 crore) and requirement of commercial operations for an asset to be restructured means smaller and inoperative bad loans will not be eligible for restructuring (they now have to be provided for). This will help banks revive the portion of good assets or allow them to reduce bad loans.

The option with banks to retain existing promoters or replace them with a team of professionals until new promoters are brought on board is another immediate advantage, as banks have found it challenging to scout for new promoters. Analysts at Kotak Institutional Equities feel mergers and acquisitions were difficult as banks were unwilling to take steep haircuts or provisions on bad loans. This logjam has probably been broken, they add.

Not surprisingly, the new restructuring norms or Scheme for Sustainable Structuring of Stressed Assets lifted the stocks of public sector banks by two to five per cent in Tuesday’s trade. With Punjab National Bank (PNB) having the largest ‘watch-list’ for bad loans among state-owned banks, its stock reacted the most (up eight per cent).

However, the flip side is that gains will not accrue immediately. “The move is unlikely to reduce the quantum of provisioning in the near term, while it would reduce gross non-performing assets,” say Kotak’s analysts.

Dhananjay Sinha, head of Institutional Research, Emkay Global Financial Services, says the scheme’s success will depend on the ability of banks to segregate stressed loans into sustainable and unsustainable loans (Part A and Part B according to the new norms) and the willingness of banks to absorb hair-cuts on unsustainable loans.

While this process could be challenging, analysts at Antique Stock Broking say RBI is leading banks to preserve the existing economic value of the assets while requiring them to book losses on the non-sustainable portion.

Nevertheless, provisioning and credit cost will remain upwards in the near term, given the time-bound provisioning mandated by the new norms. Overall, corporate lenders with unimpaired Tier-I capital would be better placed to restructure bad loans based on the new norms while PSBs with declining Tier-I capital will find it difficult to adopt the new mechanism.