Public sector lenders—which have a major share on the loans and were restructured—would be hit the most by Reserve Bank of India’s (RBI) draft restructuring norms if they take final shape.
Public sector lenders had 5.73% restructured advances of gross advances as of March 2012 as compared to 1.61% in private sector banks and 0.22% in foreign banks.
The impact on profitability of the banks could be as high as Rs 15,000 crore over next two years as banks would be required to provide this amount towards increase in provisioning for restructured assets which would lower the profitability of the banks by 7% said a report by ratings agency CRISIL.
These guidelines would increase the confidence of the stakeholders in the banks’ asset quality and would discourage large scale restructuring by them CRISIL added.
In recent years the banks took to large scale restructuring to avoid NPA classification as there was regulatory forbearance. Earlier restructured advances would attract 2% provisioning which RBI increased to 2.75% during second quarterly monetary policy review.
RBI now has proposed all the new restructuring done from coming financial year would attract the provisioning of 5% and for already restructured accounts it would be done in phases over two years. At the end of 2013-14 the banks would be needed to provide 3.75% for such accounts which will go to 5% levels in next year.
After 2015 all the restructured advances would be classified as non performing and would attract applicable provisioning which is much higher than that for restructured accounts, RBI has proposed.
According to another rating agency ICRA this would lead to gross NPA numbers in the banking system but restructured advances are likely to come down, thereby limiting the incremental impact of the new asset classification on the credit profiles of banks. There could be a steep increase in the reported NPA numbers for 2015-16. NPAs could increase to as high as 6.5 -7.5% in the first quarter of FY 2016 from 3.6% of the second quarter this year.
Bank of America-Merrill Lynch in its report said that Punjab National Bank (PNB), Indian Bank and Oriental Bank of Commerce (OBC) would be most impacted by the draft norms as they have highest restructured portfolio close to 10%. PNB and OBCs restructured portfolio was 9.6 and 9.5% respectively as of third quarter while Indian Banks restructured portfolio was 10.9% as of September quarter.
At the same time high provision coverage ratio for the lenders like Bank of Baroda and Union Bank of India will cushion them against the impact of the proposed guidelines it said.
Bankers have already started to snub the new guidelines. Shiva Kumar, managing director of State Bank of Bikaner and Jaipur said, “Increasing provisioning is ok but declaring those (restructured accounts) as NPA may not be the right idea.” Certain accounts face challenging times and they should be given opportunity to come out of it he said adding if they are declared NPA it’s not only bad for the banks but for the customers also as they will face the stigma and their performance might be affected.
However bank stocks didn’t react adversely to the draft guidelines by RBI as BSE Bankex closed just 0.79% down to 14,465 on Friday while benchmark sensex also closed 0.57% down to 19,781.
Analysts are also positive on the banking stocks despite expected negative impact of the guidelines on the banks. Vaibhav Agrawal, vice president, research, Angel Broking said, “it was expected that restructuring provisioning would be increased over a period of time, so it didn’t came as a surprise and asset quality of PSBs is now stabilising .” “We are positive on the banking sector” he added.
