 "Illustration: Ajaya Mohanty")
You might not have heard of tinnitus — a phantom noise in the ears that distorts the ability to make sense of what’s actually going on around. The outcome of the Reserve Bank of India’s (RBI) board meeting on November 19 has been variously described as a “truce”, or a battle “won-lost” by either of the protagonists involved — North Block and Mint Road. Is it a case of tinnitus?
The board made three decisions which, if executed quickly, are seen as “uppers” of sorts for India Inc ahead of the general elections in 2019. First, the RBI will weigh a restructuring scheme for micro, small and medium-sized enterprises (MSMEs) with credit facilities of up to Rs 250 million. Second, the time frame to secure the last tranche of 0.625 per cent under the capital conservation buffer (CCB) was relaxed by a year to FY20. Third, a review is to be done of the dozen banks under the prompt corrective action (PCA) framework by the board for financial supervision. As for the economic capital framework of the RBI, it will be long in the works under a new committee set up to examine it.
These moves on MSME credit, CCB and PCA are interpreted as a push-back by North Block; it’s hoped that by the next RBI board meeting on December 14, fresh headroom to lend will be created. However, senior bankers, on the condition of anonymity, pointed out that these could further complicate an already worrisome situation. The upcoming ‘Trend and Progress of Banking and the bi-annual Financial Stability Report’ by the RBI will show the systemic status in the fiscal so far.
As for the PCA, it was in December 2014 — six months after the Bharatiya Janata Party-led government came in — that the sub-committee of the Financial Stability and Development Council (chairperson is the Finance Minister) directed that the PCA, an early intervention mechanism, be put in place. It was not conjured up by the RBI. So, it’s back to square one.
What also did not hit the headlines was that a significant new variable will be in play from April 1, 2019.
Banks’ exposure to a single entity and a group will be capped “at no more than 20 per cent and 25 per cent of the tier-1 capital”.
At present, it’s at 15 per cent and 40 per cent, respectively. It can be eased “by 5 per cent in exceptional cases”.
A huge exercise is under way in banks to reassess the impact this will have on their ability to give fresh loans even as it entails a cut-back in their books over time to comply with the norms.
One route for easing the pain on exposure ceilings (though not explicitly articulated) is the proposal to push large borrowers (defined as those with long-term borrowings of Rs 1 billion and above) to meet a quarter of their financing from the bond market.
Here, infrastructure firms will face an issue. “One of the main reasons for the low demand for bonds issued by them is reluctance of investors to assume project execution risk. A way out is to provide credit enhancement by banks to infrastructure firms, but they already have high counter-party exposure to various firms, groups, and sectoral exposure,” said B Prasanna, group executive and head (global markets group), ICICI Bank.
Running on the same spot…
On the relook at MSME loans, Srikanth Vadlamani, vice-president (financial institutions group) at Moody’s Investors Service said: “This approach has the potential for negative implications. The track record of such dispensations has shown that they have largely been unsuccessful in addressing the underlying stress”.
And keeping stressed loans in the standard category led to an underestimation of the extent of the asset quality and “consequently the severity of the actions that need to be taken to address the issue”, he added.
The Rs 350-billion breather for banks on account of the CCB relaxation will be largely eaten up by FY19 provisioning for bad loans. Krishnan Sitaraman, senior director at CRISIL Ratings, said: “Our earlier estimates show they needed Rs 1.2 trillion over the next five months to meet tier-1 capital norms. Now they will need only Rs 850 billion on deferral of the last tranche of CCB.”
But this relief will not go far as the Centre having to infuse bulk of the Rs 850 billion FY19-end is concerned, because “hobbled by legacy stressed assets and weak performance, these banks have little ability to tap the capital market soon”, observed Sitaraman.
By far the biggest hurdle is the ceiling on bank exposures that has not been factored into the stand-off between North Block and Mint Road; nor was it taken up at the board meeting as an agenda item.
“It will call for a major relook at our limits. To the extent that capital continues to be impacted by provisioning, it follows that the base for these limits will be lower. It will also hinge on the fresh equity to be given to us. Some of us may have to cut back on them over time anyway,” said a senior banker with exposure to the power sector.
He pins his hope on a favourable decision by the Supreme Court on the Rs 2 trillion of power loans with regard to the RBI’s February 12 circular that could ease capital woes.
The mandatory shift to have large borrowers tap into the bond market was due to concerns regarding the ability of banks to fuel them, and to slash the reliance on bank credit — a regulatory change has to come through to go lower down the issuer’s food chain. In FY18, around 87 per cent of placements were papers rated “AA” and above.
“Amendment of guidelines to exempt PF trusts and insurance companies shall help widen the investor universe for lower rated credits. While risk aversion has increased in the wake of the IL&FS default, leading to ‘flight to safety’,” noted Prasanna.
Whichever way you look at it, it’s not going to be an easy pass for India Inc. Incidentally, tinnitus is not classified as a psychiatric condition. Cold water may — hopefully — be the cure.
