After allowing banks to spread mark-to-market (MTM) provisioning over up to four quarters on Monday, the Reserve Bank of India (RBI) gave another relief to the banks by delaying the implementation of Indian Accounting Standards (IndAS) by one year, to April 2019.
The RBI said some necessary legislative amendments, such as making the financial statements' format compatible with IndAS accounting, are under consideration, and keeping in mind the level of preparedness of many banks, the implementation is deferred. The move will help lower provisioning burden of the banks.
In IndAS, a new method of ascertaining NPAs (non-performing assets or bad loans) provisioning was to be followed. The banks were expected to report around 30 per cent higher provisioning.
Under the method, the provisioning is based on the expected credit loss (ECL) model, which is comparatively stringent than the current practice. To avoid lumpy provisioning, ECL requires banks to make provisions much before the loans go bad (from the first day of banks' exposure), based on default probabilities, which takes into account past, present and even the future expected losses. On the contrary, under the percentage-based method, banks provision based only on incurred (actual) losses.
But, the postponement of the implementation has lowered the additional provisioning pain of banks, which will strengthen their book value to some extent, albeit in the short-term. "The move surely provides immediate benefits in terms of provisioning and pressure on banks' capital will go down to the extent of the additional provisioning owing to switch to IndAS," says Karthik Srinivasan, head of financial sector ratings at ICRA.
The status-quo monetary policy might also lower banks' MTM provisioning due to the relief for bond markets. Unchanged policy rates, lower inflation estimations, etc. resulted in a sharp 16.7-basis point decline in the 10-year government bond (G-sec) yields. Bond yields and prices are inversely related. Lenders, especially public sector banks (PSBs), which have a significant portion of their investment book in G-sec under the available for sale segment, have to make additional provision for covering a loss in the market value of bonds on a quarterly basis. In the past two quarters, PSBs reeled under high provisioning (expected for the March 2018 quarter, too), due to elevated level of yields (up by 74 basis points).
However, with the recent fall, banks, mainly PSBs, are unlikely to see MTM provisioning. Analysts expect the yields to remain below the March-end level of 7.4 per cent. "Given the lower inflationary outlook (excluding housing rent allowance impact), the bond yields are expected to stabilise at 7.1 to 7.3 per cent (in 10-20 basis point range) in the near term," says Rajesh Gupta, assistant vice-president-retail research at SBICap Securities. Besides, it would also negate the impact of the past two quarters' MTM provisioning, if the banks decide to allocate a part of it in the first two quarters of FY19, according to the regulator's April 2 circular on MTM provisioning.
Moreover, the monetary policy committee also informed banks that they are not required to activate the counter-cyclical capital buffer (2 per cent of banks' risk-weighted assets) as of now. This buffer is intended to safeguard banks against the potential losses arising out of the systematic risk such as economy slowdown.
It was party time for banking stocks, mainly PSBs. While the Nifty Bank index was up by 2.6 per cent, the Nifty PSU Bank index soared by 4.9 per cent on Thursday.