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Worst is yet to come for public sector banks if one goes by recent reports and RBI governor’s statement. A Business Standard report says RBI is planning to limit loan-sanctioning powers of banks with stressed asset ratios near 20%.
The 20% number might look that most banks will be spared, but that depends on the definition of stressed assets. Currently gross non-performing assets (GNPA) and restructured advances as a percentage of advances are considered for stressed asset calculations. But if assets that were written off are added to the list, few banks that are bordering the 20% mark will become eligible for stricter norms.
HSBC, in a report on the banking sector says India’s financial system has been made vulnerable by the deterioration of the loan books of PSU banks with stress assets being at the worst level since 2002.
According to HSBC, the key reason for this is that the level of corporate leverage is higher in India than most emerging markets. RBI governor Dr Raghuram Rajan in a talk in Anand, Gujarat said that the reason so many projects are in trouble today is because they were structured with too little equity, sometimes borrowed by the promoter from elsewhere.
It is because promoters have too little skin on the table that willful defaults or non-payments of loans have increased. Banks, especially PSU banks had to bear the cost as they, at times have been pressurized to extend loan on account of political pressure.
As of now public sector banks are running out of time to improve their balance sheet on account of various reasons. First, with the economy, especially the manufacturing economy, refusing to budge, most of the corporate continue to bear the pain and are not capable to service their debt.
Second, RBI wants to maintain its stringent policy as far as restructuring and forbearance is concerned. Reports suggests that the central bank will stick to its date of restructuring and forbearance.
The restructuring window is expected to close by March 2015. Credit Suisse in a report on Indian Financial Sector has pointed out that restructuring referrals have dropped after RBI’s guidelines on the matter. The research firm does not expect problem asset addition to come down for the second half of current fiscal on account of few large stressed corporate are likely to be restructured before the restructuring window closes on Mar-15.
Governor Rajan has strong words for those banks and corporates who seem to be teaming up on the issue of forbearance. He made the point in his talk in Anand that a restructured loan is as bad as a non-performing loan. Mutilating Shakespeare he said that an NPA by any other name smells as bad.
Rajan has given hints that he is unlikely to extend the April 2015 deadline on treatment of bad loans in the bank’s books. Bankers have been demanding an extension of the forbearance for a year. The central bank had relaxed provisioning norms on restructured loans by allowing banks to provide for only 5% for standard restructured advances as compared to 15% for sub-standard assets.
What this means is that provision of those banks having restructured assets in their books will increase substantially post April 2015. Profits will thus take a hit if that happens.
What is worst is if the stressed asset of banks crosses the 20% mark, RBI might limit the loan-sanctioning powers of banks with stressed asset ratios near 20%. This restricts the banks capacity to grow its asset book and proportionately reduce their non-performing asset.
For public sector banks the clock is ticking away and the only way out of the current mess is a growth in the economy, which is stubbornly unwilling to move.
