"The Reserve Bank of India has issued various instructions aimed at resolution of stressed assets in the economy, including introduction of certain specific schemes at different points of time. In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets." Who would have believed that an RBI circular with such an innocuous beginning would leave the entire banking sector shaking?
The apex bank, on Monday, basically ditched its much-tomtommed past schemes for dealing with bank bad loans, such as Framework for Revitalising Distressed Assets, Corporate Debt Restructuring (CDR) Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR) and more. In fact, 28 circulars issued over the past 17 years have been repealed "with immediate effect". The revised framework introduced not only specifies norms for "early identification" of stressed assets, strict timelines for implementation of resolution plans, and a penalty on banks for failing to adhere to the prescribed timelines, but also makes the bankruptcy court the main tool for resolution.
What this means is more reported stressed and bad loans in the days ahead. In fact, a whopping Rs 2 lakh crore worth of stressed loans may be headed to bankruptcy court, according to The Economic Times. These loans are mostly from infrastructure sectors such as power, telecom, roads and ports and are languishing in different stages of restructuring under plans such as SDR or Sustainable Structuring of Stressed Assets (S4A).
Leading PSU banks already saddled with mounting stressed assets over the past few years are in for a rough ride ahead. The top four state-run banks reportedly account for nearly Rs 1.37 lakh crore of such assets, some of which could turn into NPAs. More stringent provisioning requirements-banks have to make a 50% provision for accounts subject to insolvency proceedings compared to 15-20% for sub-standard assets-will erode profitability and increase pressure on their already-low capital levels. Although Financial Services Secretary Rajiv Kumar said that "We don't see much impact on provisioning. Growth (loan) is intact as more capital will be available through sale of non-core assets", experts are not as optimistic. While Krishnan Sitaraman, senior director at Crisil Ratings, has been quoted saying "Our estimates are the top 50 accounts which make up for more than 50% of the NPAs are provided at 45%, which could increase to 60% in the next fiscal year", Smartkarma Insight Provider Daniel Tabbush in a recent report said "It was always the case that the Rs 2.1 trillion in government recapitalization money would go the way of provisions. With the new RBI circular, it becomes clearer". In the current fiscal, 20 PSU banks bagged Rs 80,000 crore through recapitalisation bonds and Rs 8,139 crore as budgetary support.
This translates to curtailed loan growth, which in any case has been steadily coming down. As per latest available CEIC data, India's Domestic Credit increased 5.9% year-on-year in November 2017-a record low-compared with the all-time high of 27.1% in July 2009. "For those banks having grown more aggressively in the past few years, there could be even more pain, with a higher level of unseasoned loans. HDFC Bank is a key stand out here, with some of the most fantastic growth of any bank in the country, and not due to any base effect. Its market share gains will be a bane, not a boon. And we are doubtful this is what most expect," adds Tabbush.
He also notes that it can't be a coincidence that the new RBI framework comes out now, right when banks are transitioning to the Indian Accounting Standards (IndAS), based on IFRS 9. This new accounting regulation is far more onerous on provisioning and NPL classification and according to CLSA, it may almost double stressed advances, boost provisioning by $30 billion and consume more than $26 billion in capital at state-run banks and $4 billion for private lenders.
Shares of the country's biggest banks, be it SBI, ICICI Bank or Bank of Baroda have all dipped 1-2% in this morning's trade. Things might get worse before it gets better for this sector.
With PTI inputs