The Reserve Bank of India, or RBI, has told banks to do higher provisioning than the regulatory minimum for even standard assets, or good companies, in stressed sectors. The higher provisioning for standard assets, that is, companies that are paying interest and principal regularly, will cover sectors such as infrastructure, power, metals, and telecom.
The RBI has, in fact, named telecom as one of the sectors for which banks should consider higher provisioning for standard assets by June 2017. Banks have a Rs 82,200 crore exposure to the sector. At present, the provisioning for standard assets in these sectors is 0.40-1 per cent, both in corporate and retail segments.
The RBI has also told banks to have a board-approved policy for higher provisioning. It has suggested quarterly review of stressed sectors based on parameters such as debt-to-equity ratio, interest coverage ratio, profit margins, ratings upgrade-downgrade ratio, sector NPAs, industry performance, legal/regulatory issues, etc. Telecom has been singled out for its interest coverage ratio of less than one. The ratio, calculated by dividing earnings by interest expenses, shows the company's ability to pay interest. A figure of less than one indicates that earnings are not sufficient to cover the interest outgo. There has been disruption in the telecom space after the entry of Reliance Jio triggered price war and consolidation. CRISIL has said the price war will continue this financial year also, hitting bottom lines. In fact, some banks have already become cautious. Sunil Kakar, CFO, IDFC Bank, says banks have done a reasonable level of provisioning. "The stressed asset portfolio has been provided for much more than the regulatory requirement. Depending upon our assessment of the telecom portfolio, we will make appropriate provisioning."
Given the lax credit standards in public sector banks, this proactive approach is good. Higher provisioning will not only help banks absorb losses in future but also bring profits by way of a write-back if the feared losses don't happen.
Banks generally are in a fix when an asset suddenly becomes sub-standard. In the first year, they are required to do provisioning of 15 per cent. This rises to 100 per cent of the loan in the next three years if the asset becomes doubtful.
The RBI move will hit banks' profitability, though marginally. The banking sector has seen huge provisioning in the last six quarters after the RBI initiated quarterly review by giving each bank a list of accounts to be classified as NPAs by March 2017. The 15 per cent provisioning (2.5 per cent each quarter till March 2017) led to huge provisioning. For example, SBI's provisioning rose 43 per cent to Rs 21,254 crore in the first nine months of 2016/17.
Experts say the RBI will go after standard assets in other stressed sectors also, especially metal, infrastructure, textiles, food processing, construction, mines, etc. In these sectors, stressed assets comprise 20-40 per cent sectoral advances.
The RBI move means banks will have to go through another year of short-term pain.