If the Reserve Bank of India’s (RBI) draft norms on loan restructuring are finalised, public sector lenders that hold a major share in restructured loans would be the most hit.
As of March 2012, public sector lenders had 5.73 per cent restructured advances to gross advances, compared to 1.61 per cent for private sector banks and 0.22 per cent for foreign banks. The impact on the banks’ profitability could be as high as Rs 15,000 crore over the next two years, according to a report by rating agency CRISIL. Banks would be required to provide this amount towards increase in provisioning for restructured assets, which would lower their profitability of the banks by seven per cent, it added.
According to a Bank of America-Merrill Lynch report, Punjab National Bank, Indian Bank and Oriental Bank of Commerce would be the most impacted, as they have the highest proportion of restructured portfolio of close to 10 per cent. PNB’s and OBC’s restructured portfolio was 9.6 and 9.5 per cent, respectively, as of the third quarter. Indian Bank’s was 10.9 per cent in the September quarter.
In recent years, banks took to large scale restructuring to avoid non-performing asset (NPA) classification. Earlier, restructured advances used to attract two per cent provisioning, which RBI increased to 2.75 per cent during the second quarterly monetary policy review.
Now, RBI has proposed that from the next financial year, restructuring would attract a provisioning of five per cent. For the already-restructured accounts, it would be done in phases over two years.
After 2015, all the restructured advances would be classified as non-performing and would attract applicable provisioning, which is much higher than that for restructured accounts, RBI has proposed.
According to another rating agency, Icra, this would lead to gross NPA numbers in the banking system. However, restructured advances are likely to come down, limiting the incremental impact of the new asset classification on the credit profiles of banks. There could be a steep increase in the reported NPA numbers for FY16.
According to the Bank of America-Merrill Lynch report, high provision coverage ratio for lenders such as Bank of Baroda and Union Bank of India will cushion them against the impact of the proposed guidelines.
Bankers have already started snubbing the new guidelines. Shiva Kumar, managing director of State Bank of Bikaner and Jaipur, said, “Increasing provisioning is ok, but declaring those (restructured accounts) as NPA may not be the right idea.” Certain accounts face challenging times and they should be given the opportunity to come out of it, he added.
Bank stocks didn’t react adversely to RBI’s draft guidelines as the BSE Bankex closed just 0.79 per cent down at 14,465 on Friday, while the benchmark Sensex also closed 0.57 per cent down at 19,781.
Analysts are positive on the banking stocks, despite expected negative impact of the guidelines on the banks. Vaibhav Agrawal, vice-president, research, Angel Broking said, “It was expected that restructuring provisioning would be increased over a period of time. So it didn’t came as a surprise and asset quality of PSBs is now stabilising.”