RBI's new circular on stressed assets may not hit lenders' provisions hard

The revision in stress resolution guidelines is unlikely to have a significant impact on the provisioning and earnings of corporate lenders, as banks have already recognised a major chunk of such accounts under the Reserve Bank of India’s (RBI’s) February 12 circular. 

It sets a tight framework on deciding the course of action for big-ticket stressed assets. 

While the 30-day review period gives some breathing space, the disincentive for delays and incentives for taking a case to the bankruptcy court forces lenders, such as 

State Bank of India, Punjab National Bank, ICICI Bank, etc, to act in a time-bound manner. It is also an opportunity for banks to have a relook at recovery targets and provisioning for FY20, senior executives with public sector banks (PSBs) said.

“Banks have recognised a significant portion of large stressed accounts in the March 2018 quarter under the February 12 circular. Thus, we don’t see the revised stress-resolution guidelines having material impact on banks in terms of slippages and provisioning,” said Prakash Agarwal, head, BFSI ratings at India Ratings.

For instance, credit cost or provisioning as a percentage of average loan book for PSBs and (major corporate lenders), had touched the peak levels of 4.2 per cent in FY18 (fraud at PNB too had contributed to some extent). This was highest, at least since FY2004.

Further, the stressed corporate exposure (interest coverage ratio less than 1.5x) as a percentage of total bank credit declined to 19.3 per cent during April-September 2018 from about 20-21 per cent over FY16-18, according to India Ratings, quoted in Macquarie’s February 13, 2019 report.
In fact, the revised circular is expected to encourage faster resolution of bad accounts or non-performing assets (NPAs). 

According to a note by Emkay Research, lowering a consent criterion to 75 per cent in value terms and 60 per cent of number of lenders from 100 per cent earlier, mandatory signing of inter-creditor agreement, and payment of not less than the liquidation value to dissenting lenders, would pave the way for faster resolutions.

To add to this, the new resolution demands 20-35 per cent additional provisioning of the resolution plan if it is not implemented within the stipulated time.

Agarwal said the number of accounts with exposure of between Rs 1,500 crore and Rs 2,000 crore, is not too large. For such accounts, the new stress resolution guidelines will be applicable from January 1, 2020, according to the RBI.

However, the Street is worried about the impact of power accounts. The Emkay Research note says, “We believe that the cases referred to IBC (Insolvency and Bankruptcy Code) on the basis of the February 12 circular may not be protected by the fresh circular and lenders may have to refer the cases based on different grounds.

“Banks may need to further provide for some of the existing stressed power accounts and recovery from the power accounts also needs to be worked upon. Besides, given the weak financial position of state power distribution companies, which in the last nine months have worsened, is a near-term concern as well,” Lalitabh Srivastava, AVP at Sharekhan, said.

During April-December 2018, combined losses of state distribution companies that had signed up for UDAY surged 62 per cent year-on-year to Rs 24,000 crore.

Recent supervisory data suggests that various efforts made by the RBI to strengthen its regulatory and supervisory framework and the resolution mechanism instituted through the IBC are bearing fruit. This is reflected in significant improvement in asset quality of scheduled commercial banks during 2018-19 as gross NPA ratio declined to 9.3 per cent as on March 2019.

At the same time, there has been an improvement in provision coverage ratio of the scheduled commercial banks to 60.9 per cent at end-March 2019 from 48.3 per cent during the year-ago period, and 44 per cent at end-March 2015. 

Due to weak capital position of banks and risk aversion on their part, credit growth remained subdued in recent years. However, with incipient sign of improvement in the health of banks, credit growth is picking up.

Ease of resolution  

 
  •  30 days to review and firm up plan
  •  Higher provisioning burden for resolution delays
  • Incentives for taking case to the insolvency court 
  • Plan nod by 75% by value 60% by lenders number



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