Photo: Kamlesh Pednekar
Experts, however, say that the PSBs will face a bigger impact as they have a large number of loans in various stressed brackets such as S4A, SDR, 5:25, and others, which are currently not classified as NPAs.
In the new framework, such loans will need to be recognised as NPAs or have to be reported under the IBC (Insolvency and Bankruptcy Code), 2016, if the resolution is not completed within given timeframe.
“In case of the PSBs, the quantum of bad loans
outside GNPA (gross NPA) is around 30-50 per cent of current GNPAs, which could potentially now be required to be treated as NPA or will go to the NCLT (National Company Law Tribunal), for resolution,” says Aalok Shah, an analyst at Centrum Securities.
A note by ICRA said the revised framework is likely to increase the reported NPAs of the banks in coming quarters. “This is likely to be an outcome of implementation of resolution plan for large borrowers that are currently in the Special Mention Accounts (SMA) categories. In the event, banks are unable to implement a resolution plan for the large borrowers with exposure of Rs 20 billion and above, these accounts will be required to be referred to the NCLT for resolution through the IBC. This has been the case with most of the NCLT’s second list of borrowers, whereby the resolution plans failed for most of borrowers and were referred to the IBC; this is expected to further raise the credit provisioning requirements for banks during FY19.”
Though the tighter framework is also positive for the banking sector in the long-term, it will take a toll on its profits in the near-term as provisioning will increase. “The amount of provisioning will be significant as once the account is taken to NCLT, 50 per cent provisioning is required,” Shah adds. Currently, banks have made provisions to the tune of just 5-15 per cent for such accounts.
The March quarter may face the impact of the new framework. “Since the regulator has set February 23, 2018, as the first date of reporting to the CRILC (Central Repository of Information on Large Credits), some banks may decide to recognise new NPAs during the ongoing quarter itself, which they think will eventually become NPAs after a few months. The March 2018 quarter might see partial impact,” Kajal Gandhi, an analyst at ICICI Securities, said.
Prior to this development, analysts were assuming that banks might have some relief from FY19 in terms of provisioning after the Asset Quality Review (AQR) was carried out by the RBI.
But, after announcement of this framework, they will now tone down their financial estimates as the effects of the new rules will be stretched to at least till the first-half of FY19, indicating some sort of downward revision in stock valuations, too.
Meanwhile, some analysts are also sceptical about the expected gains from the recapitalisation (recap) money to be infused by government in the PSBs. “The recap amount decided by the government appears to be sufficient for most banks even if the provisioning of PSBs goes up marginally due to this new framework but there might be a problem in terms of growth capital if the growth momentum picks up immediately,” Gandhi adds.
For now, analysts are awaiting more clarity from the banking industry and the regulator before revising their earnings estimates for banks.