Banks have opposed the suggestions of a Reserve Bank of India (RBI) committee on loan restructuring, as they fear these, if implemented, would lead to a sharp rise in non-performing assets (NPAs).
In its report released in July, the Mahapatra committee had suggested the abolition of regulatory forbearance while recasting debt after two years. In the interim, for fresh loan recasts, it had sought an increase in standard asset provisioning to five per cent, against the current two per cent.
The Reserve Bank of India had set up a working group under the chairmanship of B Mahapatra, executive director, RBI, to review the guidelines on restructured advances of banks and financial institutions.
Bankers felt if regulatory forbearance was taken away, which would mean all restructured loans would have to be classified as NPAs, it would increase NPAs in the system. This would have an implication on banks’ profitability and ratings. “Banks’ ratings would be drastically affected if NPAs increase sharply. An adverse rating would make it difficult to raise funds at viable costs,” said the chairman and managing director of a public sector bank.
The Indian Banks’ Association, the industry body of lenders, has communicated its views to the central bank.
A banking industry official said: “Bankers have suggested maintaining status quo on NPA provisioning, as the current economic slowdown has already stressed (the lenders). Public sector banks, for which asset quality worsened more than that of their private sector counterparts, are expected to see more pressure on profitability if the Mahapatra panel recommendations are implemented.”
Saday Sinha, vice-president (equity research), Kotak Securities, said: “We believe public sector banks would report higher credit costs on the back of higher slippages, along with new recommendation on restructured loans. RBI’s working group has recommended an increase in provisioning for restructured loans — from two per cent to five per cent over FY13-14. However, on fresh restructuring, banks are required to provide five per cent. We have done a sensitivity analysis, and this shows the impact on bank’s profits before tax would be one to 13 per cent during FY13-14.”
According to estimates, stressed assets in the banking system — NPAs and restructured loans — stand at about nine per cent of advances. Restructured advances amount to seven per cent. RBI estimates suggest about 20 per cent of the recast debt may turn into NPAs.
According to RBI data, since the global financial crisis of 2008, the ratio of restructured standard advances to gross advances was the highest in case of public sector banks. In 2012, while the ratio for public sector banks was 5.73 per cent, that for private banks was 1.61 per cent.
| STRESSED BOOK | |||
| Loan book (Rs cr) | Totalstressed book (Rs cr) | Stress as % of loans | |
| Public sector banks | |||
| Allahabad Bank | 110,460 | 11,920 | 10.8 |
| Indian Overseas Bank | 148,370 | 15,520 | 10.5 |
| Union Bank | 173,910 | 17,270 | 9.9 |
| Bank of Baroda | 285,810 | 17,590 | 6.2 |
| State Bank of India | 945,820 | 57,230 | 6.1 |
| Punjab National Bank | 294,470 | 14,910 | 5.1 |
| Private sector banks | |||
| Axis Bank | 171,150 | 4,430 | 2.6 |
| ICICI Bank | 268,430 | 6,110 | 2.3 |
| HDFC Bank | 213,340 | 1,040 | 0.5 |
| Stressed book = Non-performing assets + restructured book Source: Kotak Securities | |||
At 8.24 per cent, the ratio of restructured accounts to gross advances is the highest for the industries sector. For agriculture, the ratio stood at 1.45 per cent, while for services, it was 3.99 per cent. The ratio stood at 2.24 per cent for priority sector advances and 5.83 per cent for non-priority sector loans.
