The Reserve Bank of India has issued final guidelines on disclosure of restructured advances by banks, effective fiscal 2012-13. Simultaneously, the RBI has issued draft guidelines on asset classification and provisioning norms for restructured accounts, among other issues.
The final guidelines on disclosure would reduce the level of restructured advances for most banks, as accounts that have performed satisfactorily during the specified post-restructuring period would cease to be classified as restructured. At the same time, uniformity in reporting of restructured advances could lead to an increase in restructured advances for some banks, according to credit rating agency, ICRA Limited.
In its report, ICRA has revised its estimate for standard restructured advances downwards to 5.5-6.5% of total advances as on March 31, 2013 (Rs 3.1 -3.6 lakh crore), from the earlier 6.5-7.5%. Despite this revision, standard restructured advances are likely to be significantly higher than the March 2012 levels of 4.7% (Rs 2.3 lakh crore).
As for the likely impact of the draft guidelines on non-performing assets (NPAs), there could be a steep increase in the reported NPA percentage in 2015-16. NPAs could increase to as high as 6.5 -7.5% as on June 30, 2016, from 3.6% as on September 30, 2012. This is so because regulatory forbearance on classification of old restructured advances (except for infrastructure loans yet to achieve commencement of operation) would cease by April 1, 2015, said the ICRA report.
It is likely that power sector exposures would constitute a large chunk of restructured advances in the short to medium term (over 30%). According to ICRA’s estimates, gross NPA % + Standard Restructured Advances are likely to reach 9-10.3% of total advances as on March 31, 2013 from 7.5% as on March 31, 2012.
According to ICRA, overall, while the Gross NPA percentage of the banking system is likely to shoot up with the implementation of the new guidelines, corresponding restructured advances, which have also been a source of vulnerability so far, are likely to come down, thereby limiting the incremental impact of the new asset classification on the credit profiles of banks.
The RBI has proposed to increase provisioning on old restructured accounts to 3.75% as on March 31, 2014 and further to 5% as on March 31, 2015, as against the current 2.75%. Provisioning on new restructured accounts has been proposed at 5%.
While these norms would have otherwise necessitated a large increase in credit provisioning over the next two years, ICRA expects a 15-30% reduction in restructured advances to restrict the incremental provisioning requirement on this count to Rs 2,500-5,000 crore till March 2015. The expectation is based on the view that the economic environment would show improvement, going forward, while the structural issues confronting the power sector would see some resolution. Moreover, the RBI’s revised guidelines on classification of restructured accounts also allow performing restructured accounts to be excluded from the pool of restructured accounts.
