Reserve Bank of India (RBI) Deputy Governor Anand Sinha has backed the Mahapatra committee’s recommendation of higher provisioning for restructured assets. Banks, however, had opposed the proposal, saying this would lead to a sharp rise in bad assets.
Earlier, the central bank had set up a working group under the chairmanship of RBI Executive Director
B Mahapatra to review the guidelines on restructured advances of banks and financial institutions. In its report released in July, the committee had suggested the regulatory forbearance while recasting debt be done away with 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. Currently, banks can classify a restructured standard asset as standard debt by increasing the provisioning requirement. Apart from standard asset provisioning of two per cent, banks also have to ensure provisioning for diminution in the net present value of the asset, following the debt recast.
Sinha said it was found banks had not been provisioning enough for diminution in net present value. The Mahapatra panel’s recommendation of increasing the standard asset provisioning requirement to five per cent would help address this. “The Mahapatra committee suggested the two per cent provisioning norm be raised to five per cent. What this would do is close the gap between sub-standard assets and restructured standard assets…there is a lot of criticism or feeling that people get away with inadequate provisioning,” Sinha said at the sidelines of a seminar.
He cited the example of assets referred for corporate debt restructuring. He said for these, it was found the loss (arising from diminution in net present value) was 11-12 per cent.
“So, if you add the two per cent to the 12 per cent, it becomes 13 or 14, and 15 is substandard (for secured loans),” he said, indicating banks wouldn’t face too many hurdles in adapting to the new norms, if case these were implemented.
Sinha said a decision on when the norms would be implemented would only be taken after a detailed analysis of the feedback from stakeholders.
Bankers felt if regulatory forbearance was done away with (which would mean all restructured loans being classified as non-performing assets, or NPAs), it would lead to an increase in NPAs. This would also affect banks’ profitability and ratings. The Indian Banks’ Association, the industry body of lenders, has communicated its views to the central bank.
Sinha, however, defended the committee’s suggestion to increase the standard asset provisioning requirement to five per cent, saying this would act as a buffer if a significant part of restructured assets became NPAs.
“So far, the anecdotal evidence is it is in the range of 15 per cent for the overall system, though for some banks, it may be lower. If you look at the Mahapatra committee’s suggestions, these have built a stress situation and said it could be 30 per cent. Now, it is not that they have come to the conclusion it would be 30 per cent; they have said if this becomes 30 per cent, more provisioning is required. So, they have suggested increasing the standard asset provisioning to five per cent,” he said.
