The changes proposed by the Reserve Bank of India (RBI) in loan restructuring norms could hit the profitability of the banking industry considerably, top brokerages have said. The impact could be felt more by the public sector banks, they said.
According to a report by the working group set up to review the guidelines, the RBI proposes to raise the upfront provisions upon restructuring from two per cent to five percent. The older stock of restructured loans would need to provide an additional three per cent by the end of March 2014.
“The upgrade to the normal category would be made more challenging by the proposed conditions. These norms may be a step towards aligning with global standards after a couple of years. We estimate an impact of up to around 13 per cent on FY13–FY14 net profits of PSU banks and up to 0.95 per cent for new banks,” said a report by Avendus Securities.
| ADDITIONAL PROVISIONS ON EXISTING STOCK Restructured loans (in Rs cr) | |||
| Bank | Mar '12 | 1st year -1.50% | % of FY12 PAT |
| Axis Bank | 3,827.0 | 57.4 | 0.95 |
| HDFC Bank | 784.1 | 11.8 | 0.16 |
| YES Bank | 202.0 | 3.0 | 0.22 |
| IndusInd Bank | 92.1 | 1.4 | 0.12 |
| State Bank of India | 42,744.0 | 641.2 | 3.83 |
| Bank of Baroda | 15,084.2 | 226.3 | 3.16 |
| Bank of India | 17,856.1 | 267.8 | 7.00 |
| Punjab and National Bank | 25,009.0 | 375.1 | 5.38 |
| Canara Bank | 7,896.2 | 118.4 | 2.53 |
| Union Bank | 11,879.0 | 178.2 | 6.98 |
| Corporation Bank | 4,670.4 | 70.1 | 3.26 |
| Allahabad Bank | 6,353.0 | 95.3 | 3.57 |
| Andhra Bank | 5,954.8 | 89.3 | 4.65 |
| Indian Overseas Bank | 12,640.0 | 189.6 | 12.64 |
| Source: Company, Avendus Research; Data for AXSB is at end Jun12 | |||
Edelweiss analysts Nilesh Parikh, Kunal Shah and Suruchi Chaudhury, also said, “Hike in standard asset provisioning requirement to impact earnings (PBT) of PSU banks 5-10 per cent. Hit to be highest for banks like Indian Overseas Bank, Oriental Bank of Commerce, Union Bank of India and Punjab National Bank. Hit to be minimal for private banks at less than one per cent.”
Analysts feel there could still be large incremental restructuring in certain sectors, such as power and textiles, leading to a further hit on the profitability of banks. Provisions are recommended to rise in a phased manner for the existing stock during the two-year period; subsequently, 3.5 per cent in the first year and to five per cent in the second year.
Currently, in some cases of restructuring with a moratorium on payment of principal as well as major portion of interest, accounts are upgraded on the basis of payment of interest on only a small portion of debt for the specified period. In cases of restructuring with multiple credit facilities, the upgradation should be based on one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with the longest period of moratorium.
“Furthermore, the accounts classified as NPL on restructuring by the bank should be upgraded only when the principal and interest on all facilities in the account are serviced according to terms of the payment. This is likely to delay the upgradation and thus, the write-back of provisions,” Avendus analysts said.
The report also suggests the RBI may do away with ‘regulatory forbearance’ regarding asset classification, provisioning and capital adequacy on restructuring of loans, in line with international prudential measures. However, in view of the current domestic macroeconomic situation as also the global situation, this measure could be considered after a period of two years.
