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Banks could see their lending-related costs rise by up to a fifth as a recent rule change means they must make bigger provisions for restructured debt, crimping their profits at a time when consumers and firms are starting to borrow more.
This could make banks cautious about lending, hurting an economy that is emerging from its weakest growth since the 1980s. The stricter provisioning norms may also affect the recovery chances of troubled borrowers as more loans are classified as bad instead of attempts to restructure them.
The Reserve Bank of India (RBI) ended last month what it called a period of "forbearance", dating back to the financial crisis. During this time, problematic loans that were being restructured required provisions amounting to only 5% of their value, instead of 15% for the loans classified as "bad".
"If an account needs to be restructured, then they would have to provide for that as if it were a non-performing loan. So the credit cost is going to go up," said Ananda Bhoumik, a senior director at ratings agency India Ratings and Research.
Brokerage Macquarie estimates credit costs for the state-run lenders, including State Bank of India and Punjab National Bank, who dominate the Indian banking landscape, will rise from 1.18% of their total loans in the 2013-14 fiscal year to 1.3-1.4% through 2016-17.
The state-controlled banks not only have a higher percentage of poor quality loans of their total loans than privately owned banks such as HDFC Bank and ICICI Bank, they are also under-provisioned.
Macquarie expects gross non-performing loans for state-owned banks to increase 40 to 50 basis points to 6.2% in the current financial year as they won't have the flexibility to classify loans as restructured.
NO REPRIEVE
After the 2008 financial crisis, the RBI had allowed banks to treat restructured loans differently, in order to put distressed projects back on track. But critics say banks have been using the window to avoid classifying loans as bad.
Despite the central bank flagging the rule change well in advance banks were hopeful of a reprieve until almost the last minute.
As it started to become clear that the RBI was in no mood to relent, banks rushed to take advantage of the lower provisions, likely causing a spike in restructured loans in the March quarter, analysts and bankers said.
Among the largest was Pipavav Defence and Offshore Engineering's more than $1 billion debt, cleared for restructuring just days before the window closed.
"The restructured portfolio will go up very substantially," said state-owned Andhra Bank's Chairman C.V.R. Rajendran, referring to the fourth quarter as a "peak".
