Banks Brace For Earnings Impact On RBI’s Toughened Bad Loan Stance
Triple whammy for banks in Q4
Indian lenders, bruised and battered from a now two-year-old bad loan clean-up cycle, are bracing for more pain.
When the fourth quarter earnings roll in, most banks will report higher bad loans and provisions as they continue to clean-up their books and also adjust to a new stressed asset framework released by the Reserve Bank of India in February. That, together with one-off factors such as the impact of a nearly $2 billion fraud at Punjab National Bank, will mean that the asset quality indicators of Indian banks will deteriorate further.
Gross non performing assets of listed banks could rise to Rs 9.25-9.5 lakh crore at the end of the March 2018 quarter, suggest early estimates from rating agencies. Listed banks had gross NPAs of Rs 8.85 lakh crore at the end of December 2017 quarter, shows data compiled by BloombergQuint.
In a report it released on March 8, rating agency ICRA Ltd. said that the outstanding gross NPAs of listed banks could reach Rs 9.25-9.3 lakh crore by the end of the current financial year. In a Feb. 14 report, CRISIL Ltd. estimated that the number could be around Rs 9.5 lakh crore.
The rating agencies are building in a continued organic increase in bad loans and also the impact of the RBI’s Feb. 12 circular. The circular laid down a new framework for bad loan resolution. As part of the new norms, the RBI has withdrawn schemes like strategic debt restructuring (SDR) and the scheme for sustainable structuring of stressed assets (S4A). In cases where such schemes were in the process of being implemented but not concluded, banks have been asked to stop the process and mark down the assets as NPA.
One example of such a case is Reliance Communications Ltd., where lenders had agreed to restructure the account as the company said it had entered into an agreement to sell its assets to Reliance Industries Ltd. However, the sale is yet to close, as the National Company Law Tribunal put a stay on any asset sales by RCom till its arbitration with operational creditor Ericsson India concludes. Cases like these could be added to the NPA pool, bankers indicated.
To be sure, lenders have sought an exemption from the regulator on classifying accounts within the SDR mechanism as NPAs, BloombergQuint had reported on March 14. The RBI, however, is yet to respond to the request, said lenders in the know.
Along with a jump in the loans classified as NPAs, higher provisions will continue to be damaging for corporate lenders.
In a March 6 report, Nilanjan Karfa, analyst at Jefferies wrote that the impact of new stressed assets will be severe over the March 2018 and June 2018 quarters. Karfa estimates that Axis Bank, ICICI Bank, State Bank of India, PNB and Bank of Baroda could report losses before tax of anywhere between Rs 2,810 crore to Rs 15,216 crore. The estimates are based on four assumptions: 1) operating profit in Q4 is same as Q3, 2) 80 percent of the non-NPL stressed assets slip into NPA bucket, 3) generic slippage ratio is 1 percent, and 4) provision coverage required on all new NPA is 50 percent.
March May Not Be The Peak
Brokerage house Credit Suisse estimates that over the next few quarters the reported gross bad loans will move closer to the overall stressed asset pool. In a report dated Feb. 13, Credit Suisse said stressed loans are close to 16 percent of total loans, while reported gross NPAs are at 10 percent. This gap will close over the next few quarters.
In addition to 10 percent non-performing loans, banks have corporate stress of 3 percent of loans under RBI dispensations and 2 percent in watch list, etc. These stress loans are now likely to move to non performing loans quicker than our earlier expectation of next two years. Upgrades of non performing loans have also become more stringent and slower.Credit Suisse Report
The RBI’s new rules give banks a short period of 180 days to restructure stressed accounts, failing which, these accounts would need to be referred for insolvency proceedings. Another Rs 1.5 lakh crore worth of NPAs are now likely to be referred for insolvency in the next six months, in addition to the nearly Rs 3.5 lakh crore of bad loans already referred, said Credit Suisse.
The new norms also make it tougher to upgrade an account. The RBI says that a defaulting borrower must demonstrate satisfactory performance till 20 percent of the loan is repaid. Earlier an account could be upgraded after 12 months of satisfactory performance.
Others fear continued asset quality stress from known and unknown sources.
Speaking on the sidelines of an event on March 20, veteran banker Uday Kotak warned that loans given to small and medium enterprises would be under pressure as the economy formalises due to the implementation of the Goods and Services Tax.
In an interview to BloombergQuint this week, Saurabh Mukherjea, CEO at Ambit Capital said that bad loan additions could continue to come from corporate assets and new segments like small-ticket MUDRA loans.
We will see the PSU banks report pretty dire numbers. I suspect even some of the private sector banks with large commercial books will also have adverse numbers to report…I am not convinced that March will again be the peak of the NPA cycle. There will be bad news on the NPA front right through next year. NPA situation on Mudra loans is bad…not sure if there will be meaningful recoveries in companies in the insolvency and bankruptcy process…so the bad news on NPAs will not peak out in Q4Saurabh Mukherjea, CEO, Ambit Capital