Ratings agency Icra on Monday said the quantum of stressed advances reported by banks is understated by structuring of large exposures under 5/25 refinancing. The reported gross NPA percentage is understated owing to the use of strategic debt restructuring scheme, it said.
The agency said in a statement there has been moderation in the pace of stressed asset formation (from 5.6% in FY15) to 3.3% in H1 FY16. “(There has been) no further increase in reported stressed advances, 5/25 refinancing helps to arrest the increase,” ICRA said, adding that sale of NPAs to ARCs and 5/25 refinancing led to understatement of stressed assets.
It said debt outstanding against strategic debt restructuring is estimated at around 0.5% of banks’ credit book as on September 30, 2015. Considering the trend in refinancing/restructuring done so far, ICRA revised its projected gross NPA ratio to 5.0-5.5% as on March 2016. “However, considering the high level of net NPA ratio and the cases classified as fraud, credit provisioning is unlikely to decline materially from H1 FY16 levels (1.5% of average advances), impacting the profitability over short to medium term,” ICRA explained.
It said despite reduction in fresh stressed asset formation, high exposure of the banking sector to steel and power (around 14% as of September 2015, out of which only around 20% is classified as stressed) remains a credit concern. “Should some of these large exposures slip in the classification, the reported vulnerable numbers could also worsen,” it said.
Commenting on the sector’s exposure to power sector at R5.8 lakh crore (9.4% of total banking credit), ICRA said it has been a credit concern with credit challenges varying from weak financial of discoms, lack of long-term PPAs, structural weakness in power offtake contracts, unviable high cost projects and lack of fuel linkages.
The government has recently approved a scheme, UDAY (Ujwal Discom Assurance Yojana), for the financial turnaround of state-owned distribution companies. The scheme proposes to wipe out the incremental cash losses of discoms by FY18-FY19, while reducing the debt burden of discoms by proposing takeover of 75% of the discoms’ debt (used to fund losses) by the respective state governments.
“If all states participate in the scheme, PSBs’ reported restructured advances could come down by 0.8-1.0% from the levels of 7.2% as of September 2015,” it said, adding that the implementation of scheme will also reduce vulnerability of banks’ exposure to IPPs to some extent, as with improvement in financial health of state discoms, counter party risk for these borrowers will come down.