The Reserve Bank of India (RBI) on Tuesday released a series of guidelines with a view to tighten norms concerning recognition of and provisioning for bad assets at banks. These include clauses requiring banks to make disclosures in cases where the regulator’s assessment of their provisions and/or gross non-performing assets (NPAs) are at variance with their own, and making provisions at higher rates against loans given to “stressed sectors of the economy”.
A notification on the central bank’s website flagged concerns about banks not making adequate disclosures about stressed accounts. “The Reserve Bank of India (RBI) assesses compliance by banks with extant prudential norms on income recognition, asset classification and provisioning (IRACP) as part of its supervisory processes,” the notification said, adding “There have been instances of material divergences in banks’ asset classification and provisioning from the RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the bank.”
In order to ensure greater transparency on the part of lenders, RBI said banks must disclose as much when the additional provisioning requirements assessed by RBI as part of the AQR exceeds 15% of a bank’s published net profit for the reference period or when its additional gross NPAs identified by RBI exceed 15% of the published incremental gross NPAs.
Another notification from RBI requires banks to set aside larger amounts than the regulatory minimum as provisions against standard assets in sectors which are facing relatively high levels of stress. For this, it has mandated that banks put in place a board–approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors.
The policy will have to be reviewed at least on a quarterly basis to account for the performance of various sectors of the economy to which the bank has an exposure and evaluate the present and emerging risks and stress therein. RBI said the review may look at aspects like debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, and legal/ regulatory issues faced by the sector. The reviews may also include sector-specific parameters, it said.
The central bank made particular mention of stress emerging in the telecom space. “More immediately, as the telecom sector is reporting stressed financial conditions, and presently interest coverage ratio for the sector is less than one, Board of Directors of the banks may review the telecom sector latest by June 30, 2017, and consider making provisions for standard assets in this sector at higher rates so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date. Besides, banks should also subject the exposure to the sector to closer monitoring,” it said.
Bank exposure to REITs, InvITs capped at 10%
An RBI notification on Tuesday said banks will be allowed to invest only up to 10% of the unit capital of a Real Estate Investment Trusts (REIT) or Infrastructure Investment Trust (InvIT). In addition, they must put in place a board-approved policy on exposure to REITs or InvITs, laying down internal limits on such investments within the overall limits on exposure to the real estate and infrastructure sectors.
Banks will also have to adhere to prudential guidelines issued by RBI from time to time on banks’ equity investments, classification and valuation of their investment Portfolio, Basel III capital requirements for commercial real estate exposures and Large Exposure Framework.