Tougher norms for restructured assets prescribed by the Reserve Bank of India (RBI) could adversely affect profitability of Indian banks and push up non-performing asset ratios across the banking sector over time.
The more immediate impact will be seen on profitability with analysts estimating a hit in the range of 0.2%-13.8% of estimated profit before tax (PBT) for FY14, Bank of America-Merrill Lynch said in a report.
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IDBI Bank could see the most severe impact on its bottom line of 13.8% of PBT while Punjab National Bank, which had a restructured portfolio of over R30,000 crore as on March 31, could see a 7.7% hit on PBT in FY14, the brokerage estimated. In addition, banks could see a further impairment due to higher provisioning needed for fresh restructured accounts.
?The challenge will be to deal with the 5% provision requirement on newly restructured accounts,? said KR Kamath, chairman and managing director, PNB.
As on March 31, assets restructured by state-owned banks stood at R1,98,900 crore, or 6.5% of total assets, a report by Kotak Institutional Equities Research noted.
Another state-owned lender, Bank of Baroda, which has a pipeline of R2,500 crore worth of restructuring in the first quarter, said that the 5% provisioning would shave R50-60 crore off its profit.
?Our provisioning is already at 2.75% as of March 31; an increase of another 75 bps will obviously impact our profitability to some extent which we are yet to quantify? said SK Jain, executive director of the bank, while talking about the current restructured portfolio.
In its report in February, Crisil had estimated that the banking sector?s provisioning requirement would increase by R15,000 crore within two years, which will lower banks? profits by around 7% during the period.
Along the impact on profitability, the banking system may see a rise in its reported non-performing asset (NPA) ratios when the RBI does away with asset classification benefits for restructuring in 2015.
The ratio of gross NPAs is likely to go up to 320 basis points by June 2015 from March 2013 levels of 3.3%, analysts estimate.
?However, increase in reported gross NPAs would not have a material impact on the credit profile as vulnerability would remain the same,? ICRA analysts noted in their report on Friday.
On Thursday, the RBI put out stringent guidelines for restructured accounts based on a report submitted by the B Mahapatra committee. The guidelines said that all new cases of restructuring from June 1 would attract 5% provisions, while in the case of assets already in the restructured portfolio, the provisions would be raised from the current 2.75% to 5% in a phased manner. Banks are required to raise their provisions to 3.5% by March 31, 2014, on the current stock of restructured assets.
While bankers say the tighter norms will make restructuring tougher, it will not deter banks from considering genuine cases.
“If it is a viable case of restructuring, then banks will still restructure irrespective of the higher provision. If its a case of postponing an NPA, then bankers may be reluctant,” said Soundara Kumar, deputy managing director at State Bank of India. The country?s largest lender already has a restructured portfolio of Rs 34,000 crore, with slippages at a rate of 16-17%.
Lenders, though, expect that the broader macroeconomic situation will also help in reducing the impact of higher provisions. “Going forward, the whole assumption is that the economy will turn around, meaning a slowdown in restructuring,” said M Narendra, chairman and managing director, Indian Overseas Bank.
Experts say that the new norms will ensure that banks look at restructuring applications closely before accepting them. This will not only reduce the rate of slippages, but will also cut down the high number of restructuring cases that was seen in the recent past.
“Cost of restructuring has gone up for banks and promoters. This will dissuade large-scale restructuring of the type we have seen in the past two years,” said Pawan Agrawal, senior director, Crisil. “It will mean that there would be greater diligence in restructuring and hence the likelihood of slippages reduces.”