The Reserve Bank of India (RBI) has rejected a proposal by bankers to extend the date of forbearance for provisions on restructured loans by another year, according to two bankers privy to the discussions held on Monday.
The withdrawal of the regulatory forbearance on restructured advances could lead to a sharp increase in banks’ gross NPAs to 5.7% by March 2016 from 4.5% as of December 2014, domestic rating agency Icra had said in a report in February.
From April 1, RBI had removed the distinction separating restructured assets and non-performing assets (NPAs), mandating that banks will have to provide at 15%, on a par with substandard asset classification norms of RBI.
A March 11 report by Macquarie notes that banks used to get away with conservative provisioning by restructuring loans and only providing 5% on them, whereas provisioning requirements now on classifying a loan as NPL is 3-4x of restructured asset provisions. “As NPLs age, provisioning will further go up. So banks will progressively increase their coverage requirements on bad loans over the next few years,” the report added.
Executives from public and private sector banks, such as State Bank of India, Punjab National Bank, Bank of India, Axis Bank and ICICI Bank, as well as officials from the credit restructuring (CDR) cell and members of the Indian Banking Association (IBA) were part of the closed-door meeting held with RBI officials in Mumbai.
The primary purpose of the meeting was to iron out issues arising in the joint lenders’ forum (JLF) mechanism and to expedite decision making. However, bankers used the platform to set forth their request to the regulator.
IBA officials reportedly said the bankers’ views on restructured account provisioning will be sent separately to RBI. However, RBI officials during the meeting “informally conveyed” to the bankers the regulator will not consider an extension.
The regulator provided some relief to banks in late-March, clarifying that cases referred to either the CDR cell or a JLF for restructuring, regardless of whether it is considered or approved, would be exempted from the revised rule. Consequently, references made in Q4 FY15 to the CDR cell, in terms of value, almost equaled the cases referred in 9MFY15. The cell received references worth R21,100 crore in Q4FY15 compared with R23,000 crore in 9MFY15.
Bankers are now resorting to the “rectification” option offered under the JLF mechanism, which allows them to sidestep the “restructured” classification. RBI has also created new schemes such as 5:25 for infrastructure, power and steel accounts, which will also not attract the 15% provisioning.
Essar Steel, Bhushan Steel, Adani Power subsidiaries and Jaypee Infratech are some of the companies that have sought relief under the 5:25 mechanism, according to information available with FE. Alok Industries with an industry exposure of almost R20,000 crore and Monnet Ispat (R11,000 crore) have been bailed out with additional funds under the rectification option.
The NPA levels for public sector banks breached the 5% mark by the December 2014 quarter, while that of private setcor banks were at 2.1%. Public sector banks’ fresh NPA generation was impacted by higher slippages from restructured accounts, which stood around 25% of the new NPAs generated in Q3, said the Icra report.
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