With three months left for banks to retain the standard tag on loans they recast, the Reserve Bank of India (RBI) on Monday expressed concern about the extent of restructured assets in the banking sector, especially in public sector banks.
According to RBI’s Financial Stability Report (FSR), the gross non-performing advances (GNPAs) of scheduled commercial banks (SCBs) as a percentage of the total loans increased to 4.5% in September from 4.1% in March 2014. Stressed advances, or combination of bad loans and restructured loans, rose to 10.7% of the total advances in September 2014 from 10.0% in March.
“PSBs continued to record the highest level of stressed advances at 12.9% of their total advances in September 2014 followed by private sector banks at 4.4%,” RBI said.
Data from the corporate debt restructuring (CDR) cell showed that lenders have restructured more than R1 lakh crore of assets in FY14 alone, while in FY13, R78,498 crore loans were recast by bankers through CDR mechanism.
On CDR, the central bank said that out of the total number of cases referred to/approved under CDR, 49% have been successfully implemented till date. It added that one of the reasons for the reduction in CDR referrals could be because of RBI’s move to allow banks to restructure their large credits with aggregate exposure R100 crore and above outside CDR under the Joint Lenders’ Forum (JLF).
The number of cases referred to the CDR cell had fallen since the June quarter with only 2 cases referred as against 28 in the same period last year. Subsequently, the amount of loans referred in Q2FY15 stood at R13,300 crore compared to R24,859 crore in the comparable quarter previous year.
RBI’s forbearance on classification of restructured asset will end on March 31, 2015, and no fresh restructured accounts can be classified as standard after the deadline.
After that, all restructured assets will attract 15% provisioning, compared to 5% at present. Justifying its decision, RBI said while it may be legitimate to have regulatory forbearance during major crises, forbearance for extended periods and as a cover to compensate for lenders/borrowers’ inadequacies engenders moral hazard. On a granular level RBI said infrastructure, iron and steel, textiles, mining (including coal) and aviation, which have been identified as stressed sectors in the earlier FSRs, constituted 52% of total stressed advances of all SCBs as of June 2014, whereas in the case of PSBs it was at 54%.
The central bank also said the relatively higher possibility of slippages in restructured standard advances is required to be factored in by banks from the capital adequacy perspective. “Even in ‘business as usual’ conditions, any restructured advance which would be generally categorised by a rating agency as a sub-investment grade, carries much higher probability of turning into non-performing asset than a standard asset,” it said.
Commenting on banks’ credit appraisal process, RBI said that since banks have been short-term working capital providers, their appreciation of such risks in infrastructure projects seems to have been inadequate and, hence, the appraisals of most of the project loans have been prerogative of a handful of merchant banks.