This move by RBI will provide much-needed breather to ailing banks, says Crisil

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Updated: April 11, 2018 7:27:41 PM

The decision of the Reserve Bank of India (RBI) to allow banks to spread provisions for bond losses in the third and fourth quarters of the fiscal year 2017-18 over the next four quarters will provide "the much-needed breather" to banks.

rbi, pnb, central bank, axis bankAccounting for the MTM losses over four quarters would provide the much-needed breather to banks. (Image: Reuters)

The decision of the Reserve Bank of India (RBI) to allow banks to spread provisions for bond losses in the third and fourth quarters of the fiscal year 2017-18 over the next four quarters will provide “the much-needed breather” to banks by reducing their provisioning burden to the tune of Rs 27,000 crore, rating agency Crisil said.

The Central Bank last week allowed the banks to spread the provisioning for each of these quarters equally over up to four quarters, commencing with the quarter in which the loss was incurred. The breather includes allowing an extra quarter to reach 50% provisioning on accounts referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) framework permitting spread-out of marked-to-market (MTM) losses on investments incurred in the third and fourth quarters of fiscal 2018 across four quarters.

“Accounting for the MTM losses over four quarters would mean ~Rs 8,000 crore provisioning relief including write-backs for banks in the last quarter of fiscal 2018,” said Rama Patel, Director, Crisil Ratings.

“Another relief worth ~Rs 19,000 crore, in the form of lower provisioning or write-back, would also ensue because the RBI has permitted banks to achieve 50% provisioning on accounts referred to NCLT by June 2018 instead of March as stipulated earlier,” Rama Patel added.

Profitability of banks has come under intense pressure as provisioning requirements have been rising with the ageing of non-performing assets (NPAs), withdrawal of various restructuring schemes prior to February 2018 causing an increase in NPAs, and a sharp rise in bond yields since September 2017 leading to significant MTM losses in their gilt investments.

However, the silver lining in fiscal 2019 is expected to be recoveries from the resolution of few large accounts under the IBC, especially from the steel sector, which recently saw multiple bids from investors. That should provide some offset to the high provisioning requirements, Crisil added.

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