Reserve Bank of India has advised banks to make provisions at a rate higher than the regulatory minimum in order to help them shield their balance sheets from stressed assets shock. The central bank has emphasized that the provisioning rates prescribed are only the regulatory minimum and has encouraged the banks to make provisions at higher rates based on an evaluation of risk and stress in various sectors of the economy.
This has been done with the intent that the banks have adequate provisions for loans and advances at all times. Banks have been asked to come up with a policy, which is approved by their respective boards, to make provisions for standard assets at rates higher than the regulatory minimum, based on their evaluation of risk and stress in various sectors of the economy.
Further, the banks have been asked to ensure a quarterly review of the sectors to which banks have exposure. RBI said in the circular that the focus of this review should be “to evaluate the present and emerging risks and stress therein.”
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The central bank in its notification indicated that the review may include broad quantitative and qualitative aspects such as debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, legal/ regulatory issues faced by the sector, etc. and any sector specific parameters.
Further, the banks have been asked to review the telecom sector latest by June 30, 2017, as this sector is currently reporting stressed financial conditions with interest coverage ratio of less than one. Banks have been asked to make provisions for standard assets in this sector at higher rates so that necessary strength is modelled in their balance sheets in case the stress reflects on the quality of exposure to the sector at a future date. Also, the banks have been asked to monitor their exposures to the telecommunication sector in detail.
Banking stocks in India have been on the up-move due to government’s continued statements about resolving the problem of stressed loans and helped by strong fundamentals. Earlier last month, Finance Minister Arun Jaitley spoke about taking recursive and prudent financial measures to solve the problem of stressed assets in order to smoothen the credit cycle of all the major state-run banks.
Recently, the talk of creating a ‘bad bank’ has gained momentum to buy bad debts from lenders to restructure them, as it has now become imperative to tackle record stressed loans of $133 billion held by Indian banks by last September, or about 12.34% of their total loans.